Entrepreneurial States: Reforming Corporate Governance in France, Japan, and Korea

2. A Story of Change and Divergence

2 A Story of Change and Divergence What explains the variation in national responses to the golden bargain, even among relatively similar economies? Why have Korea and France been able to go further in reforming their economic structure than Japan? The degrees of strategic political autonomy and options for effective bureaucratic delegation define the reform capacity of political entrepreneurs as they mediate the incentives of the golden bargain. In this chapter , I systematically analyze the components of this argument and present aggregate comparative data on all three countries that clearly demonstrates the linkage between political autonomy and reform outcome. In particular, I provide overall data to measure the intensity of the golden bargain, the degrees of political autonomy and bureaucratic delegation, as well as reform outcomes, before analyzing the relation between these variables. The primary focus is on the period from 1995 to 2002. Indeed, 1995 can be seen as a cutoff point when the golden bargain becomes visible in most stakeholder systems. Indeed, by 1995, most OECD countries had opened their capital accounts and largely deregulated finance (with some limitations in Korea) and the flood of equity capital was becoming visible across the globe. Although the visible jumps in the foreign penetration of domestic stock markets varied somewhat (1995–97 in France, 1998–2000 in Korea, and 1999 in Japan), the global presence of the golden bargain can be traced back to about 1995. I therefore analyze the immediate response of relatively similarly economic systems to this new external stimulus. Common External Impulse: The Revolution of Global Portfolio Flows What is the actual magnitude of global equity flows, and do they affect Japan, France, and Korea similarly? Cross-border capital flows as a whole took off after 1985. In particular, cross-border transactions in bonds and equities , as a percentage of GDP, skyrocketed among G7 countries. Starting in the 2–5 percent range in 1975, they reached 100 percent of GDP by the late 1990s in all but Japan—at 91 percent, due to an enduring cyclical depression of its financial markets. They further increased to the 300–500 percent range by 2003 in most countries. Figure 2.1 summarizes the evolution of total portfolio flows (equity and bonds) in five of the seven major developed economies. The explosion in portfolio flows as a percentage of GDP is visible in all five advanced economies included in figure 2.1 beginning in the early 1980s. Yet a great acceleration takes place after 1995, particularly in all A Story of Change and Divergence 31 600 500 400 300 200 100 0 1975 1985 1990 1995 2000 2003 ▲ ▲ ▲ ▲ ▲ ▲ X X X X X X ◆ ◆ ◆ ◆ ◆ ◆ ● ● ● ● ● ● ■ ■ ■ ■ ■ Germany France USA Canada Japan ■ Figure 2.1. Total cross-border portfolio transactions in bonds and equities as a percentage of GDP (gross purchases and sales of securities between residents and nonresidents) among five key countries Source: Table VI.5, Bank of International Settlements (BIS), 69th Annual Report, available on the BIS web site at www.bis.org/publ/ar99e.htm. Updates for 2000 and 2003 from BIS Monetary and Economic department, May 2006. The data originates from central banks and national statistics. Notes: • Unfortunately, data for other countries, such as the UK or Korea, is not included in the BIS report. The UK, in particular , discontinued the reporting of gross capital flows in the early 1990s. • The year 1990 was the year of the summit and the subsequent burst of the stock bubble in Japan. It was an anomaly. • For France in 1975, the data was not available. To retain the integrity of the graph, the average of the other four countries (3) has been used here, instead of a distorting 0. three European economies considered in the Bank of International Settlements (BIS) sample. Initially, the bulk of the portfolio flows consists of bond flows. Equity flows take off after 1995 and their rate of growth after that date is greater than that of bond flows. Again, the flows are greatest in France and Germany (as well as in Canada). Equity inflows are one of the most rapidly growing components of global capital flows. Equity flows are primarily driven by U.S. and, to a lesser degree , British pension funds and other institutional investors. During the 1990s, as the sums managed by British and U.S. funds grew, these investors sought to diversify their portfolios and increase their overseas investments. Between 1990 and...