Banking Sector

[yellow knifeTop contributor]

Banks and the directions banks get are very important for the development of a nation. Bank of Tokyo Mitsubishi UF J has obtained approvals to open representative office in Sri Lanka.

In this background lets look at how banking sector is controlled and directed in different countries like South Korea, Malaysia, Thailand, Japan, Taiwan, Indonesia towards achieving economic growth.

[yellow knifeTop contributor]

All banks are financial intermediaries . That mean they collect from depositors excess money and transfer that to deficit units. For doing that they charge interest .

Charging interest is labelled as usury by many religions and prohibited.

Buddhism is one religion that does not prohibit charging interest and  as per David Graber's book DEBT , a Buddhist devotee by the name of Hariswamini recorded the usage of interest of her deposit . (p.253)

Another source

Journal of the Royal Asiatic Society

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Royal Asiatic Society of Great Britain and Ireland - 1841
This inscription records that a female devotee, Hariswamini, to prevent begging, caused an almshouse to be erected, and money was given for the lamps of the

[yellow knifeTop contributor]

When Islam an Christianity prohibited usury it was Jews that took into banking business in Europe.

However its worthy studying Barclays Bank which has been surviving for more than 250 years and taking many entrepreneurial risks like lending for rail road laying, ship building, and many other big projects. Even Hyundai got loans from Barclays where the amounts were huge that even states find it difficult to take such loans..

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[yellow knifeTop contributor]

What made Barclay's to take such high risks towards developing a better future for human race is because they are Quakers .

So its worth understanding who are Quakers...To understand Quakers we should know Gorge Fox.

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George Fox believed that God has created all equal and hence no need to consider some superior because they are priests and to pay tax to Church. This new thinkers were not allowed to join government jobs by Church. Therefore they had to select jobs that others do not do, like banking.

[yellow knifeTop contributor]

Barclays is not the only business of Quakers...


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[yellow knifeTop contributor]

Jews, Quakers and others who were not followers of main stream religions took banking business and became rich.

It made all others to understand the power of banking.. Medici family was a banking family of Medieval Europe. Lets stop discussing much of the past and concentrate on modern days banking and its influence in different countries..

[yellow knifeTop contributor]

Once a country is developed it allows much freedom for banks. In return banks chase profit like any other business. Thus it becomes very natural for banks to grant loans for consumption where the return in very high.

But developing nations governments should strongly control where the credit is flowing.

The best banking returns in the east Asian region are produced in the region's most backward ( poor ) countries- Philippines, Indonesia and Thailand.

Thailand is considered as the best pupil of IMF in east Asia region as it practice what IMF preach.. that is deregulating and liberating banks.

But countries like Korea financial policy frequently accepted low near-term returns on industrial investments in order to build industries capable fo producing higher returns in the future.

In this context its worthwhile comparing the Consumption Loans offered by Sri Lankan commercial banks by means of Gold Pawning.

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[pathfinderTop contributor]

Good post

[yellow knifeTop contributor]

Germany in 1870's  industrialization had been accompanied by the creation of powerful investment banks.

Similarly in US industrial progress was fostered by the high tariff policies, railway subsidies and cartel tolerance of the federal government. In this context banking magnates such as J.Pierpont Morgan invested heavily in the industrialization process , creating business empires with huge economies of scale


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In short , state directed industrial policy came first, and bank financing second.

[chutiputhaTop contributor]

thank u Sir..

[BackstageTop contributor]

Thanks YK. This is so good.

[yellow knifeTop contributor]

When state did not focus on Manufacturing, banking sector neglect them.

Best example is Spain. 19th Century Spain had a large number of investment banks. Spain legal system and state was in favour of railroads but not on manufacturing.



As a result Spanish banks financed thousands of kilometers of railroad lines, for which all the rolling stock was imported and for which there were no manufacturers to transport. After banking crisis in 1870s Spain remained thoroughly UN-industrialized.

Similarly Austria had plenty of investment banks and weak infant industry policies.

In sum , throughout history financial systems have catalyzed different developmental outcomes depending on the policy environment that has surrounded them. And it is the governments of successful emerging states that make financial systems support effective industrialization.

[yellow knifeTop contributor]

Germany and US had been the first countries to raise their savings and investment ratios to 20% of GDP. In 1960 the American government adviser W.W.Rostow predicted in his influential book The Stages of Economic Growth that an unprecedentedly large cohort of developing economies would soon be able to achieve savings and investment rates in excess of 15%.

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In the event, every one of the nine major east Asia economies , from Japan to Thailand delivered post-war savings and investment rates of 30% to 50%.

[yellow knifeTop contributor]

The Loudest and most evangelical message of IMF,WB and US Treasury was that deregulating the financial sector could put the development efforts of lagging countries back on track. States were encouraged to privatize existing banks and license new banks to take a  laissez-faire attitude to international flows of capital and to expand stock markets.







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These arguments are knows as Washington Consensus

The Washington Consensus is a set of 10 relatively specific economic policy prescriptions that is considered to constitute the "standard" reform package promoted for crisis-wracked developing countries by Washington, D.C.–based institutions such as the International Monetary Fund (IMF), World Bank, and the US Treasury ...

