GLOBALIZATION OF CAPITAL MARKETS AND THE ASIAN FINANCIAL CRISIS

Authors

  • E. Han Kim

    1. Fred M. Taylor Professor of Finance and International Business, as well as Director of Mitsui Life Financial Research Center, at the University of Michigan Business School.
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      Earlier versions of this article were presented as a keynote speech at the First Joint Conference of the NFA (Nippon Finance Association) and APFA (Asia-Pacific Finance Association) on July 22, 1998, in Tokyo, and at the plenary session of the Eighth International Economics Convention of the Korea Economic Association and the Korea-America Economic Association on August 18, 1998 in Seoul. This article also draws on two previous papers I co-authored with Vijay Singal: “Stock Market Openings: Experience of Emerging Economies,” University of Michigan working paper (1998); and “Are Open Markets Good for Foreign Investors and Emerging Nations?”Journal of Applied Corporate Finance Vol. 10, No. 3, Fall 1997. I would like to acknowledge helpful comments from Daniel Ebels and the editor Don Chew.


Abstract

This article has three basic aims: (1) to analyze the impact of the opening of their capital markets on the economies of host countries; (2) to investigate the causes of the Asian financial crisis; and (3) to evaluate the likely effects of the South Korean government's recent attempts to restructure its corporate sector.

Although the recent Asian financial crisis has led some to question the merits of open capital markets and to call for regulatory restraints on capital flows across international borders, the scientific evidence suggests that the opening of stock markets to foreign investors has been largely beneficial for emerging economies. On average, stock market liberalization has been accompanied by increases in stock prices and reductions in stock return volatility, reductions in inflation, and reductions in the rate of currency depreciation.

Much of the blame for the Asian currency crises is assigned to Asian policymakers' futile attempts to defy market forces by trying to maintain their currencies at artificially high levels. But a more fundamental cause of Asia's economic problems has been the widespread value destruction by Asian corporations, which has led to a lower value for the overall economy and weakened the banking sector. The government-directed banking systems and weak corporate governance structures (including managerial incentives to increase size and market share at the expense of shareholders) that characterize most Asian economies have resulted in systematic overinvestment, bloated payrolls, and sharp declines in corporate profitability.

While applauding most of the Korean government's recent measures to reform the economy, the article expresses skepticism about the government-mandated restructuring of the chaebol known as the “big deal.” Rather than trying to direct the process of restructuring, Korean policymakers should limit their efforts to improving the market mechanism by increasing competition in the markets for capital, corporate control, and goods and services. The Korean market for corporate control transactions could be greatly improved by increasing the efficiency of bankruptcy proceedings and by allowing hostile takeovers by foreign as well as domestic investors. To increase the productivity of capital, Asian companies should seek to realign managerial with shareholder interests by tying compensation to measures of value creation like EVA.

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