FOREIGN CAPITAL INFLOWS to developing countries constitute part of the world's saving. Over the past two decades, world saving as a proportion of world income has fallen. A comparison of the periods 1968-81 and 1982-88 illustrates this worldwide decline in saving ratios (Aghevli et al. 1990, pp. 9 and 36-37): saving in developed countries has fallen from 25 to 20 per cent of GNP and developing country saving has fallen from 25 to 22 per cent of GNP. One important reason for the worldwide decline in saving is rising government deficits: up from 2.9 per cent in the period 1972-80 to 4.5 per cent in the period 1981-88 (International Financial Statistics Yearbook [1988, p. 156; 1991, p. 156]).

The decline in world saving implies that not every country can maintain its level of domestic investment by increasing foreign capital inflows. Overall, the decline in saving has to be matched by an equal decline in investment. In fact, saving and investment ratios have fallen in all geographical regions of the world since 1982, but least in developing countries of Asia and the Pacific. As world saving has shrunk, so the world real interest rate has risen from 1.5 per cent during the period 1970-80 to 4.8 per cent in the period 1981-91. With no signs of a reversal in the declining trend in global saving and the immediate saving-reducing impacts of the war in the Gulf, reunification of Germany, reconstruction of Eastern Europe, and deliberate current account-reduction policies being implemented by Japan, Korea, and Taiwan, the costs of foreign borrowing can be expected to rise still higher in the 1990s.

The decline in foreign capital inflows to developing countries has necessitated structural adjustment in the form of an increase in export earnings or a reduction in import expenditure. The national accounting identities imply that the adjustment has to raise national saving or reduce domestic investment.

THE BALANCE-OF-PAYMENTS ACCOUNTS show that a current account deficit is financed by capital inflows or decreases in official reserves. One way of presenting this identity is:

CA + KA ≡ ΔR,

where CA is the current account, KA is the capital account, and ΔR is the change in official reserves. As an item in the balance of-payments accounts, foreign direct investment (FDI) is one of several capital flows. Other things equal, therefore, an increase in FDI increases capital inflows. If the change in official reserves is unaffected, the increased capital inflow is matched by a smaller current account surplus or a larger current account deficit.

The current account itself can be defined as the difference between national saving S and domestic investment I:

CA ≡ S – I.

The most obvious link between FDI and the current account in equation 2 is through domestic investment. If FDI finances additional capital formation in the host country, it raises domestic investment I. Equation 2 shows that this worsens the current account as required by equation 1.

The current account can also be denned as the difference between exports of goods and services X plus net factor income from abroad NFI and imports of goods and services IM:

CA ≡ X + NFI – IM.

If FDI increases capital formation in the host country, the increased investment could involve increased imports of raw materials or capital equipment. Alternatively, it could reduce exports by diverting them into the additional investment. In either case, the current account must deteriorate in equation 3 by exactly the same amount as it does in equations 1 and 2.

If FDI finances additional capital formation, equation 2 demonstrates that the current account deteriorates to the same extent that FDI increases capital inflows. In such case, FDI cannot provide additional foreign exchange to finance a pre-existing current account deficit. The extra foreign exchange is entirely absorbed in financing a larger current account deficit.

How does the organization and regulation of the financial system, notably the role of banks, influence critical dimensions of domestic and international economic performance through the process of corporate control? That is, how does the institutional design of the financial system influence the character of the capital-allocation process, national economic performance, and international economic and financial relationships? In order to address this question, we must first consider alternative stylized models of financial-industrial control structures as well as alternative stylized models of banking organization. We can then apply the models to four quite different approaches of bank-industry linkages—the Japanese, German, French and Anglo-American. Each can be evaluated against a set of performance benchmarks of the real sector of the economy, with the role of financial institutions as the centre-piece of the discussion. Finally, each can be assessed by its implications for the liberal international economic order that has been so painstakingly constructed over almost half a century, particularly in international structural adjustment, trade liberalization and market access, and the evolution of international finance and capital markets.

Banks as a Central Element in Corporate Control Systems

Corporate control has to do with the management of enterprises. A classic assumption underlying market capitalism is that management acts consistently in the best interests of shareholders, maximizing their long-term wealth as measured by the stock price. Agency problems—defined in terms of potential divergence between the interests of owners and those of managers—do not arise. Managers consistently meet their fiduciary responsibilities to owners in a firm's purchasing and marketing decisions, in investment projects and financing decisions, in the use of human resources, and in maximizing available economies of scale and scope.

