SESSION I

ISSUES IN DOMESTIC RESOURCES MOBILIZATION IN THE ASIA-PACIFIC CONTEXT

The mobilization of domestic resources is a central issue in economic development. It was noted that national efforts to mobilize resources needed to be supported by a conducive external environment. Adverse developments in prices of exports, sharp fluctuations in exchange rates or instability in the international financial system could severely constrain such efforts. Sound domestic macroeconomic management and transparent governance has to be complemented by transparency in the operations of global financial market operators such as hedge funds and investment banks. Keeping these aspects in mind, the discussion in this session focused on the regional manifestations of issues related to the raising of government revenue, the role of the banking system, the role of capital markets, the role of the government in setting the rules of the game and regulating the financial system, finance for SMEs, social development and on areas for regional cooperation.

Government revenue

In view of the generally acknowledged role of the government in promoting economic and social development, the need for enhancing government revenue was underscored. There were possibilities to increase tax revenues in countries of the region, particularly by improving the efficiency of tax administration and better enforcement. But in the design of the tax structure, it was important to pay attention to equity aspects and not just simplicity or revenue implications. A view was expressed that it was also important to develop a culture of tax compliance which could be fostered by the perception of the government as being honest and fair.

There were possibilities to increase non-tax government revenues through various modalities such as increasing fees for services, privatization of state enterprises and making regulation at least partially self-financing. However, again, the concern for equity and other trade-offs need to be taken into account.

The borrowing of a government from its domestic capital markets should be undertaken with caution. In small countries the distortions created in the domestic financial system by such borrowing put a limit on its feasibility. However, in larger countries with more developed capital markets, government borrowing could help the market by setting benchmark curves for returns on bonds, etc.

There was a view that fiscal and monetary policies of a government should be used primarily for maintaining macroeconomic stability, which would provide a conducive environment for savings and investment. There was also a view that governments cannot be indifferent to allocative decisions, especially because liberalization of the financial sector may lead to a higher propensity to consume.

It was suggested that the tax systems needed to be made more supportive of long-term domestic investment rather than short-term speculative investment.

Domestic financial markets

It was recognized that commercial banks should follow market signals in their lending policies, but that they needed to improve significantly their credit assessment capabilities.

One suggestion was to encourage the development of credit bureaus supported by an adequate legal and institutional framework to help with checking the credit standing of clients.

It was suggested that the discussion of private and public roles was oversimplified and that public sector specialized banks could have a role to play in mobilizing savings and investment in sectors of little or no interest to commercial banks such as the agricultural sector or low-cost housing. They could also play an important anti-cyclical role in the economy.

It was recognized that as the dominant role of the banks in the domestic financial system of many of the larger economies in the region declines, with more firms seeking to raise finance from the share and bond markets, this may add some degree of stability to the economy. However, the development of viable domestic capital markets was a time consuming process, which needed to be supported by regulation aimed at encouraging disclosure, transparency, and better accounting and auditing practices for firms raising funds through the markets. There were positive signs for increasing the stability of capital markets with the emergence of mutual funds, provident funds, the use of fund managers, and the concomitant decline in reliance on individual domestic investors and foreign investors. However secondary markets often lack sufficient liquidity to be viable.

The regulators/supervisors of capital markets including the banking system should be independent and should push the movement towards international norms of various sorts. Also, efforts should be put into developing independent domestic credit rating agencies.

There was a large need for further capacity building in the financial system, both for government regulators and financial institutions, especially for better credit analysis, proper risk management, and enforcing the discipline of disclosure. The private sector should be encouraged to play a positive role in human resources development. There was a need to increase the assistance from developed countries to contribute to capacity building of the developing countries in the region in financial industries. It was suggested to establish a regional mechanism to implement this pattern of cooperation.

Role of the government

It was suggested that the role of government in the region should evolve so that its primary role becomes one of formulating and enforcing prudential regulation and not managing the economy directly. It should refrain from directing credit and otherwise interfering in the operations of the financial system if it wishes to be a credible supervisor of this system. These practices can easily distort the rules of the game and subvert the fairness and transparency of rules. The government should rather limit its interventions to clear cases of market failure and should make efforts towards minimizing government failures where its interventions are warranted. It should, of course, continue to provide public and merit goods.

There was a proposal for countries to create a quasi-judicial court of regulation that could examine and evaluate the government regulations and order a repeal or revision if an appeal by the regulated is found to be justified.

Finance for SMEs

Financing the investment needs of SMEs which have traditionally not had access to bank or capital market funds due to lack of assets or a track record will become increasingly important. This need can be addressed through more diversified financial systems including mechanisms such as venture capital funds, second boards of stock markets, and commercial credit reference agencies which can collect information on their debt exposure. Instead of collateral, lenders and investors need to consider credit exposure, long-term prospects and repayment capability. This would require overcoming information asymmetries through improving the procedures for SMEs to provide the required information. However, in the process of encouraging the financing of SMEs, one has to ensure that investors' interests are protected.

Revenue for social development

It was noted that provident funds could be used to encourage savings, with the funds raised used for investment in such areas as health, education and housing which contribute to social development.

Areas for regional cooperation

There was a need for coordination and harmonization of tax policies to avoid unnecessary competition such as through the provision of tax incentives for investment. A beginning in this respect could be made within the framework of subregional organizations.

The idea of a regional-wide clearing system for bond markets was proposed to overcome the problems associated with small bond markets.

A proposal was made for a region-wide mechanism for cooperation on capacity building for the financial sector for both regulators and the financial institutions focused on meeting international norms of behaviour.

There is a need for an international bankruptcy procedure. It should also be ensured that private debt does not become government debt.