Banking transparency vital for recovery: Dornbusch
JAKARTA (JP): Improved transparency in the banking sector would help restore confidence of both domestic and foreign investors and bring about economic recovery, renowned international economist Rudiger Dornbusch said here yesterday.
From the external side, Dornbusch said, economic recovery in Indonesia and other countries in the region would depend very much on the recovery of Japan's economy from its current financial crisis.
"I think the banking sector is the most important one to provide complete and unlimited information to the rest of the world," he said at the Prasetiya Mulya School of Management's 1997 anniversary lecture at the Jakarta Convention Center yesterday.
"If that isn't done, then the crisis will get worse. And if it is done, then it would be an important step to get out of it," Dornbusch added.
He said a lack of transparency in most sectors, especially in the banking sector, still prevailed in countries currently hit by the currency crisis -- including Thailand, Indonesia, Malaysia and South Korea.
Most banks hid behind bank secrecy laws in those countries. "To hide mismanaged banks behind bank secrecy is quite fantastic," he said.
Transparency in the banking sector was important because it was bad debts, especially those derived from offshore loans, which drove countries in the region into an abyss.
Banks easily procured foreign loans, some even short-termed, to finance unproductive projects, such as in the property sector.
Unless banks in the affected countries opened their books to scrutiny, foreign investors would never put their money back into those countries and domestic investors would not deposit their money in domestic banks.
Consequently the cost of funds would remain high, as would interest rates. Such a situation would primarily punish small and medium enterprises because they could not afford to procure credit.
"Actually, for the most part, the crisis is over. Now you are in the work-out phase where you want to get the interest rates down.
"The best way to do that is for people to understand just what the books of companies and banks look like because if an investor doesn't know what its like, he doesn't want to touch it, and then money is very expensive.
"When the public has a better understanding of the accounts, the interest rates will come down and the recession won't be bad," he said.
Dornbusch, a Ford professor of economics and international management at the Massachusetts Institute of Technology, suggested that Southeast Asian leaders collectively call on Japan to mend its economy so that it could grow and absorb exports from the region.
"I draw attention to the Japanese problem as an extraordinary problem because it affects all Asian economies," he said.
Japan is on the brink of a crisis following the collapse of the country's fourth largest securities firm, Yamaichi Securities -- believed to be the greatest bankruptcy after World War II.
Even if the Japanese government was capable of mending the financial sector by taking over all bad banks and cleaning them up, it would still be confronted with the issue of growth.
"If Japan doesn't grow, your crisis will become more intense, and we may loose free trade," Dornbusch said.
If Japan's economy did not grow, most emerging Asian economies would have problems in exporting most of their products as Japan had been a large traditional market for them.
Consequently, all Asian economies would try to double their exports to the United States or European countries, which would likely impose restrictions to reduce current account deficits.
"That's why Japan has to grow. If Japan doesn't grow, then the United States and the European Union will get all of the problems. We don't want that much," he said.
"I'm surprised that leaders in the region talk nonsense about establishing an Asian Fund instead of about problems in Japan," Dornbusch said.
It was wrong to concentrate on the Asian Fund as "the issue is not to get rescue money but to clean up the system," he said.
He contended that all Asian countries currently hit by the crisis already received rescue money from the International Monetary Fund. Therefore, there was no need to establish such a fund unless it would be used as an excuse to hide economic mismanagement.
It would take a few years for countries plagued with crisis "to clean up their mess" and therefore growth would not reach the level before the crisis came.
Growth for the coming few years would reach two-thirds of the level before the crisis provided that Japan's economy grew to absorb exports of Asian economies, Dornbusch said. If not, growth would surely be lower. (rid)