Few issues are more important in setting the agenda for economic growth than the structure, conduct and performance of a nation's financial system. Standing at the centre of the transactions and resource allocation process, high performance financial systems are increasingly important as determinants of sustainable economic progress and stability. This is as true domestically as it is internationally. National financial systems require an efficient “window” on global sources and uses of capital, as well as market developments and financial technologies that change in substance and form at a rapid pace. Few countries can afford to be isolated from these developments—especially as they develop mature industrial structures and rapidly evolving services sectors—or fail to create and maintain domestic financial systems that can eventually meet world performance standards.

This study outlines the framework of high performance financial systems and the parameters for financial firms operating in them. We begin with an intuitive structural model of financial intermediation, and discuss the various stages of its evolution in terms of static and dynamic efficiency characteristics. We then consider issues facing players in, and users of, the financial system. We emphasize strategic positioning alternatives facing banks and other types of financial institutions, and the principal determinants of their competitive performance. This includes the critical role of regulation as a major factor affecting the performance of the financial system itself, both in the context of national economic growth and competitiveness, and as a factor in defining the future of various types of financial firms.

The study also deals with a critical and controversial dimension in the design of the financial system, that is the relationship between the structure of financial institutions, and the linkages to ownership and the control process in industry. How countries deal with this issue can have dramatic effects on both the financial system and the fundamentals of industrial performance.

The end of the Cold War is often interpreted as the victory of capitalism and the defeat of communism. But what is “capitalism”? Look- ing around the world, there are many countries where the economic system is considered a capitalist economy. Nevertheless, capitalism differs from North America to Western Europe and Japan, from East Asia to Latin America. What are the minimum common denominators of capitalist economies? What are the major factors which differentiate one capitalism from another?

In my view, despite apparent differences in many respects, the capitalist economies seem to have at least the following two common denominators.

First, the existence of private enterprises, which are owned and managed by private citizens who seek greater profits through a variety of economic activities on their own initiative. Private ownership of the means of production and distribution is a very important element. Of course, not all are entirely free to act, and all of them have to comply with regulations, controls, and guidance of the state to different degrees, but they are at least privately owned and managed. In many capitalist economies, there are state-owned enterprises, but even in the countries where the state-owned enterprises are very influential, the areas they cover are still a part of the entire national economy. There are an increasing number of countries where state-owned enterprises are gradually privatized.

The second common denominator is the market mechanism, through which prices are more or less determined by market forces, that is, the balance between the demand for and the supply of goods, services, and capital. Of course, in many capitalist economies prices are regulated when the supply of certain items is not sufficient, or when control of the prices of particular items is considered crucial for the entire national economy, or in cases of national emergency. Even then, however, the authorities are prepared, perhaps reluctantly, to adjust these controlled prices if and when they clearly divert too much and too long from the equilibrating level of demand and supply.

The ability of financial institutions to exploit opportunities within the C-A-P framework depicted in Figure 3.1 depends on a number of key firm-specific attributes. These include the adequacy of the institution's capital base and its institutional risk base, its access to human resources, its access to information and markets, its technology base and managerial culture, and the entrepreneurial qualities of its people.

Adequacy of the Capital Base

In recent years, financial institutions and their regulators have started to pay increasing attention to the issue of capital as a source of competitive power as well as prudential control (BIS 1986). This has always been true for activities appearing on the balance sheet. But with increasing concentration of domestic and international finance in the securities markets, the role of capital has become important as the principal determinant of risk-bearing ability in securities underwriting and dealing, as well as in off-balance sheet activities. One step removed, a large capital base that allows an institution to be a successful player in securities underwriting and dealing also may enable it to undertake mergers and acquisition activities, private placements and other value-added services for its clients.

Capital adequacy thus conveys a decided competitive advantage in bringing specific products to specific international markets, in maximizing firepower and reducing costs in funding operations, in being able to stick with particular clients in good times and bad—thus being considered a reliable financial partner—and in achieving compliance with capital requirements mandated by the regulators.

The Institutional Risk Base

Financial institutions fund themselves by creating financial assets held by others. In a deregulated environment where financial institutions are forced to bid for funds, the perceived quality of an institution is an important determinant of its ability to fund itself at the lowest possible cost. The level of embedded exposure to institutional risk has become particularly significant in the interbank market, and in the securities industry, leading to a substantial spread in funding costs between institutions and in erosions of funding availability from time to time, particularly in crisis situations.

