Q: In your debate [on Tuesday] with Larry Summers, you said the IMF was a slush fund for US foreign policy objectives. Do you think that if Thailand had been strategically important to the US, the IMF would have stepped in to bail out Thailand in 1997? And that there might then have been no Asian crisis?
A: That’s right, there might not have been an Asian crisis. We don’t know what would have happened. But it is a reasonable bet that if Thailand had a stronger relationship with the US, it would have had assistance faster. It really spread to Korea, and the banking system in Korea has been a problem for a long time.
The first time I went to Korea was 20 years ago, and they were worried about the banking system then. They’re still worried about the banking system. So we don’t know what might have happened, but certainly things would have been better. But things would have been better still if the IMF had made countries clean up their banking system. The people in the financial markets have been easily fooled, in my opinion. They look at the fiscal side of the country and say, “Gee, these countries run small deficits or surpluses, so they are really good countries.” But they don’t look at the banking system, where a lot of the things governments want to do get done. That’s not limited to Asia. It was true in Israel and other countries. They hide the deficit and say, why don’t you lend to this particular industry at marginal rates.
Q: One of the points you made in the debate was that the banking sector needs to be liberalized and opened to foreigners. In the case of Malaysia, foreigners like HSBC and Citibank already have a 25% market share, but the banking system is still not perfect.
A: The advantage of having the foreigners there is that one, you don’t depend so much on short-term credits. You have people like HSBC who are there permanently and balance their portfolio in local currency. Second, you have a place where the local population – if they get nervous about the banking system – can run to without causing a foreign exchange crisis, on top of a banking one. Our commission [the US Congress-appointed Meltzer Commission] wanted two things: one, foreign banks in the country, and two, local banks to be solvent. The second one would take care of the cronyism and corruption that lies at the heart of not just Asian, but world banking.
Q: How would the commission go about separating the IMF from the US Treasury, and stop the IMF being used to promote US foreign policy objectives?
A: Let me say, there’s no perfect answer. The US is a big country. It pays 26% of the cost of the IMF – if you do the accounting right. It will always have a dominant role. So it isn’t going to be easy to separate the two. But there are things we can do. In Turkey, the current management of the IMF has said it will go through with the loan it committed to in November, but if there are geopolitical considerations affecting Turkey then that’s your [the US’s] problem. The new management of the IMF is effectively saying, “We’re not here to do the geopolitical business of the United States.”
I guess we’ll see how much the IMF gives way on that. But Turkey is a very interesting case, because it doesn’t even have an IMF problem. There is $20 billion of foreign exchange reserves, so they don’t have a liquidity problem. It doesn’t have liabilities that are bigger than that $20 billion. The problem is one that’s been there a long time – every political party has at least one bank, and the banks don’t do banking business in the normal sense. It does the political will of the party it’s associated with. Once they close these banks, Turkey will be a better place, and that’s all one should say.
We can’t guarantee the US won’t lean on the IMF. But two things are changing. One is that the cold war is over. And the other is that with the end of the cold war, there are a great number of forces drawing people into an Asian group, or European group – and that will make it harder for the US to push its will through these international organizations.
Q: You’re saying it’s all about sound banking systems. But how would the IMF go about monitoring these?
A: Well, it won’t be perfect, there will be problems. The way the thing works now is that the politicians get the IMF to tell them what to do, and they then go to the parliament and say the IMF has ordered us to do these things. That system doesn’t work, because there isn’t a buy-in from the locals. We want democratic accountability. We want the finance minister to go to the parliament and say, “We want to do these things because it’s good for the growth of the country. We’re going to create jobs, we’re going to get capital and get foreign direct investment, and in order to do that we have to clean up the banking system and get rid of the cronyism. Or at least a lot of it. We need to establish the rule of law in the court system. We’re going to do that, not because the IMF told us to do it, but because we want to do it.”
Q: At the micro-level, would there be a metric that is used to determine bank soundness? For example, would an individual or family be prohibited from owning more than 1% of a bank?
