Financial Liberalisation - Coursework Example

ON LIBERALIZATION As the world enters into a New World order where we see the phenomenon of the establishment of a global village that thrives intothe creation of a global market and posits the probability of a global citizen. Contemporary human beings find themselves grappling with the movement known only in our times - globalization wherein, the world has shrunk not physically nor geographically rather it has shrunk politically, culturally, socially and economically. However, ironic it may seem, we are living in a global village, globalization together with the other "isms" that supports its foundation has created a larger disparity between the rich and the poor, the well-fed and the hungry, the First world and the Third world. In the light of this irony, this paper intends to look at liberalization from the Asian perspective, specifically from the viewpoint of China and South Korea. The idea of liberalization holds at its core the notion that there be a total and complete opening of the market so that trade and capital can freely enter and move out without the burden of tax, tariffs and other forms of governmental control. Coupled with this is the idea of deregulation, which implies no governmental intervention or minimal governmental intervention in the dynamic movements of the market. This perception of liberalization has in fact has been carried over to all aspects and players of the market sparing nothing even financial institutions. The notion of financial liberalization connotes the idea that "financials markets are left to their own devices"(Soros, 2002,p 112). This inspite of the fact that financial market are basically different in nature from that of actual markets since the latter is working from known quantities (physical goods and services) whereas the former is technically working from unknowable quantities. Being such, the moment that financial markets are left on its own they are liable to go to extremes and breakdown. Thus, financial liberalization, though pinning for a free, level market playing field, is an oxymoron since financial institutions are basically not to be left at their own devices but must be supervised and to some extent managed by monetary authorities. Take the case of China. China's opening to international foreign trade is quite new. Considering the fact that China has just started opening her doors to foreign investors in the 60's. But despite this, the staggering improvements in financial markets in China is worth noting. On 1984, China has undertaken financial reforms and new monetary policies. Under the financial reforms, China has established its central bank known as People's Bank of China (PBOC) who has the direct say on matters pertinent to national financial institutions. While, four specialist's banks have also been established as the PBOC's arm in commercial banking functions. They are the "Industrial and Commercial Bank of China, which caters for urban enterprises an residents; the Agricultural Bank of China, which caters for rural enterprises and residents; the People's Construction of China, which mainly caters for construction enterprises; and the Bank of China which specializes in foreign exchange business" (EAAU, 2000, p 113). Further more, in 1994 three new banks have been established and these are: "State development Bank (lending for major infrastructure projects); China Import and Export Bank (providing finance for traders) and China Agricultural development Bank (providing funds for agricultural crop purchasing)"(EAAU, 2000, p114). The latter have been established for the main purpose of removing policy-lending obligations from the four state-owned specialist's banks so that it can develop into "commercial entities" (EAAU, 2000, 114). These banks perform their specific functions over and above the normal banking transactions of accepting deposits and withdrawals, offering loans and guarantees, investments in Chinese treasury and government bonds. The most significant manifestation of financial liberalization in China happened on January 1997, when four foreign banks where allowed "to transact renminbi yuan business" (EAAU, 2000, p114). These are all significant reforms that can be observed as part of China's liberalization program. Amidst China's opening-up its doors to foreign trade and investments, still financial market institutions are under State Council. Consequently, the State Council is no longer in direct control with regards to monetary and financial policies (since it is the PBOC that performs the function of monetary policy management and supervision of the financial institutions). What is remarkable is the fact that financial institutions in China are only partially liberalized and the Government still retains some direct quantitative controls. Thus, it is safe to say that, problems that looms with regards to financial liberalization cannot be attributed directly to the evils entailed in liberalization. Rather, the problems encountered by financial institutions can be attributed firstly, to the lack of financial development strategy due to failure of inter-bank market which could be "nationally integrated by a national payment system" (EAAU, 2000, p 116). Secondly, on the issue on State banking system, since we have previously presented the banking system of China which has been partially liberalized, so much so, it is not sufficient to provide incentives to banks and to promote liquidity. Lastly, China's political and ideological structures at place which, can be claimed on the basis that the reforms undertaken by China "adopt(s) the form of a market system but not the reality"(Lal, 1999, p 93). Though commercial banking is technically separate for the central bank, the commercial banks are still taking for granted the fact that if they get into trouble the central government will bail them out and this notion is not helping the financial sector in any positive sense. Thus, it can be maintained that although financial liberalization is now being taken as one of the major reforms of China's opening to foreign trade and investment, it cannot be categorically claimed that it is now possible to speak of the possible failures of liberalization in China for most scholars are technically in agreement that China has not really opened up enough in terms of liberalization and globalization. And that what most are complaining of is still perceptible and palpable government control in all economic aspects that affect and influence market movements in China. South Korea, on the other hand, unlike China has wholly opened its door to foreign investments and trade. Thus, the remarkable economic growth that it has experienced from 1967-1987 has made Korea "one of the outstanding newly industrializing countries (NICs)" (Kim and Kihl, 1988, p 189). In fact, the