INTERVIEW: Gautam Kaji, World Bank official

By Salil Tripathi

feb 1996

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 than prevention.

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 of GDP.

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.