A: It’ll vary from country to country but that’s the kind of thing which we think countries will try to adopt. It’s not going to be very easy. The people who run the banking system and the political system are all members of the same club, and so on. So there’s a certain amount of this that won’t go away. But we do need to have some rules that keep some of this at arms length. But we won’t get to this point because we the US, or the IMF, or the World Bank tells them to do it. We’ll get it only when they decide it’s something they want to do, and it’s in their interest to do so.
Q: Many years ago, HSBC had a policy where no one could own more than 1% of the bank. It certainly served to make the institution more professional than other Asian banks…
A: Hong Kong has had a very good banking system. Why? Well, I think because they brought in British law, British regulation, careful banking systems and developed it under a model that separated government from the banking system – at least in an ideological sense – and diversified the ownership of the banks. That’s a model, and people will say it’s an Anglo-Saxon one. I say, no, it’s a workable model that works well and prevents crises.
Q: The banking model you describe essentially closes off the avenue of the Japanese/Korean growth model, where the banks are used as conduits for fast growth. So you’re saying there will be an encouragement by the IMF of the Anglo-Saxon model rather than a Japanese banking model.
A: The Japanese model isn’t doing too well these days. To the extent that it worked in Japan and Korea, it worked at a time when capital markets weren’t so important, in countries with high savings rates, and was successful in getting households to subsidize businesses. That model works okay until you open the country and have an open capital market. Part of what the WTO is doing is to allow foreign financial institutions to come in and tap into your savings, and be able to invest them anywhere in the world. That means the [Japanese] model doesn’t work. It can only survive in a country with a blocked exchange rate or where you have some method for taxing the savers in order to finance capital accumulation.
Q: Is it possible to have economic change in Japan without cultural change?
A: That’s a hard question. It is certainly true that any step towards deregulating Japan is a cultural change. I’ve spent a lot of time in Japan and it’s amazing how many times you run into restrictions you haven’t heard of before. Having said that, I believe if Japan cleaned up its financial system and stopped the deflation, it would resume growth. It will take decades for Japan to become a more open economy – but that is not essential for Japan to return to growth. It is, however, necessary to get the banking and financial system restructured.
Q: There are 6800 construction companies in Japan today. A function of cleaning up the banking system would be reducing the number of those to, let’s say, 500. That would lead to a lot of unemployment. There are other chronically inefficient sectors too, like retailing. Is Japan willing to face up to such unemployment?
A: Japan’s population is ageing, and a lot of the population that benefits from the retail sector are people that are older. That part of the system will gradually adjust. Big retailers are starting to open in Japan. Of course, in every country, construction is very mixed up with politics because it is so heavily dependent on contracts. But that poses a problem. Any effort to clean up the banking system necessarily means they are going to have to stop lending money to the construction industry to keep those companies alive. So there will be some shrinkage in that industry.
Q: There’s a number that says that 90% of Japanese people work in low return industries and only 10% in the very famous export companies.
A: Yes, but that’s a problem we also see in China. And in Korea. Actually, China is the best example, because the difference between the growing part of the economy and the heavily subsidized part of the economy is enormous. It’s even bigger than in Japan. If China is going to develop then there’s going to have to be a shift of resources out of the money-losing state sector and into the progressive modern sector. The same is true of Japan. I don’t know that the 90% versus 10% is an entirely accurate description, by the way.
Q: You have been going to Japan for 15 years and giving the Japanese advice. Do you think Japan is culturally capable of 15% unemployment?
A: I don’t think we are talking about anything like these numbers. If we tried to do it overnight, then it might be this large. But I would not advise them to do it overnight. You want to try and build the new industries… let’s start from a different perspective. Japan has a hardworking, educated population that saves a lot. Over the last 20-30 years, there hasn’t been a place in Japan to invest those savings because of the structural problems. So there are very few countries that are as well positioned to build up capital and reform the economy than Japan. It doesn’t have the population growth problems of Southeast Asian countries, where it has to find jobs for more and more people. It doesn’t have to grow at 4% a year just to absorb new workers. The Japanese only need to grow at 2-3% to create new jobs for people coming in. With the high savings rate, and the education and intelligence of the Japanese, that doesn’t seem to be an insurmountable problem at all. China is a much bigger problem. It doesn’t have the educated, trained population – and the size of the state sector is a much bigger problem. I would worry much more about China.
