Summary

Introduction
Regional and International Contexts
Singapore's perspectives and strategies
New Instruments
Hedge Funds
Reforming the Bank Sector
Capital Controls
Conclusion and policy implications

Introduction

Since the Asian financial crisis (Krause, 1998), crisis prevention or at least, minimising the political economy of deleterious effects which inevitably encompass the global community, has prompted suggestions from governments, political and business leaders and academicians on global financial reforms. But no financial architecture can simultaneously accommodate the impossible trinity of continued national sovereignty, a cushioned regulated and supervised financial market and the benefits of globalised capital markets. There is possible conflict between political feasibility and an architecture even if it can ensure a stable world financial order. Issues pertaining to who the architects and regulators should be would define and shape the architecture itself. The only consensus seems to be that despite the conventional wisdom of market forces, financial markets and their operations constitute a systemic risk too large and powerful to be left to themselves and blind faith in them is misplaced.

Actually, there are no less than ten proposals for the new financial architecture, including what the G7 and G22 (G7 plus 15 developing countries) were to produce in studies aimed at improving transparency and surveillance in the world financial system.

Regional and International Contexts

Japanese Finance Minister Miyazawa's proposal for a tricurrency system with the Euro and yen joining the dollar was opposed by the US which clearly enjoys its hegemony (Asian Wall Street Journal, 28 February 1999 and International Herald Tribune, 30-31 January 1999). Japan's proposal of an Asian Monetary Fund in October 1997 was rebuffed by the US on the same ground. A yen block has not taken off as even Asia resented Japan as a marauder. Generally, the Japanese, like British and German, opt for more regulation, monitoring and correcting the oversight on international vehicles as conduits for international capital flows such as hedge funds. Asia has little choice but to depend on the triad of US, Europe and Japan to maintain and safeguard the global financial system.

A new global financial architecture is not necessarily a radical transformation of the global monetary and financial regime. Two criteria are critical, namely, their political feasibility and their success in creating a more stable world financial order. Instead of throwing out the baby with the bath water, the best and most practical approach would be to improve existing institutions, beginning with the IMF and amending IMF articles to make capital account convertibility a goal of IMF policy like current account. Barring objections to the danger of expanded power and American influence in IMF which must be tackled at another level, the role of IMF remains and can be elevated with safeguards. It could help members achieve an optimal speed and sequencing of capital account liberalisation. As a check and balance for IMF powers, more private sector involvement in the form of credits to supplement IMF resources, expertise and committee of creditors is sensible. As the walls between domestic and international capital markets become more and more porous, it is inevitable that IMF surveillance would mean greater incursion into domestic legal and economic arrangements. All the more, private sector as a partner in these efforts would make some areas less politically sensitive and more neutral as the market needs information and transparency as well.

Singapore's perspectives and strategies

As a small city state despite its first world standard in living and high per capita income matching those of the G5, Singapore as a global trader thrives on a liberalised trade system while mindful of unfettered international capital flows. Even before the crisis, it was moving to liberalise its financial sector.

Yet, Singapore would be committed to aspects of the new global financial infrastructure which enhance features of corporate governance, transparency and safety first.

Such, the Stock Exchange of Singapore (SES) is developing a securities borrowing and lending market (SBL) which will establish organised short selling market practice with safeguards to prevent excessive volatility (Singapore Business Times, 6 November 1998). The SBL represents a the conviction that capital mobility and hedge funds are not themselves bad and over regulation is neither possible nor necessary.

New Instruments

The SBL is one of the proposals of SES Review Committee supported by the Monetary Authority of Singapore (MAS) for two reasons. One is to develop Singapore as a full-fledged capital market, adding liquidity and depth to securities market in an organised market subject to supervision by the SES to provide transparency to market players which is preferred to the existing over-the-counter securities borrowing and lending market. Secondly, the absence of an onshore SBL market has limited shortselling mostly to big foreign funds with access to offshore securities. With the new proposal, retail players can enter SBL market. Retail investors should be able to borrow securities for shortselling. Securities lending or shortselling per se is not evil, as it facilitates more transactions, liquidity and settlement as well as provides flexibility. A successful fund management environment depends on ability of fund managers to hedge their long positions and this in turn depends on successful and profitable shortselling mechanism. The SBL represents additional source of income for custodial banks, brokers and investors with large securities holdings.

