ISEAS-NTU Financial Reforms and Liberalization Ranking Indices For ASEAN 10 + 5 Economies (i.e. China, Japan, South Korea, Hong Kong & Chinese Taipei)*

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ISEAS-NTU Financial Reforms and Liberalization
Ranking Indices For ASEAN 10 5 Economies (i.e.
China, Japan, South Korea, Hong Kong Chinese
Taipei)
presented by
Dr Tan Khee Giap Associate Professor of Banking
Finance Nanyang Business School Founding Member,
Asia Research Center, NTU Visiting Senior
Research Fellow, ISEAS Dr Chen Kang Associate
Professor of Applied Economics School of
Humanities Social and Sciences Founding Member,
Asia Research Center, NTU Visiting Senior
Research Fellow, ISEAS
Prepared for the inaugural launch on 10 March
2006, Seminar Room II, Institute of South East
Asian Studies (ISEAS). This project is funded by
Nanyang Technological University (NTU) ISEAS
with support by a team of able research
associates from Nanyang Business School at NTU
who include Mr. Chew Wei Lip, Mr. Chin Chea
Theen, Ms. Leow Yiqin, Ms. Ng Ee Teng, Ms. Tan
Sun Sun, Ms. Yap Lay Ming, Ms. Shahirah Bte
Arshad, Ms. Khoo Miaosi, Ms. Kwan Poh Teing, Mr.
Seah Choon Kiat, Mr. Liaw Siqin and Mr. Chen Zhiy.
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Presentation Outlines

• Background and primary concerns.
• Issues at stake project objectives
• The research framework for Financial Reforms and
  Liberalization Ranking Indices (FRLRI)
• The methodological approach, simulation studies
  data sources
• Overall FRLRI for ASEAN 10 5 economies
• What IF simulated rankings for ASEAN 10 5
  economies
• Strategies forward identifying agenda for
  unfinished reforms

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Background and Primary Concerns

• Lack of coordination and inconsistent policy
  actions in monetary and financial reforms in East
  Asia are well recognized, although there is no
  lack of discussions on the broad framework and
  ground work setting for integration.
• Since the 1997 financial crisis, reform effort
  made to date in financial and monetary fronts are
  far from satisfactory, with many pre-crisis
  problems remained and nature of issues unchanged.
  
• The continued lack of fair and true
  representation, and hence voices struggling to be
  heard from emerging economies in international
  groupings, forum and international agencies are
  worrisome and inadequate.
• Think-tanks and academics could join effort
  should fill the gap by providing impartial and
  independent assessment and quantification through
  in depth research and market studies.
• The ISEAS-NTU study is the first comprehensive
  attempt to quantify financial reforms and
  liberalization of ASEAN 10 5 economies
  reflecting regional conditions.

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Background and Primary Concerns

• Rapidly growing emerging Asia economies such as
  China and India since the new millennium have
  attracted rapid inflows of foreign direct
  investments (FDIs) from developed economies to
  Asia since the late 1990s, and more recently
  portfolio investments (PIs) inflows including
  establishments of multi-country cross-border
  investment funds.
• International trade and financial services are
  twin pillars of globalization. Notwithstanding
  the frustration at WTO multilateral negotiations,
  some progress made on trade front is evident with
  flourishing regional and bilateral free trade
  agreements (FTAs).
• The slow progress in the much talk about
  post-crisis international financial architecture
  (IFA) is disappointing, establishing regional
  financial architecture (RFA) in East Asia is thus
  an urgent task but must be simultaneously
  undertaken with domestic financial liberalization
  (DFL).
• Asia, being the most rapid growing region in the
  world, renders effort to promote harmonious and
  consistent regional monetary and financial
  integration even more critical.

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Issues At Stake Project Objectives

• In the crisis aftermath, there is greater
  recognition on appropriate role of governments
  and markets in financial reforms and
  deregulation, and their respective strength and
  failure are pivotal to further regional monetary
  and financial integration (Stiglitz 2003).
• The post-crisis Peer Review System, introduced by
  IMF and ADB to East economies are less than
  successful because regional governments still
  harbor suspicion and reject imposing nature of
  international agencies, and there is this general
  lack of faith and trust by top leaderships of
  some crisis-affected economies.
• The Self-Assessment System undertaken by
  international agencies including the World Bank
  resulted in progress findings which are too good
  to be true as governments tend to be
  over-generous in the self assessment exercise.

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Issues At Stake Project Objectives

• The ISEAS-NTU FRLRI is a Peer Pressure System
  that is non-confrontational, non-negotiating,
  non-obligatory and non-committal. The modus
  operandi works through influences, soft
  persuasion, constructive consultations, most
  important of all, to exert annual peer pressure
  through publicity and power of international
  media and press.
• The prime objective is to construct a prototype
  analytical framework to annually quantify
  progress made in financial reforms and
  liberalization for ASEAN 10 5 economies.
• In terms of financial reforms and liberalization,
  the ISEAS-NTU study is intended not as much to
  single out top economies, but more so to
  encourage weaker economies to identify areas in
  need of reforms through our What If simulation
  exercises.

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FRLRI FRAMEWORK
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Indicator in reverse order (i.e. the lower the
value, the better is the indicator)
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Indicator in reverse order (i.e. the lower the
value, the better is the indicator)
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Indicator in reverse order (i.e. the lower the
value, the better is the indicator)
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Methodological Approach

• The basis for the ranking is the standardized
  value (STD). We first compute the 15-economy
  average for each indicator following which the
  standard deviation (S) is calculated using the
  formula
• Following which STD is computed, by subtracting
  the 15-economy average from a economys original
  value and then dividing the result by the
  standard deviation as follow
• Note that sub-factor rankings are the average of
  the STD values of all the ranked indicators which
  make up each sub-factor. This average is found by
  dividing the sum of the STD values by the number
  of indicators in each sub-sector. This enables us
  to lock the weight of sub sectors independently
  of the number of indicators they contain.
• Category rankings are determined by dividing the
  sum of the sub categories STD values by the
  number of sub categories in each category. The
  computation of the overall ranking for the ASEAN
  10 5 economies is found by computing the
  weighted average of the 4 categories STD values.
• Given that implementation and enforceability is
  still a major issue for corporate governance
  (OECD 2003), we therefore allocated weight of 100
  for category 1, 2 3 but 50 for category 4.