Asian Development Bank Report claims that the "annual economic growth rate of South Korea was 11.4 percent"(Kim and Kihl, 1988, p190). This figure alone, acts as a sure sign that the economy of South Korea is experiencing growth that will make it more competitive in the international market. All of these economic spurts are result of liberalization at work in South Korea. But the more immediate question is this, where is South Korea really going This question is of paramount importance for one of the basic issues that are being confronted in South Korea today is the widening income disparity and inequality. It is true to claim that indeed the economy benefited largely from the open door policy adopted by Korea after the Korean War. Although, the income of the poorest in Korea continue to increase because of the good economy, the disparity between the income of the poor and the rich continue to increase as well. This simply means that the gap between the income and salary of the poor and the rich is getting wider. This is due to the fact that income inequality is considered and recognized as by product of concentration of economic power. Ironically, the concentration of economic power is "a paradox in that it is the result or product of free capitalism itself" (Kim et. al, 1988, p 92). This is an important issue among the Koreans for concentration of economic power is perceived as concentration of wealth to some privileged Korean families or the "chaebols." The chaebols are the industrial conglomerates who hold the economic power in Korea. Basically they are the few wealthy families that controls major economic industries in Korea. The presence of these wealthy families that appears to be beyond government control are capable of amassing wealth as is heightens the already visible inequality of economic opportunities and benefits. It adds fuel to the strong Korean sentiment that they are not getting their fair share in lieu of Korea's growth and development. Thus, it is believed that the anger or negative sentiments of ordinary Koreans against the rich in Korea runs deep. In fact, analysts are claiming that income inequality is to be expected in Korea since it is a reality in an economy that is expanding and growing but that its growth and expansion is accompanied by high inflation which is what exactly is happening in Korea. And the second problem and one of the major problems that Korea is facing as a result of liberalization is that it has technically made its economy dependent on foreign debt, for it basically built its from foreign debt. What does it mean For Korea to attain its current status of NIC, it has to rely heavily on borrowing thereby making Korea by the end of the 90's the "world's fourth largest debtor nation."(Kim etal, 1988, 211) In fact, the $44 billion or so debt of external borrowing, of which some 35 percent I short term, limits South Korea's freedom of maneuver compared with relatively unindebted Taiwan. The Seoul government cannot allow its current policy of steady depreciation of the won (to retain export competitiveness) to go too far without risking an increase in the debt service burden (already very high if the short-term component of debt is included), as well as a rise in inflation. Yet exports must be boosted if the current account deficits, and thus future deficit-financing borrowing, are to be held in check. (Kim and Kihl, 1988, 211) It shows that the economic resurgence that Korea is experiencing as a result of liberalization is a heavy, onerous and complicated chain that ties Korean to the ground and made the kowtow to the demands of international financial institutions like the World Bank and International Monetary Fund. The heavy borrowing that Korea has undertaken has technically made the Korean industrial economy primarily financed by external debts. What is staggering in Korea's scenario is not even perhaps the immense foreign debts that hey have. Rather, the more pressing situation that Korea has to face is the fact that they have to create measures that will control and limit their dependence to heavy foreign borrowing. And, at the same time, that they should control and retain stability in all fronts specially political and social factor as they cannot afford any measure of uncertainty and disturbances for they are basically playing it at the hands of international financial institutions. Thus, the demand for the Korean government is to stop being obsessed with economic growth but rather start concerning itself with the demands of ordinary Korean people. In the end, what we should do is to rid the world of international monetary institutions like the IMF who strongly believes that the movement of the wold and its peoples can be understood and charted by the laws of economics. Since, the world is homo faber let political, economic and social sovereignty should reside with the peoples themselves. For the monolithic principle and perception of the world is simply irreconcilable with the stark reality of pluralism and diversity of which the world is made of. REFERENCE LIST: A. BOOKS Department of Foreign Affairs and Trade. Overseaes Chinese Business Networks in Asia. Australia: East Asia Analytical Unit, 1995. __________China Embraces the Market: Achievements, Constraints and Opportunities. Australia: East Asia Analytical Unit, 1995. Dickhut, Willi. Crises and Class Struggle. Germany: Neuer Weg Verlag und Druck GmbH, 1985. Kautsky, John H. Political Changes in Underdeveloped Countries: Nationalism & Communism. New York: John Wiley & Sons Inc., 1962 Ma, Hong.China Studies Series: New Strategy for China's Economy. Beijing: New World Press, 1983. Kim, Ilpyong J. and Kihl, Young Whan. Political Change in South Korea. New York: Paragon House, 1988. Segal, Gerald. "Deconstructing Foreign Relations in China." In China Deconstructs: Politics, Trade and Regionalism. Eds. David S. G. Goodman & Gerald Segal. New York: Routledge, 1994. Soros, George. On Globalization. Oxford: Public Affairs Ltd. 2002. Wong, John. "An Overview of ASEAN-China Economic Relations," In ASEAN- China Economic Relations: Trends and Patterns. Eds. ChiaSiow-Yue & Cheng Bifan. Singapore: Institute of South East Asian Studies, 1987. B. ELECTRONIC SOURCES Neumann, Peter. " Private Acquisition by Foreign Investors In China: Is the Party Finally Over" http://www.chinalawandpractice.com, accessed on February 2006. Norton, Patrick. "The Foreign Corrupt Practices Act: A Minefield for US Companies in China," http://www.chinalawandpractice.com, accessed on February 2006. Structuring Acquisition in China: What You Need To Know http://www.chinalawandpractice.com, accessed on February 2006. United Nations Convention Against Corruption, www.unitednations.com, accessed on February 2006. United Nations Conference on Trade, www.unitednations.com, accessed on February 2006. Read More