Finance for Growth: Policy Choices in a Volatile World (review)

Hamilton-Hart's research is that despite adopting the "correct" policy, outcomes may be perverse or the desired results not forthcoming because of weak governing capacity. Although all three countries displayed a fairly high degree of financial sector internationalization and high capital mobility, their degree of success in undertaking interventionist financial policies, and all three countries did adopt such policies, differed in line with their differing governing capacities. Hence, in Indonesia, both liberalized as well as interventionist financial policies had high costs. On the other hand, Singapore's interventionist financial policies were successfully executed while Malaysia's record was mixed. Thus, it. appears that it is less the type of policy adopted that matters, albeit within a fairly wide though not unbounded range of policy options, and more whether the policy chosen is effectively implemented in a consistent and rule-abiding manner that does not impose high costs on the economy. A second point of interest relates to Malaysia's heterodox response to the 1997-98 financial crises, namely the imposition of limited capital controls. Much of the discussion in the literature on this issue has tended to focus on whether the controls were necessary, and responsible for Malaysia's recovery from the crisis. What Hamilton-Hart's analysis does is take us beyond this sometimes unproductive debate to point to an aspect of the Malaysian capital controls that is often missed in these discussions, namely the capacity of the Malaysian state, its central bank in particular, to effectively design, implement, monitor, as well as review and fine-tune the capital control policy in a manner that did not impose high costs on the Malaysian economy. This episode suggests that governments with relatively high governing capacity have access to a wider range of policies, even so-called heterodox ones, than are available to governments with low governing capacity. Hamilton-Hart's insightful analysis raises two questions about the role of states in an era of globalization. First, could state organizations built around regularity and internal discipline make it more difficult for them to respond to external pressures in novel ways, as such attributes tend to ensure that things are done in pretty much the same way as they always have been accomplished? In short, could the presence of such governing capacity, necessary though for effective policy implementation, nevertheless, prevent "thinking outside the box"? A second, and related question, is whether states with high governance capacity, and past success in economic management derived from it, would be tempted to "tinker" with the economy to effect certain desired outcomes in ways that may turn out to be counterproductive , particularly in unfamiliar situations? With globalization ratcheting up the degree of risk, uncertainty and volatility associated with economic and financial markets, such questions become highly salient. Hamilton-Hart's thought-provoking book is a very valuable contribution to the literature on states and the financial sector more broadly, and on Southeast Asian comparative political economy more specifically. It offers us new insights into a little studied phenomenon in political economy, namely the manner in which policies are implemented and the institutional factors that influence that process. We are, as a result, able to take some significant steps forward in our understanding of financial sector governance, a highly salient issue in a world characterized by globalization of the economy and especially of financial markets. HELEN E. S. NESADURAI Institute of Defence and Strategic Studies Nanyang Technological University, Singapore Finance for Growth: Policy Choices in a Volatile World. A World Bank Policy Research Report. New York: Oxford University Press, 2001. Pp. xv+212. This book provides a coherent approach on how financial sector policies can be designed and used effectively to foster economic growth and to ASEAN Economic Bulletin 300 Vol.20, No. 3, December 2003 reduce poverty. Policy recommendations highlighted in this book were based on empirical evidence from recent financial sector research. Although the scope of this book goes beyond Southeast and East Asia, many of the issues discussed are clearly relevant for countries affected by the Asian financial crisis of 1997-98. The causal linkage between finance and economic growth are well argued in this book. Financial institutions could be seen as performing...