In the real world, of course, agency problems can and do arise, and present one of the most difficult problems in market economics. How these problems are resolved, therefore, is of great importance, whether the issue is assessing the performance of mature market economies, or designing and executing effective privatization in the Eastern European or Asian transformation economies.

Democracy is the legitimating myth of the 20th century. It does not take long for a beginning student in Political Science to learn there is a bewildering list of democratic claims. There is “constitutional democracy”, “liberal democracy”, “populist democracy”, “democratic centralism”, “people's democracy”, “guided democracy” among many. Once it has been declared that all men are created equal, it is impossible to roll back the belief, Pareto and Hayek notwithstanding. And it develops into “the sovereignty of the people” and “the will of the people”. Performance legitimacy is an alternative but, by itself, is neither sufficient nor enduring. Even totalitarian or authoritarian regimes do not rely on performance alone for their legitimacy. For that matter, neither is democracy by itself enough. The de-legitimizing of a non-performing democratic regime has led to its replacement by other forms of government. This has happened not only in developing states, but in established industrialized democracies as well.

This paper takes off where Professor Huntington's The Third Wave left off. Professor Huntington made a valuable and significant contribution by tracking the patterns of democratization and their reversals, and explaining the hows and whys of democratization of the most recent wave. For the many now engaged in the democracy debate, it was useful to be reminded by Professor Huntington that the Schumpeterian formulation of democracy as a procedural arrangement, an “institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people's vote”, is the definition of democracy that has gained the widest consensus today. Democracy is the selection of leaders through competitive elections, or put another way, a democratic system is that which practices free and fair elections.

Although Schumpeter meant his definition to be a “value free” functional specification, even this definition contains a margin of ambiguity and requires value judgement. The ambiguity lies in the degree of freedom and degree of fairness considered essential, for not only is the electoral process itself scrutinized, evaluating accompanying political rights is a source of debate and differences as well.

Symbolically, the 1970s represent an era when “Third Worldism”, nation-state building, and secularist ideologies came to be criticized for failing to achieve their stated goals. The Nasser regime seemed to have played an ambivalent role in religion. The state had always made compromises with religion: Islam was declared the religion of the state, but shari'a law was interpreted under the cover of secular law. In short, the regime wanted to formulate religion according to its own political aims (Rodinson 1966, p. 240). This ambivalence and “utilization of religion” to promote foreign politics and to mobilize the clergy to propagate the ideology of the regime so as to create missionaries of socialism among the people (ibid., p. 242) became problematic in the seventies and eighties, when the state, through its use or manipulation of religious symbols ended up creating its own opposition.

It was during the seventies and eighties, therefore, that many intellectuals, in the centre as well as in the periphery, became even more critical of “Third Worldist” ideology and secularism. This, however, was felt more strongly in the Middle East than in Southeast Asia. Perhaps the defeat of the Arabs in the 1967 Arab-Israeli war represented the climax for all Middle Eastern societies, when all previous values were criticized. Secularism and modernism, as well as Pan-Arabism were debated, and a strong return to religious values was expressed. According to Laroui, many intellectuals attributed the Arab defeat to the fact that any type of imported social organization, such as that under Nasser, could only lead to failure. This explains the birth of the concept of Asala (authenticity), which was held to be an indigenous reaction against the West. It should also be noted that this trend was not only expressed by the Islamists but also by many disappointed liberals and Marxists who seem to have suffered from successive crises of ideology beginning as early as ‘Abduh's time (see Laroui 1988, p. 83).

Like most countries in Southeast Asia, the situation of the ethnic Chinese community in Vietnam has been a sensitive issue raising complex questions about ethnic relations, national policy on minorities and citizenship, economic domination of the local economy, and larger strategic interests. Certainly, in recent years, there were times when Vietnam's critical relations with its giant neighbour, China, got entangled with the question of the Hoa (Chinese) community in Vietnam. But present-day considerations are actually rooted in a much larger reality conditioned by both geography and history. Geographical proximity has meant a very early and long engagement with China. It had meant Chinese colonization and with that the inevitable influx of Chinese population and cultural influence. Even after the Vietnamese statehood was established permanently, there were at various times waves of Chinese migrants and periodic invasions from this huge northern neighbour. In the course of this long history, a Chinese community has emerged as a relatively permanent fixture in Vietnamese society. What makes the Chinese community distinct goes beyond numbers. It is also where they have settled, what trades they have chosen, and how they have been responding to the shifting socio-political realities of a new land. This first chapter looks at such historical trends.

