Private Capital Flows, Emerging Economies, and International Financial Architecture

June 10, 1999


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Financial Markets

Emerging Markets


Firms and development strategies based on a rear-view mirror view will leave companies, projects, and entrepreneurs scrambling for capital access. The control of capital in the developed world continues to shift away from private and state-owned institutions and toward public markets. Small and medium-sized firms with the best prospects for innovation and income/wealth generation need to be liberated from their dependence upon bank-based financial systems. They must also have the ability to turn to market-based systems with access to institutional capital providers at home and abroad.

Discussion of financial architecture cannot be separated from the problems of concentration of political power, industrial control, and financial capital. Growth and equity in the economy is limited by entrepreneurs' dependence upon commercial banks that are state-owned or directed, and thus historically removed from shareholder and creditor accountability. If politically connected holding companies can shift most of their liabilities to a few subsidiaries and then give those units to the government for liquidation through restructuring authorities, new investment will not occur. As the Wall Street Journal recently reported, hints of recovery promoted by financial assistance packages may well have stalled efforts at financial reform and corporate restructuring. In Thailand, where thousands of companies stopped paying their debt in 1997, restructuring is at a standstill. In Malaysia, corporate debtors have been insulated with a government-directed credit committee. In South Korea, chaebols have expanded their debt and statelinked companies and family conglomerates have resisted change throughout the crisis countries.