Corporate Governance Competition And The New

International Financial Architecture

G7 countries concerned about the stability of the international

financial system
With in the financial system the efforts for reform have
evaporated instead reform in developing countries financial
and economic systems are being pressed
Reforms will help global markets function properly as
developing countries provide distorting and inaccurate
information about their markets
Corporate governance= how enterprises are governed and
operated in DC.
The structuralist interpretation of the Asian crisis was one of
the reasons why policy recommendation by the IMF for
emergency loan requires fundamental changes to labor
regulations, CG and relationship between gov and businesses
Causes of Asian crisis under structralistic interpretation
o Fragile financial system is a result of weak CG, lack of
competition and relationship banking (crony-istic
relationships)
relations between financial institutions, business
and the government shielded the system from
market discipline and encouraged the overinvestment that led to the crisis.
o High leverage ratios heighten their vulnerability
o Transparency and inside information led to information
asymmetry
o once the market began to assess the true facts, there was a collapse of
confidence.

Criticism: this does not explain the previous success of the

Asian tigers, and why china and india did not have crisis even
though have similar systems

Another rational for the crisis was the financial liberalization

(dismantle of controls of borrowing): short term borrower was
borrowing internationally and found its debt in non tradable
sector and speculative real estate.

Corporate Governance: A Framework for Implementation (Iskander and Chamlou

2000)
The five basic principles of corporate governance promoted by the OECD/World
Bank protection (shareholders and stakeholders), equitable
treatment, timely and accurate disclosure, diligence from the
board of directors end

Saxon model of corporate governance- should be nationally owned

One size fits all
Facts about CG in DC
o The share of family owned business in top traded
companies is very high
o Other major form of ownership is government owned in
developed countries
o Crony capitalism- the relationship between large family
capitalist and gov allies
Fact is there is no real relation
Theoretical foundations for the proposals on corporate
governance
o LLSV thesis
it argues that the greater the protection afforded
to minority shareholders and creditors, the more
external financing firms will be able to obtain.
If the minority shareholders are protected , the
greater access to finance ensures better corporate
performance and behavior
However these conclusions are overstated. Like it
ignores relationships between workers and
managers
Glen, lee and singh analysis
o Over 20 years there has been changes in patterns of
corporate finance and stock market development. This
should not only be attributed to changes in the
corporate law or legal origin
o The LLSV approach also elevates shareholders and creditors above
other stakeholders in the firm and relegates other important
relationships (such as the relationships between workers and
management and suppliers and the firm) to secondary status.
CF patterns in 1990 and 80s
o DC financing through external source rather than retained profits
o The effects of stock market development on CF depends on two things
1. The nature and efficiency of takeover mechanism (flawed and
expensive method of CG) due to
a. Managers needs to empire build
b. Requires loads of information not easily available
c. Expensive way to change management
d. Takeovers are a way to avoid meeting contracts
2. Pricing process (where speculation herding and fads that undermines
the efficiency of the allocation of resources)
Hence this is often dominated by speculation, herding and fads that
undermine its capacity to efficiently direct the allocation of
resources.

In the wake of the Asian crisis, it has been argued that

developing country
Conglomerates and economic efficiency
o Large family owned conglomerates are a problem due to
Lack of transparency
Poor CG
Inadequate accounting procedures
Therefore inefficient
o Moral hazard problem as government considers them to
be too big to fail
o But in reality conglomerates are good and efficient
response to capital labor and product market
inadequacies
o they promote industrialization and are efficient at
overcoming market imperfections
o high leverage ratio is not out of line from most
developed countries
o Asian crisis was due to the unmonitored and
uncontrolled exposure to short term external debt rather
than high debt to equity ratio
o Capital account liberalization immediately after the
crisis rather than monitoring and controlling capital
movement

Another reason for Asian crisis is the low competition (this fact
is debatable)
o But low competition has resulted in lower rates of
returns rather than advanced economies where rate of
return is higher and competition is more intense
o Competition policies needed because
1. Privatization of state owned enterprise
2. International merger wave
o The 2. is important because of DC need to protect
themselves from mammoth multinationals
o One size fits all in not a good policy. Small firms are
important

OECD Experience With Capital Account

Liberalization
Capital account liberalization is easing restrictions on capital
that flows across a countrys borders
There is a code of liberalization. Following are the
characteristics
o Gradual initially
o Sped up 1980
o Took a long time

o Was sequenced for the first 25 years

Long term flows being liberalized first
Short term in the 1980s
o Process acknowledged diversity
Middle income countries allowed to pursue
liberalization more slowly
This has changed now
Gradual approach had two step
o Liberalization over direct investment (real estate, credit
link to international transactions, financial credits and
loans, physical movement of capital) and long term
capital movement and trade transaction
o Liberalization of short term transactions
The liberalization could be influenced by
o Derogation: dispensation of all capital account
movements
o Instruments
o Reservations: imposing restrictions under specific rules

The entry requirements the third wave members have faced are:
No restrictions on payment transfers.
Open and transparent regime for FDI.
Liberalisation of long-term transactions.
Quick timetable for further liberalisation.