Hedge Funds

There is no specific policy to ban or attract hedge funds and the supervisory function of the MAS is to ensure there is no over exposure as noted by Lee Hsien Loong, chairman of the MAS (Sunday Times, 24 January 1999). His views are in full consonance with Finance Minister Richard Hu who defines Singapore’s response to hedge funds as a preference to regulate them by imposing conditions through the intermediaries. These are the banks which lends the funds. These have the prudential requirements to limit the ability to lend and both the IMF and BIS should issue rules to introduce such prudential requirements. The idea is to first identity entities or hedge funds to which they lend to and second, aggregate the information to know the magnitude. Transparency will be attained as a consequence which make policy and awareness of the size and scope of the activities of hedge funds possible. The key to good defence from external rapaciousness is improving such transparencies of the market, a strong settlement and payment system and a reduction in the need and opportunity for sudden shifts of the „herd". What spooks financial crisis has been the confidence and sentiments of the market and there is the need to protect the economy against uncomfortable market movements by avoiding one-way bets in the form of inconsistent policies and indefensible currency pegs. These would open the economies wide open to speculative attacks.

Reforming the Bank Sector

Singapore has gone further into liberalisation with a blueprint announced by Lee Hsien Loong of the MAS. The most significant policy is scrapping the 40% ceiling on foreign ownership of local banks and MAS to issue a qualifying full bank licence to six foreign banks, allow five more restricted banks and give greater market access to qualifying offshore banks. But policy has not gone to the extent of foreigners taking complete control of any local bank.

At the same time, Singapore has allowed more foreign lawyers in together with other professionals under its policy to attract foreign talents. Singapore is moving from a safe, sound but not sustainable position to a new one which gives competition for local banks, better services and a more viable financial centre in the long run. It has no other options but follow global and technology trends and keep maintaining its international competitiveness as the region catches up.

Having protected and nurtured local banks and nudged them six or seven years ago to move, merge or go downhill, Senior Minister Lee Kuan Yew had warned that they would be wiped out in ten years or less if they still did nothing (Business Times, 8 May 1999). He urged infusion of foreign talents to the helm of traditional family owned Chinese banks as even partially government owned Development Bank of Singapore (DBS) has done in appointing a foreign CEO. Plausibly, if local Chinese banks are still resistant to merge and upgrade in line with the global financial system, they would give the excuse for more state intervention which should be exercised with care and due diligence.

The liberalisation plan is a clear signal that Singapore could support a wide range of the ideas discussed internationally with respect to the new financial architecture. It may fall between the American philosophy of completely open and unregulated financial markets and the Japanese and European approaches of tougher regulation. It is realistic to take a middle-of-the-road solution in view of its size and vulnerabilities including total trade to GDP ratios between 200 to 300%. But though It would be more committed on corporate governance and transparency, MAS is not itself very transparent in releasing financial sector statistics and information. For instance, information and data on components, trends and types of savings by households and firms and identity of holders of government bonds and stocks, are not published.

Capital Controls

On capital account liberalisation, Singapore relies on inward direct foreign investments (DFI) and multinational corporations (MNCs) to attain high technology industrialisation and markets in the OECD countries. It encourages outward DFI under its regionalisation policy to take advantage of factor resources and tap demand through market penetration in booming Asia Pacific. However, there is a discreet policy of capital control in the amount of Singapore dollars which can be taken out for outward DFI. This is not unlike other subtle forms of capital controls elsewhere as in control of local and foreign currencies by travellers though Singapore has no such restrictions on local and foreign visitors.

On Malaysia's proposal shortly after the crisis broke, to use the Singapore dollar for trading within the region, Singapore was silent and did not respond then. Partly, it may be unsure if that would help others wean themselves from trading in the US dollar. More to the point, allowing the Singapore dollar for regional trading would commit Singapore to issue more currency. Under its currency board system dictating a prudent 100% backing, it would impose a drain and strain of its balance of payments and official reserves would have to be depleted. The MAS would lose control of monetary policy with an offshore dollar market which may go beyond ASEAN, funds being fungible and walls around financial markets porous. Instead, Singapore, gave other forms of in-kind and financial assistance to neighbouring countries in bilateral packages and through IMF (Low, 1999). There is more control over cost and impact in these packages than an unstructured involvement by way of its dollar as a trading currency which depends crucially on successful macroeconomic stabilisation elsewhere.

