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Debt, financial sector development and Asian economic growth
Economic Systems 31 (2007) 1–2 www.elsevier.com/locate/ecosys
Editorial introduction
Debt, financial sector development and Asian economic growth
Abstract This special issue of Economic Systems includes four papers that broadly relate to the relationship between financial sector development and debt in the Asia-Pacific region. The motivation underlying the choice of the Asia-Pacific region in this special issue is due to the increasing importance that this region will play in powering future world economic growth. In addition, in recent times the focus has been upon the importance of equity and financial sector development, as opposed to debt. The world currently faces many economic imbalances and increasing importance is being placed in the Asia-Pacific upon the breadth and depth of bond markets in helping to restore equilibrium in the world economy. Debt influences corporate funding opportunities and may assist countries in achieving sustainable economic growth. These four papers contribute to our knowledge on the relationship between debt and financial sector development. # 2007 Published by Elsevier B.V. JEL classification : F34; F43; G21 Keywords: Debt; Development; Swaps; Country indebtedness; Japanese banks; Opacity; Capital flows
This symposium in Economic Systems brings together a collection of papers that examines the association between country indebtedness, economic growth and financial sector for a selection of Asia-Pacific economies. In particular, the aim of the symposium was to publish a balance of papers that straddles theory, empirical evidence as well as future policy recommendations to alleviate the burden of debt in emerging economies that may boost economic growth. There are clear examples to show how debt relief assists in economic growth. Jeffrey Sachs, the United Nations Millennium Project Coordinator, was the originator of the ‘debt overhang’ hypothesis. This hypothesis proposed that economic growth and social reconstruction would be hampered if poor country resources were diverted to the repayment of interest on hefty overseas debt commitments. In addition, it is feasible for debt relief to lead to a reduction in country risk and, in turn, result in more capital flows (good cholesterol) for investment, creating a virtuous circle. In this special issue, Swapan Sen, Krishna Kasibhatla and David Stewart test the ‘debt overhang’ hypothesis for a selection of Asian and Latin American countries and find that debt overhang impeded growth in both regions, but to a lesser extent in Asia. 0939-3625/$ – see front matter # 2007 Published by Elsevier B.V. doi:10.1016/j.ecosys.2006.12.001
2
Editorial introduction / Economic Systems 31 (2007) 1–2
In general, governments have tended to favor trade above debt relief as a way of assisting the developing countries in the Asia-Pacific. However, greater trade can only come about if resources are diverted from the repayment of interest on hefty overseas debt to economic growth priorities. An under-utilized way of ensuring debt relief can be used transparently for reconstruction is through a Debt-for-Development Swap, which offers two advantages. On the one hand they reduce debt and the crippling repayments of the poorest countries, while on the other they ensure funds are directed to projects in specific sectors, such as education, the environment or development. In this special issue, Danny Cassimon and Jos Vaessen present a coherent framework that examines whether micro, sectored or macro focused Debt-for-Development swaps are the most viable way to meeting the Millennium Development Goals. They suggest that there is an unexploited potential to implement Debt-for-Development swaps in the Asia-Pacific region. Critical for the success of these financial instruments has been the involvement of NonGovernment Organizations and International Aid Agencies, who bring much needed knowledge and skills to help ensure that money is channeled into its intended purposes. Transparency and accountability are two important ingredients for this conduit of debt relief to be effective. In this regard, Price Waterhouse Coopers (PWC) recently announced in March 2005 their agreement to allocate 8000 man hours to monitor and enforce the fair and transparent distribution of cash to tsunami victims, as well as other aid projects. It is thus likely we will see an increasing role for international accounting and management consultancy firms in the disbursement of economic development capital which enhances donor confidence in aid agencies and may lead to more money being donated. In this issue, Vince Hooper and Suk Joong Kim use PWC’s opacity indices to investigate their influence on three types of net international capital flows: foreign direct investment, portfolio capital and international bank lending. In general, they find support for higher opacity leading to a reduction in capital inflows. Therefore it may be beneficial for the alleviation of the burden of debt to be coupled by more coherent accountability architecture and infrastructure. Finally in this issue, Kazuo Ogawa, Elmer Sterken and Ichiro Tokutsu explore the determinants of the number of long-term bank relationships of Japanese firms. They find that debt rich firms have more bank relationships than those with large equity stake-holders. Their findings have implications for opacity in the keiretsu formation, economic growth and financial sector systemic risk. Academics can play a pivotal role through research into the impact of debt on the economy and help strive towards the Millennium Development Goals in an attempt to ensure that the misery and suffering of abject poverty becomes history. It is hoped that this symposium can play some role in that process. Vince J. Hooper* School of Banking and Finance, The University of New South Wales, UNSW Sydney, NSW 2052, Australia *Tel.: +61 2 9385 5984; fax: +61 2 9385 6347 E-mail address: [email protected]