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Simulation Studies Data Sources

• Avoiding being obsessed with ranking per se, and
  to be constructive we conduct simulation
  exercises by identifying 20 weakest indicators
  as measured amongst the lowest STD values across
  all 86 indicators, then improve them to the
  15-economys average.
• Note that amongst 82 indicators used, we
  identified 14 weakest indicators from category 1,
  2 3, while 3 weakest indicators were identified
  from category 4 reflecting the 0.5 weight
  previously assigned.
• Given that implementing reforms involved time lag
  and their improvement in terms of ranking may not
  be readily reflected, and in order to enable
  economies to keep tract and maintain their good
  performances, we did however identify 20
  strongest indicators amongst all indicators which
  would not be reported here.
• Indicators used based largely on 2004 data were
  sourced from International Financial Statistics,
  International Monetary Fund. ASEAN Secretariat,
  Bank for International Settlements, Political
  Economic Risk Consultancy, Governance Metrics
  International World Development Indicators.

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Empirical Rankings Interpretations

• The results of the overall financial reforms and
  liberalization ranking is by and large within
  expectations, with emerging economies ranking
  lower and developed economies in top positions.
• On financial institutions stability and
  soundness, Indonesia ranked rather high at second
  position reflecting substantial restructuring,
  clearing up and recapitalization after spending
  RP650 trillion.
• On development and liberalization of financial
  markets, Singapore leads the league reflecting
  Monetary Authority of Singapores liberalization
  measures introduced since 1999.
• On central banking policies and management
  efficiency, again the findings are not surprising
  with top ranking coming from developed and newly
  industrialized economies.
• On corporate governance, rules and regulations,
  interestingly Malaysia, Singapore, Philippines
  China are ranked amongst top positions, and we do
  want to reiterate that these top positions are
  not equivalent to effective implementation and
  enforceability. Surprisingly Hong Kong ranked
  rather low at 6th position in this category. Hong
  Kongs low level in this category is confirmed by
  a recent survey done by Pacific Economic
  Cooperation Council on Macro Corporate Governance
  Scorecard (see Cheung Jang 2005) where it was
  ranked lowest amongst the East Asian economies.
  However, in terms of perception by investors,
  fund mangers and analysts, the survey results
  revealed that Singapore Hong Kong persistently
  ranked 1st and 2nd.

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What IF Simulations Limitations

• Ranking can be a meaningless exercise and
  obsessed with ranking is both dangerous and
  wrong.
• What If simulation is constructive as it
  highlights strength identifies weaknesses for
  further reform effort
• The major limitation being that What If
  simulation is a static evaluation where
  improvements are made and assessed on one economy
  while holding other 14 economies unchanged or
  ceteris paribus.
• Corporate governance indicators are based on
  rules and regulations put up by an economy, but
  do not necessarily reflect their implementation
  or enforceability, thus we assigned only 50 of
  category weight. We are however of the view that
  having a comprehensive corporate governance codes
  reflects a good starting position.

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Empirical Simulated Rankings Interpretations

• The simulated results revealed that Chinese
  Taipei (6th to 4th), Malaysia (7th to 5th)
  Indonesia (8th to 5th) could move up within top
  5 positions if they improved upon 20 of their
  weakest indicators to the 15 economy-wide average
  which we identified, ceteris paribus.
• For Chinese Taipei, amongst 20 weakest
  indicators include ratio of foreign assets to
  total assets, ratio of foreign currency bond to
  total bond outstanding, aggregate effective
  currency mismatch, ratio of bank capital to
  assets, degree of distribution of loans by sector
  to total loans etc.
• For Malaysia, amongst 20 weakest indicators
  include exchange rate policy, ratio of foreign
  assets to total assets, foreign equity limit in
  existing local banks, stock market efficiency
  etc.
• For Indonesia, amongst 20 weakest indicators
  include exchange rate stability, ratio of banking
  assets to GDP, ratio of foreign assets to total
  assets, ratio of bond market capitalization to
  GDP, long term interest rate etc
• From the 2nd position, Hong Kong could overtake
  Singapores 1st position in the overall ranking
  if it improved the 20 weakest indicators to
  the 15 economy-wide average which we identified
  to include ratio of liquid asset to liability
  base, ratio of foreign assets to total liability,
  ratio of property related loans to total loans,
  exchange rate policy etc.

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Strategies Forward and Identifying Unfinished
Reform Agenda

• After the inaugural launch of the ISEAS-NTU
  FRLRI, we would improve our studies by setting up
  an independent and objective advisory panel
  consist of experts from 15 economies to gather
  financial sector-specific feedbacks .
• The ISEAS-NTU study can later, when resources
  permit, be extended to the entire Asia by
  including Australia, New Zealand, India
  Pakistan.
• We hope the ISEAS-NTU study will further
  stimulate discussions and dialogue amongst market
  practitioners, government officials and academics
  through annual release of ISEAS-NTU study.
• We noted specifically the effectiveness of
  international press media is helping us to
  deliver the peer pressure effect. We therefore
  are prepared to subject our research rigor to
  scrutiny and be absolutely transparent to share
  our findings publicly, thank you all.