To Japan's hope to have Tokyo, Singapore, Hong Kong and Sydney financial centres help Asian nations raise bonds by guaranteeing these sovereign bond, Lee Hsien Loong has reportedly responded that Singapore could possibly help if there was an interest in the Singapore dollar or other currencies (Straits Times, 22 May 1999). This is in line with its policy on financial sector development.

Conclusion and policy implications

The metaphor of mending the road or drivers to avoid a crash (The Economist, Global Financial Survey, 30 January 1999) is appropriate and a little of both is the best compromise for the emerging global financial architecture. The Asian crisis has shown patent weaknesses of the current system including conditionalities of IMF programmes failing to take account of concomitant social distress and political economy effects. The human dimension of economic reforms is now increasingly appreciated by IMF. However, Camdessus reminds critics that it would be very difficult to do the right thing socially without doing the right thing financially (Asiaweek, 28 May 1999, p 93).

While the West favours corporate governance and transparency, Asia may opt for authoritarian styles, like Malaysia for capital controls (Haggard and Low, 1999). The difference may be more apparent than real because neither are simple absolute solutions. Just as transparency is not easy to achieve, Malaysia has eased its unorthodox controls by introducing a graduated exit tax in February 1999. Whichever approach, they converge to the same goal of stability and safety in their respective financial system. Singapore prefers an open competitive system in general even if it does not go all the way as seen in its liberalisation of its banking sector. But it would not be keen and cannot afford unorthodox solutions like explicit capital controls because confidence is an important premium to support its financial centre. It is known for its policy consistency and stability and is acutely aware of its physical size and lack of other resources beside its intellectual capital and economic management and governance to sustain itself.

It is in Singapore's interest to see ASEAN and Asia recover from the crisis, leaner, cleaner, sturdier and more competitive from bank and corporate restructuring. Its MNCs, government-led companies (GLCs), banks and other corporations are actively involved in afflicted countries, helping in their financial and corporate restructuring and reform. Because it is more rule based, generally following most international laws, rules and conventions, it could be exemplary in its dealings and operations in the region. It would support the main struts of the new financial architecture positing improved corporate governance, transparency, prudential regulation, monitoring and supervision. It has joined ASEAN members in mounting an alert or advance warning system for crisis prevention and most important of all, concerted co-operation among members also in the Asia Pacific Economic Co-operation (APEC) to ensure stability in financial markets.

While its economy and financial sector are not small in relative terms, they are in absolute terms and it is highly vulnerable through interdependence with the region and global economies. To remain competitive, Singapore has liberalised its banking and legal sectors which make its financial sector stronger. This would help countries in the region in raising funds or channelling them to more efficient uses. Its policies are thus generally in the right direction and could help others along in the new global financial architecture.

But realistically, political feasibility and sensitivity constitute a large part of political commitment to implement policies and platitudes. Singapore can play a role in the ASEAN and APEC regions to broker ideas and schemes which will achieve the visions of the new financial order. However, geopolitics within and outside Asia Pacific region are changing with governments, political leaders and society still in transition in many Asian states. There is a tremendous challenge for Singapore to intermediate between the needs and aspirations of the developing world and economies in transition and the rest of players in the global financial system. It could be exemplary to others showing how the global financial system need not be an exploiter and evil mechanism to transfer hard earned wealth away. Indeed, the crisis should give cause for them to gear up their financial infrastructure and human software and skills to manage themselves better along financial and technology highways.

Here again, Singapore has more cultural insights, hopefully, understanding and experience dealing with neighbours in the region to help a flow through of ideas, exchanges and consensus building between the designers of the new global financial architecture, its users and players. The strong presence of MNCs and worldclass players in the financial and capital markets operating in and out of Singapore should also help in its roles as honest broker, intermediary and consensus building. What is required are equally visionary and pragmatic leaders in partnering countries to go beyond the political economy of reforms. Singapore is economically and politically too small to play a leading role and has to defer this to a larger ASEAN or Asian state. But it could be a powerful bridge and conduit in the new global financial architecture because of its structures, institutions and policies more akin to OECD standards.

Linda Low is working in the Department of Business Policy, National University of Singapore