In sketching an American perspective on economic. development, capitalism and democracy, let me* begin by asserting that the fundamentals of human nature are universal. The profit-maximizing model beloved to classical economics exhausts neither the range of mankind's motives nor its capacity for folly. Still, history suggests that rapid material advancement depends on harnessing the acquisitive instinct — greed, if you must, or as Adam Smith put it, self-love. Recall Smith's premises:

The economic arrangements based on these observations and premises we call capitalism. Our century has been the testing-ground for alternative theories of economic development that purported to be based on more attractive motives, in which each would contribute according to his abilities and receive according to his needs. And Smith's invisible hand could be replaced by the wisdom of central planners guided by modern science. This debate was settled at Berlin in 1989. Economically, the supposed development exploits of socialism were revealed as a fraud. And morally, as a basic premise underlying an economic system, the alternative to greed was revealed as terror.

Given this experience, it can be distracting to talk of an “American” path to development and an “Asian” path to development.

In Chapter 1, it was established that before the French colonial period, the ethnic Chinese community already played an active and significant role in several sectors of Vietnam's economy, for example, trade, mining, and handicraft. The French colonial period brought die beginnings of a modern capitalist economy, and how the Chinese business community adapted to this new challenge and expanded their role in it were to have a long-lasting effect right into the independence years. This chapter will look at the extent to which the Chinese have established themselves in the economy as a whole and in the individual economic sectors of the country during the years of the French, and thereafter in the Republic of Vietnam (ROV) in the South after the country was partitioned in 1954. No attempt is made here to look at the economic role of die Chinese in the Democratic Republic of Vietnam (DRV) in the North for two reasons. Firstly, the ethnic Chinese community was not that large in die North and secondly, after 1954 the DRV started to establish a centralized economy which eventually so marginalized private capital, whether of Vietnamese, ethnic Chinese, or foreign ownership, that it became irrelevant.

A common factor ran through the shifting patterns of the ethnic Chinese community's participation in the economy. That was the shaping force of die politics of whichever regime was in power. Starting with the French colonial period, Chinese enterprises engaged themselves mainly in commerce and a few processing industries such as the milling of rice. They refrained from investing heavily in other industries because the French excluded local and other foreigners (Chinese) from die industrial sector. It was not till after the Nanjing Agreement between France and China on 16 March 1930 that die Chinese in Vietnam got their right to participate in foreign trade and industrial activities.

The history of Chinese settlement in Vietnam evolved through several stages. The first massive influx came into what is today North Vietnam as long ago as 214 BC; subsequent waves were to follow, brought about by political instabilities or dynastic changes in China. Vietnam had traditionally been a refuge for defeated soldiers and fugitive scholars from China. These early settlers were assimilated through the centuries and no extant ethnic Chinese community in Vietnam could trace its roots directly to those times. Vietnam's rulers had also deliberately crafted state policies to assimilate Chinese immigrants, one significant period being from the fourteenth to the sixteenth centuries. So what remains identifiable as centres of Chinese settlement belongs to more recent history, the second half of the seventeenth century. Then there had been gathering points of Chinese immigrants in the northern and central parts of Vietnam such as Thang Long, Pho Hien, and Hoi An. Those Chinese communities then were engaged mainly in trading and handicraft. However, their trading activities were not maintained and developed in the centuries that followed. Most of them did their seasonal business and after a period of time returned home to China or emigrated to other countries.

But from the late seventeenth century onwards, historical and socioeconomic conditions permitted the beginnings of a Chinese migrant community as a relatively permanent entity within the ethno-demographic and socio-economic structures of Vietnam. There was, first, the large inflow of Chinese immigrants to the southern part of Vietnam. They congregated in distinct areas, being permitted to do so by the ruling Nguyen lords at that time. The relatively large numbers and the longevity of these communities saw the birth of community organizations based on dialect affinity and kinship ties. These were known as bang or clans. Business being a major lifeline of the Chinese, a Chamber of Commerce was also set up together with other kinds of business associations based on trades.

Intellectual interest in the growth and study of democracy is not a post-Cold War phenomenon, but its intensified interest is. The last decade produced several projects focusing on transitions to democracy in developing countries, the conditions facilitating the emergence of democracy, and the transition process itself, to better understand the opportunities for liberalization, the breakdowns and the reversals. Recently a new question has been asked, that is whether the widespread democratization process will yield similar end-products in different parts of the world which are endowed with vastly different heritages and history, or whether we will see the emergence of variants in democratic models.