Editorial introduction
Debt, financial sector development and Asian economic growth
Abstract This special issue of Economic Systems includes four papers that broadly relate to the relationship between financial sector development and debt in the Asia-Pacific region. The motivation underlying the choice of the Asia-Pacific region in this special issue is due to the increasing importance that this region will play in powering future world economic growth. In addition, in recent times the focus has been upon the importance of equity and financial sector development, as opposed to debt. The world currently faces many economic imbalances and increasing importance is being placed in the Asia-Pacific upon the breadth and depth of bond markets in helping to restore equilibrium in the world economy. Debt influences corporate funding opportunities and may assist countries in achieving sustainable economic growth. These four papers contribute to our knowledge on the relationship between debt and financial sector development. # 2007 Published by Elsevier B.V. JEL classification : F34; F43; G21 Keywords: Debt; Development; Swaps; Country indebtedness; Japanese banks; Opacity; Capital flows
This symposium in Economic Systems brings together a collection of papers that examines the association between country indebtedness, economic growth and financial sector for a selection of Asia-Pacific economies. In particular, the aim of the symposium was to publish a balance of papers that straddles theory, empirical evidence as well as future policy recommendations to alleviate the burden of debt in emerging economies that may boost economic growth. There are clear examples to show how debt relief assists in economic growth. Jeffrey Sachs, the United Nations Millennium Project Coordinator, was the originator of the ‘debt overhang’ hypothesis. This hypothesis proposed that economic growth and social reconstruction would be hampered if poor country resources were diverted to the repayment of interest on hefty overseas debt commitments. In addition, it is feasible for debt relief to lead to a reduction in country risk and, in turn, result in more capital flows (good cholesterol) for investment, creating a virtuous circle. In this special issue, Swapan Sen, Krishna Kasibhatla and David Stewart test the ‘debt overhang’ hypothesis for a selection of Asian and Latin American countries and find that debt overhang impeded growth in both regions, but to a lesser extent in Asia. 0939-3625/$ – see front matter # 2007 Published by Elsevier B.V. doi:10.1016/j.ecosys.2006.12.001
2
Editorial introduction / Economic Systems 31 (2007) 1–2
In general, governments have tended to favor trade above debt relief as a way of assisting the developing countries in the Asia-Pacific. However, greater trade can only come about if resources are diverted from the repayment of interest on hefty overseas debt to economic growth priorities. An under-utilized way of ensuring debt relief can be used transparently for reconstruction is through a Debt-for-Development Swap, which offers two advantages. On the one hand they reduce debt and the crippling repayments of the poorest countries, while on the other they ensure funds are directed to projects in specific sectors, such as education, the environment or development. In this special issue, Danny Cassimon and Jos Vaessen present a coherent framework that examines whether micro, sectored or macro focused Debt-for-Development swaps are the most viable way to meeting the Millennium Development Goals. They suggest that there is an unexploited potential to implement Debt-for-Development swaps in the Asia-Pacific region. Critical for the success of these financial instruments has been the involvement of NonGovernment Organizations and International Aid Agencies, who bring much needed knowledge and skills to help ensure that money is channeled into its intended purposes. Transparency and accountability are two important ingredients for this conduit of debt relief to be effective. In this regard, Price Waterhouse Coopers (PWC) recently announced in March 2005 their agreement to allocate 8000 man hours to monitor and enforce the fair and transparent distribution of cash to tsunami victims, as well as other aid projects. It is thus likely we will see an increasing role for international accounting and management consultancy firms in the disbursement of economic development capital which enhances donor confidence in aid agencies and may lead to more money being donated. In this issue, Vince Hooper and Suk Joong Kim use PWC’s opacity indices to investigate their influence on three types of net international capital flows: foreign direct investment, portfolio capital and international bank lending. In general, they find support for higher opacity leading to a reduction in capital inflows. Therefore it may be beneficial for the alleviation of the burden of debt to be coupled by more coherent accountability architecture and infrastructure. Finally in this issue, Kazuo Ogawa, Elmer Sterken and Ichiro Tokutsu explore the determinants of the number of long-term bank relationships of Japanese firms. They find that debt rich firms have more bank relationships than those with large equity stake-holders. Their findings have implications for opacity in the keiretsu formation, economic growth and financial sector systemic risk. Academics can play a pivotal role through research into the impact of debt on the economy and help strive towards the Millennium Development Goals in an attempt to ensure that the misery and suffering of abject poverty becomes history. It is hoped that this symposium can play some role in that process. Vince J. Hooper* School of Banking and Finance, The University of New South Wales, UNSW Sydney, NSW 2052, Australia *Tel.: +61 2 9385 5984; fax: +61 2 9385 6347 E-mail address: [email protected]