INTERVIEW: Gautam Kaji, World Bank official
By Salil Tripathi
A Call For Self-Reliance
East Asia’s infrastructure needs are mounting: Projects costing hundreds
of billions of dollars will be required over the next decade. Many assume
the Washington-based World Bank will take the lead in funding them. But the
Bank has a better idea. It wants countries to boost development of their
capital markets. Since earning an MBA degree from the University of Pennsylvania’s
Wharton School, India-born Gautam Kaji, 54, has spent 27 years with the World
Bank, rising to regional vice president for East Asia before taking over
in 1994 as managing director. He recently shared his views with Asia, Inc.’s
Salil Tripathi in Singapore:
Every country in East Asia has an enormous wish list of infrastructure projects.
Clearly, the World Bank, or even foreign investors, cannot pay for all of
that. The environmental implications of all the projects also need to be
taken into account. East Asia will have to know that cleaning up is costlier
There is no single East Asian model for an economic miracle, but there are
some common characteristics that are easy to replicate anywhere. Growth in
this region has been based on substantial domestic savings and investment.
Outsiders like the World Bank and private investors have contributed small
though critical amounts. East Asia has a vast appetite for foreign capital,
but now an equally vast domestic savings effort is needed. The real sectors
of the economy agriculture and manufacturing cannot continue to prosper in
isolation. Greater development of the financial sector is necessary.
How do we mobilize resources to reduce the waiting period for phone lines
in the Philippines or create housing for the rapidly rising urban centers?
Equity markets and commercial banks cannot take on such a task. Infrastructure
projects have long gestation periods requiring large-scale finance, often
in local currency, to match their cost and revenue streams. This is fundamentally
different from financing the needs of relatively small, export-oriented,
fast-payout light-manufacturing businesses.
The only real solution is to accelerate the development of capital markets.
Bond markets have a longer time horizon and they link borrowers directly
with national savings pools. The region’s equity markets have grown phenomenally:
Hong Kong, Malaysia, Singapore and Thailand are among the world’s 20 largest
stock markets. But markets can work effectively only if they have sufficient
depth. Frankly, some of the stock markets in the region have yet to lose
their lottery-like characteristics.
Bond markets have been slower to emerge in East Asia and are much smaller.
Total market capitalization of the East Asian bond market is a mere $340
billion, less than one-third that of the region’s stock markets [excluding
Japan]. The size of the bond market of Hong Kong is only 9 percent of its
gross domestic product. In contrast, the American bond market is 110 percent
Bond markets won’t develop by themselves. More effort will be needed to develop
contractual savings institutions: China has a tiny sector, and that does
not help, given its demand for infrastructure finance. And you cannot manufacture
bond markets with an edict. East Asian bond markets will be different from
Western markets because the countries here run fiscal surpluses. It will
be the corporate sectors and project finance that will take the lead. This
requires new benchmarks, new underwriting patterns, effective credit rating
and new structures.
East Asia will have to implement financial-sector reforms like freeing interest
rates for bonds and removing tax disincentives on bonds. Regulators will
have to learn to regulate, not control, markets. There must be efficient
systems for clearance, liquidity support mechanisms and development of institutional
infrastructure. And finally, the most difficult for some countries to achieve,
greater openness. Sound accounting and disclosure policies are essential
to build a base of well-
informed investors and issuers.
We at the World Bank are pleased to have played a modest supportive role
in the East Asian miracle. But the vast bulk of effort in future will have
to come from the countries themselves.