The Political Economy of Capital Market Reforms in Southeast Asia (review)

The main argument of the book is that the structure of political parties in the three Southeast Asian countries of Singapore, Malaysia and Thailand determine the conceptualization and implementation of capital market reforms. The more concentrated the party structure and the greater the internal organizational strength of the party in power, the greater the probability that "public regarding" or public welfare enhancing policies will be implemented. The author then relates the successful capital market reforms and implementation of the reforms to the political party structure and the internal strength of the party. Using this conceptual model he argues that the Singapore government was more successful in implementing credible and effective capital market reforms that transformed Singapore into an international financial centre in comparison to Malaysia and Thailand. He also argues that Malaysia was more successful than Thailand in implementing capital market reforms because its political power structure was more stable than that of Thailand. Furthermore, only one dominant party in a coalition of parties had been in power in Malaysia whereas there has been tremendous political change in Thailand over the period of the study, that is, 1980 to the present.

The author also argues that external factors were not as important as internal factors in motivating capital market reforms in Singapore. He asserts that internal pressures of the electorate were more important "to the extent that the electorate as a whole preferred such public goods policies as capital market reforms, which stood to enhance social welfare, the government had a strong incentive to initiate and enact these policies" (p. 108, para. 1). He also argues that the "concentrated party system and the internal organizational strength of the PAP enabled the government to implement economic strategies for the long term public good, even if they harmed the interests of specific social groups and were unpopular in the short term" (p. 109).

However, in sharp contrast, Malaysia's capital market reforms were often subverted by rent-seeking behaviour by powerful interest groups within the dominant party structure. The author claims, "the public-regarding orientation of reforms that stemmed from party system concentration was significantly diluted by the rent-seeking behavior of politicians, which derived mainly from intra-UMNO organizational attributes" (p. 176). The author argues that efforts to liberalize the securities industry, make it more competitive, decontrol commission rates and improve capital adequacy of stock broking companies were compromised by powerful interest groups within the ruling UMNO party which had vested interests in securities companies and stock broking firms. It appears that UMNO preferred a gradual incremental approach to reforms rather than a "big bang" approach.

In Thailand, because of fragmented political power, vested interest groups were able to resist reforms and "private financiers constantly lobbied for the protection of their regulatory privileges and resisted competitive pressures associated with market liberalization..." (p. 145). The Thai government was unable, due to fragmented party structures, to make much progress in capital market liberalization by the mid-1990s. Although the number of members of the Stock Exchange of Thailand was increased, the new seats were captured by the cronies of the dominant politicians.

As a result of the more effective implementation of capital market reforms, Singapore ranked much higher than Malaysia and Thailand in terms of enforcement of securities and corporate governance rules, which include financial reporting standards, government efforts to improve securities laws, information disclosure, compliance with international best practices, the formation of independent board committees and minority shareholder protection (p. 130).

The author asserts that the three countries had made efforts to move from a bank-based economic system to a market-based economic system and hence the rationale for capital market reforms. In these efforts Singapore was more successful than the other two countries. However, little comparative data on the transition from a bank-based to a market-based economic structure is presented except to suggest that the annual average ratio of stock market capitalization to bank assets and the ratio of stock market...