Comment on “Changes in Development Finance in Asia: Trends, Challenges, and Policy Implications”


Fumiharu Mieno, Graduate School of International Cooperation Studies, Kobe University, 2-1 Rokkodaimachi, Nada, Kobe, Hyogo 657-8501, Japan. Email:

Nishizawa (2011) overviews the recent trends and changes in “development finance” in the East Asian context. His paper recognizes the emergence of abundant domestic savings in Asia as the largest structural change in this field, and then discusses four major dimensions: (i) the changing but persisting role of official aid sources; (ii) the new wave of infrastructure finance; (iii) the possibility of Green finance; and (iv) the continuing role of foreign direct investment (FDI). As a conclusion, Nishizawa proposes some policy implications based on the necessity of an effective system to utilize the domestic sources of finance, the complementarities among respective financial resources, and the need for incentive design for the effective use of private sources of finance.

The issues raised here are commonly related to two kinds of challenges that “development finance in Asia” faces today. One is what the surge of domestic sources of finance implies. When the weight of domestic source of finance increases, the central concern shifts from the form of the transfer from the external source to the efficiency of financial intermediation. The domestic financial systems in Asian countries have not yet fully transformed themselves toward functioning suitably to meet this changing reality. The other challenge is the emergence of new issues located at the boundary area of private and public finance, and, therefore, the necessity for a reconsideration of the role of the government. The infrastructure finance, Green finance, calls for new designs for the public–private partnerships (PPPs) for policymakers.

I would like to raise two points related to the recent trends in East Asia alluded to in Nishizawa's discussion. The first is the implication of the expansion of FDI in the financial context. Nishizawa (2011) discusses the continuing FDI inflow, most of which is directed to the traditional exporting manufacturing sector. While FDI is known to encompass vast spillover effects through technology diffusion, FDI is mostly financed by self-financial fund-raising methods. A larger dependence on FDI means an expansion of nonmarket types of fund-raising in corporate finance. As is well known, East Asian countries are characterized by a high degree of self-financing. Therefore, continuing FDI can be understood as one factor that causes the financial intermediation in the financial system to remain shallow.

The second is the change in the lending behavior of commercial banks in the last decade. While commercial banks in East Asia recovered from the deadly Asian Crisis in the late 1990s, their business focus has remarkably changed. The share of their total lending to the manufacturing sector has declined, and the share of their lending to the nonmanufacturing sector has sharply increased. It is true that the consumption and service sectors have substantially grown in the last decade, but the export manufacturing sector still remains as a major growth engine. The commercial banks have withdrawn their commitment from the economies' most important growth engine for a decade.

Another crucial point in discussing “development finance” in Asia is to consider the stages of the growth structure in the real economy, in the traditional, present, and future perspectives. The traditional (current) structure in East Asia is still in the form of FDI-led and export-oriented industrialization. The expanding FDI and persistent large share of exports in gross domestic expenditure implies that this structure is still steady today. Given such a structure, there is limited room for financial intermediation to fully function, even though the domestic sources of finance are already abundant.

The present and changing structure, on the other hand, has been already occurring in a few aspects. Growing consumption is one. As has been mentioned, commercial bank loans and a part of the funds raised in the bond markets have been deeply involved in this field. In the “development finance” context, in contrast to the industrial sector, the consumption area is already linked to domestic sources. Another aspect is probably the growing need for funds for infrastructure. Supplying the funds to this sector requires a careful system design with careful consideration to the role of the public and the private, as Nishikawa discusses.

The issue of Green finance should be located as an area related to the future structure of East Asian economic growth. The scheme is now being designed and built on a trial and errors basis. The East Asian economy, as whole, needs to achieve an environmental-friendly transformation in the future. Furthermore, it is sometimes argued that South East Asia has a potential comparative advantage in the relevant fields such as bioresource, biomass, or solar energy. In the future, the financial system will face the challenge of how to support such a new stage of economic structure, which may bring more capital- and knowledge-intensive fashions, and will require a consideration of the role of public-based finance.

Nishikawa describes various dimensions related to two major challenges: the upsurge of domestic sources of finance and the reconsideration of the PPPs. In my view, the financial systems in East Asian countries at present are actually very slow to cope with the upsurge of the domestic sources of finances. The sequencing of the work to overcome these two challenges should be consistent with the sequences of the stages of the growth structure in the real economy.