In the same way, the growth of the capitalist system and practice of a free market in each country and region may be shaped by individual and special pressures and forces which in some situations lead the state to play a role not anticipated in the traditional free market model.

The differences in the capitalist, free market model of East Asian countries have been observed to be distinct from those in the industrialized West, and most certainly different from that of the United States.

It has been the growing concern of many academics and policy-makers that in the post-Cold War era, these differing perspectives and practices of democracy and the free market could become the substance of the new ideology debate in the coming decade between countries in East Asia and the West, led by the United States.

To bridge the gap and to provide a forum for an exchange of views and discussion, the Asia Society, the Institute of Policy Studies, the Singapore International Foundation and the Institute of Southeast Asian Studies organized a conference on “Asian and American Perspectives on Capitalism and Democracy” from 28 to 30 January 1993 in Singapore. The conference brought together a number of distinguished academics and journalists from the United States, Japan, Korea, Taiwan, Hong Kong and the ASEAN countries to reflect on the two key themes.

1. Socialist transformation of the southern economy and the decline of Chinese business

After the collapse of the Republic of Vietnam (ROV) regime in Saigon (30 April 1975), the socialist government of a united Vietnam embarked on a programme to transform the capitalist economy of the South from one based on the market principle to a centrally planned one. An ideological requirement of this exercise would be the removal of a wealthy class of people at the top and the redistribution of their wealth. That being the case, the prosperous business community of the entire South, whether Vietnamese or ethnic Chinese, were affected. However, the Chinese suffered more because of their disproportionately high involvement in business. The effort to convert the southern economy proceeded in stages in this order: the anti-compradore bourgeoisie movement and first currency reform in late 1975, and then the socialist transformation of private capitalist industry and trade, accompanied by another currency reform in 1978.

a. The anti-compradore bourgeoisie movement and first currency reform in September 1975

One of the first things the Hanoi government did after liberating the South was to start eliminating the compradore bourgeoisie. “Compradore” bourgeoisie (from the Portuguese word for “buyer”) was the formal communist term for those local agents acting on behalf of foreign capitalists and who had made money through playing such an economic role. In the context of Vietnam, the southern compradore bourgeoisie were said to be big businessmen who were “reactionary in politics”, who colluded with imperialism and the Saigon regime. This was a political criterion to define that class. There was also an economic criterion which typified compradore bourgeoisie as people who made their fortunes in contract work or commerce in support of the U.S. and Saigon administrations. They were also guilty of using their economic clout to establish monopoly control over markets. They were regarded as an “instrument of the U.S. imperialists for carrying out their neocolonialist policy” and as the “principal social basis” of the Saigon regime “which in turn relied on it to grow rich”.

A comparison between Indonesian President Soekarno and Egyptian President Nasser reveals fascinating similarities in the common search for legitimacy of a modern state, based on both religious and historical traits rather than on communal and traditional patterns of solidarity. In this respect, an analysis, for instance, of the discursive level of the Bandung conference would be much more significant to understanding political rule in post-colonial countries than “anthropologistic” interpretations (for the discourses of the Bandung conference, see Bennabi 1956). Both Soekarno and Nasser referred strongly to Islam as well as to Afro-Asiatism as a form of nationalism. Both men often stated that they were believers. Yet, it is interesting to note that, as they matured, they developed a growing suspicion towards the intermingling of religion and politics. Islam, thus, remained in the rhetoric to enhance the idea of secular nationalism (cf. Lacouture 1971, p. 166; and Legge 1975, p. 251). Both leaders then played an ambivalent role in the use of religious symbols for the purpose of etatization.

It is important to mention here that as in colonial times, the bargaining over the legitimacy of Islamic discourse was divided between Egypt and Saudi Arabia. Nasser claimed an Islam which entailed an Arab dimension but also “with Socialist principles of Justice and Equality” (Vatikiotis 1965, p. 123), whereas Saudi Arabia claimed a more Salafi, and capitalistoriented type of Islam. In the sixties, Nasser and Soekarno tried to establish a coalition against the Salafi-oriented movement. This led in 1965 to the creation of the Islamic World Organization in Jakarta. In turn, in 1962, 111 of the Salafi ‘Ulama politicians and intellectuals of thirty-one Muslim countries met to oppose the Soekarno/Nasser alliance and to enforce the Wahabi vision of Islam (Schulze 1983, p. 35). It is in the context of the creation of these new nation-states and their attempts to manage Islam that we should understand the institutional exchange between Egypt and Indonesia.