Banking transparency vital for recovery: Dornbusch

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)