Governing Finance: East Asia's Adoption of International Standards

7. Practical and Theoretical Implications

This study began by asking three main questions. These are: To what extent do Asian countries comply with international regulatory standards? What explains compliance and noncompliance? And to what extent is mock compliance a sustainable strategy for developing countries and private sector actors? In this chapter, I provide answers to these questions by drawing on the detailed assessment of compliance outcomes in four crisis-hit Asian countries that is provided in the main body of this book. Post-Crisis Compliance with International Standards in Asia The empirical chapters demonstrated that in Indonesia, Korea, Malaysia, and Thailand there has been a transition toward regulatory neoliberalism since 1997. In all cases, the crisis reinforced more tentative pre-crisis policy shifts toward stricter financial regulation, but which (with the partial exception of Malaysia) had generally failed to affect substantially both public regulation and private sector behavior. In the wake of the 1997–98 crisis, governments in all four countries publicly committed themselves, often within the context of IMF conditionality, to the overhaul of their frameworks of financial regulation in line with international best practice standards. Although this proved politically controversial in all countries, by mid-1998 there was surprisingly little open rhetorical deviation by governments from this agenda. Since 1998, all four governments imported international standards of many kinds into domestic legislation and administrative frameworks, notably 7 Practical and Theoretical Implications Practical and Theoretical Implications 167 SDDS in the area of macroeconomic data transparency, but also in banking supervision, corporate governance, and accounting standards, among others. In most cases these international standards were drawn directly from those promulgated by the main international standard-setting bodies, including the IMF, Basle Committee, OECD, and IASB. Sometimes, because these international standards were often fairly general, governments and the IFIs also drew upon more specific financial regulations in place in the major Western countries, above all the United States and sometimes the United Kingdom. Formerly obscure concepts such as Prompt Corrective Action, Forward-Looking Criteria, Tier 1 capital, independent directors, and IFRS found their way into government policy speeches and documents, private sector press releases, and the news media in Asia. As a result, the broad framework of financial regulation and supervision has changed markedly in most Asian countries since 1997, including the four investigated in detail here. The chronic failures of regulatory oversight and enforcement that were evident in countries like Korea and Indonesia before 1997 appear to be much less extensive today. The formerly widespread abuses of legal lending limits by many Asian banks and the nonexistent levels of disclosure of key information in much corporate financial reporting in the region appears also to be a thing of the past. However, despite this clear movement in the direction of regulatory neoliberalism , the quality of compliance with international standards since the crisis has varied considerably over time, across standards, and across countries . Over time, a pattern emerged whereby formal compliance was often easier to achieve than substantive, behavioral compliance. This is not to say that the formal adoption of international standards was always easy. Indeed, there was also a clear tendency for governments and the IFIs to be excessively optimistic about even formal compliance prospects at the outset of the crisis. In Thailand, notably, formal compliance with international standards has proven very difficult to achieve due to parliamentary opposition. Even in Indonesia, Malaysia, and Korea, early optimism that stringent new standards of bank capitalization and loan classification could be rapidly adopted soon led to backtracking as it became clear that this would exacerbate private sector financial problems and jeopardize economic recovery. Such “temporary” departures from international standards continued as late as 2003–4. In other words, there was a tradeoff between the extent of formal compliance and the ability of governments to avoid reneging on compliance commitments either through regulatory forbearance or selective enforcement . When formal compliance was relatively high, as in Korean banking supervision by 1999, the government subsequently employed considerable regulatory forbearance once it became clear that substantive compliance would have imposed unacceptably high costs on the private sector and 168 Governing Finance the government. By contrast, when formal compliance was low, as in Thailand generally, the need for regulatory forbearance was also lower. Even here, when international standards were imported by the stock exchange into the Thai regulatory framework, enforcement was often poor. Across all countries, failure of parliamentary ratification was much more likely in the area...