Washington Consensus - Wikipedia, the free encyclopedia

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[yellow knifeTop contributor]

The consensus as originally stated by Williamson included ten broad sets of relatively specific policy recommendations:

1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
   
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
   
3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
   
4. Interest rates that are market determined and positive (but moderate) in real terms;
   
5. Competitive exchange rates;
   
6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
   
7. Liberalization of inward foreign direct investment;
   
8. Privatization of state enterprises;
   
9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
   
10. Legal security for property rights.
    

[yellow knifeTop contributor]

Our education system often neglect history and never combine economy with history.
 
Meredith Jung En Woo got the luck of mastering history then other subjects and made her to see the world and predict...

[th]Meredith Jung-En Woo[/th][th]Born[/th][th]Occupation[/th][th]Korean name[/th][th]Hangul[/th][th]Revised Romanization[/th][th]McCune–Reischauer[/th]

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Seoul, South Korea

Professor

우정은

U Jeong-eun

U Chŏng'ŭn

[yellow knifeTop contributor]

Years before the Asian financial crisis, the Korean finance scholar Jung-en Woo warned Asian states about Latin America's IMF sponsored reforms.

" Privatization in Latin American Southern Cone had its conglomerates run amok" she wrote. " buying up banks to buy up other enterprises stocking up loan portfolios with loans made out of affiliated firms. ...it
led to Chilean and Argentinine grupos (Groups )  profiting like bandits. Despite the evidence from Latin America about the risks of premature bank deregulation - not to mention what was seen after financial deregulation in Russia in the early 1990s -south -East Asia went ahead with very similar policies. Once again political leaders knew too little history and were too easily bewitched by economics.

[yellow knifeTop contributor]

Before moving ahead on banking lets just read about Meredith Jung-En Woo.


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Resigning to write a book ?



On October 7, 2013, Woo announced her resignation from the position of Dean of the College and Graduate School of Arts and Sciences, effective May 2014, by University of Virginia email. She plans to write a book named The Three Worlds of East Asian Capitalism, and then to return to teaching

Books she already wrote ?

• Race to the Swift: State and Finance in Korean Industrialization Columbia University Press, 1991.
  
• Past as Prelude: History in the Making of the New World Order Westview Press, 1991.
  
• Capital Ungoverned: Liberalizing Finance in Interventionist States Cornell University Press, 1996.
  
• The Developmental State Cornell University Press, 1999.
  
• Neoliberalism and Institutional Reform in East Asia Palgrave, 2007.
  
• What Does North Korea Want? op-ed in The New York Times published 7 July 2006
  

From Books to Films ?

She was the executive producer of

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[yellow knifeTop contributor]

South East Asian countries extended the period of not listening the advises of IMF, WB and US Treasury as much as possible.

Japan, Taiwan, South Korea did their best to not to listen to advice from IMF..until they passed many milestones in development..

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[yellow knifeTop contributor]

Japan had formal repeated demands from the IMF and the secretariat of the General Agreement on Tariffs and Trade (GATT the forerunner of World Trade Organization ) to move to currency convertibility from 1959, but hung on to its highly restrictive Foreign Capital Law until 1980.




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Korea and Taiwan were similarly reluctant to accept the demands for free up Capital flows until 1990s.

[yellow knifeTop contributor]

Finally in 1994 South Korea had to  listened to IMF , and faced heavy inflows of by short term gain minded investors. Basically these investments goes to real estate investments and other non-productive activities like stock market speculations.




Japan, Korea and Taiwan each experienced financial crises when liberalizing. But what was more important was that these states resisted pressure from the Washington Consensus and held liberalization until very substantial development progress had occurred.

[yellow knifeTop contributor]

The key control of maintaining financial control in a developing economy have always been

1. Capital Controls

2. Banking systems.

Banks are beholden by Central Banks, thus governments can pave way through Central Banks. ( Who said Central Banks should be independent from Government ? )

Stock market and Bond markets, by contrast are subject to instantaneous selling by investors in times of panic.

[yellow knifeTop contributor]

Lets study Japanese Banks

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[yellow knifeTop contributor]

Earlier economists did not really explore Banking sector until the great depression of 1929 and Keynesian emerging.

So during Meiji Restoration era, the policy makers of Japan just copied what US was doing.

Initially they allowed the setting up of scores of banks with the ability of issuing currency.

Net result was 1870s Hyper-inflation and in 1880s Deflation.

As mentioned the book Alchemist, the Bankers found the solution in Goldilocks... Neither too big nor too small fits in.. You have to find what suit you..



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Therefore a Central Bank was created with monopoly of currency issuing.

Later three big industrial lenders were created by government

1. Yokohama Specie (1870)
2. Nippon Kangyo ( 1897)
3. Industrial bank of Japan (1902)

[yellow knifeTop contributor]

At the start of 20th Century there were 2000 banks in Japan. That was too much.. So there were bank-runs..

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DEFINITION of 'Bank Run' A situation that occurs when a large number of bank or other financial institution's customers withdraw their deposits simultaneously due to concerns about the bank's solvency.

Bank Run Definition | Investopedia

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