1. Chinese immigration and economic activities in Vietnam before the colonial period

a. Stages of Chinese immigration

Being contiguous with China, with routes of communication both by land and by sea well developed for more than two millennia, Vietnam was the first country in Southeast Asia to receive large numbers of Chinese immigrants. These people were drawn to Vietnam for several reasons:

1. Harsh natural conditions with disasters such as famine and epidemics forced the Chinese to look for a more favourable environment. Vietnam was also a favoured place for settlement because its way of life was not too different from that of China, thus making it easier for the Chinese migrants to adapt.

2. Earning a living and doing business was easier in Vietnam because of Chinas stiff taxes and restrictive policies on business activities.

Overview

There is a new wave of market-oriented transitional economies in the countries of Indochina – Laos, Vietnam and Cambodia. Since 1988, economic reforms and political liberalization in the Indochinese states have paved the way for them to re-enter the global system and improve their economic growth.

The new thinking in economics suggests that institutions can either facilitate or retard growth in developing countries. Accordingly, institutions must develop simultaneously with reforms so as to capture innovations in order to achieve economic growth. In line with this theory, the recent economic and political liberalization measures accompanying institutional changes in the Indochinese states have been encouraging.

In July 1992, Laos and Vietnam signed the Treaty of Amity and Cooperation with ASEAN. Accordingly, they gained observer status in ASEAN which should help to foster trade and investment linkages. Meanwhile, the European Community (EC) will continue to be a major aid donor to the Indochinese states.

Laos

The New Economic Mechanism (NEM), launched in 1986 and based on market-pricing and better distribution policies, should continue to reform the multi-sector economy. Laos' economic reforms and policies since 1990 include the introduction of a new accounting system in production and domestic trade, assigning a permanent body for monitoring budgetary revenue, promulgating a central bank law, and integrating official and parallel exchange rates.

Real GDP (gross domestic product) growth in Laos, at constant 1988 prices, was reported to be 4 per cent for 1991, and is projected to grow at 4 per cent and 4.5 per cent in 1992 and 1993 respectively. The Laotian economy is characterized by a high share of government consumption (89.6 per cent of the national economy in 1991). Thus, greater economic liberalization and privatization will be required to capture improved economic efficiency and growth in the future.

Agriculture and agro-forestry will remain the major economic sectors in Laos on the basis of sectoral employment and output.

AS THE GLOBAL SUPPLY of capital has dwindled, some have seen FDI as a potential additional source of finance for the balance of payments. Using Meade's (1951) distinction between autonomous and accommodating capital flows, Turner (1991, pp. 9195) addresses the question of whether or not net FDI inflows are accommodating and hence constitute additional financing for the balance of payments by regressing components of the capital account on the current account financing requirement (both in first differences) for some countries of the Organisation for Economic Co-operation and Development (OECD). The estimated equation takes the form:

ΔKFi = α0 + α1ΔKFR,

where ΔKFi is the year-on-year change in the net capital flow item expressed as a percentage of GNP and ΔKFR is the year-onyear change in the current account minus the official settlements balance also expressed as a percentage of GNP (both in current prices).

Turner (1991, table 33, p. 92) finds that short-term bank flows are significantly correlated with the current account financing requirement with coefficients ranging from 0.27 (United Kingdom) to 0.88 (Canada) for seven of the ten OECD countries. In the case of FDI, however, Turner concludes that this flow is much closer to being autonomous than accommodating; the coefficient is significant only in the case of France with a value of only 0.13. Turner ranks long-term bank lending as the most autonomous, FDI next, portfolio investment third, and short-term bank loans as the most accommodative type of capital flow; Turner's results are reproduced here in Table 2. Only coefficients with t statistics of 1.5 and over are reported.

Using Turner's methodology with data on net capital flows from International Financial Statistics CD-ROM for a sample of sixteen developing countries, I find a rather different response pattern, as shown in Table 3. In contrast to the OECD countries, other long-term capital flows appear to be just as sensitive to current account financing requirements as short-term flows in this sample of developing countries.