This paper critically reviews the conventional discussion on the financial system in Southeast Asia. Discussion of the financial crisis in 1997 has usually stressed, as a way forward, the enhancement of corporate governance, overcoming excess debt finance, and a shift to market based financial methods such as equity and bond markets. By showing numerical evidence for the cases of Thailand and Malaysia, this paper challenges these conventional views from the perspective of the relationship in the region between the financial and industrial sectors.
Considering the early emergence of the financial sector in Southeast Asia and the relatively delayed industrialization of the region, bank lending to the manufacturing sector is a relatively recent practice. The foreign-capital-led industrialization after the mid-1985s created a further serious cleavage between these sectors. Examination of recent micro-financial data for firms since the early 1990s shows that the debt ratio and the bank borrowing ratio in the major firms in Thailand and Malaysia was surprisingly low, and that these figures neither increased during the early 1990s when crisis was creeping, nor changed after the crisis.
Ten years on from the crisis, the economy of the region has recovered, a process led mainly by the growth of the manufacturing sector, whilst the financial sector remains stagnated. In spite of the efforts of governments and international organizations, careful empirical observation indicates that the shift in the financial systems towards a market-based approach, such as equity or bond markets, is still in progress.
The financial system and the corporate finance structure are generally prescribed by the structure of the manufacturing sectors that constitute the demand side of the fund. The unexpectedly slow development of the market-based financial system, in spite of the efforts of the authorities, could mean that the demand for funds through the organized market is still scare in major industries such as export manufacturing.
In the long run, a change in the financial system and in corporate finance would be brought about by a change in the manufacturing sector, while policy reform in the financial system should remain circumspect. Considering the still inactive financial intermediation of the commercial banks, it is necessary to pursue a balanced recovery of the financial system, instead of a one-sided emphasis on a market-based shift.
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