Exchange Rate Policy Options for Southeast Asia
Merton H. Miller (Graduate School of Business, The University of Chicago)

The economies of Asia must surely rank as the leading economic success stories of the late twentieth century. Never before has the standard of living of so vast a population risen so rapidly. Despite recent setbacks, that standard of living, I firmly believe, will resume its rise in the years ahead, though perhaps not right away. The shocks suffered in the past two years have exposed in many of those economies structural weaknesses that must be remedied before the process of long-run sustainable growth can be resumed.
Long-run structural changes, however, are not the focus of this paper. The needed reforms have been discussed and described over and over again, although, sadly, the peoples of Asia don’t always seem to be getting the point. Instead, I concentrate here on the issue of exchange rate policy options facing the Asian economies, a subject currently the source of much acrimonious controversy among both academic economists and the various central bankers of the area. Before turning to these controversies, however, let me emphasize that I concentrate on the countries of Southeast Asia – Thailand, Malaysia, Indonesia, Singapore, the Philippines and South Korea – and not mainland China. Many of the same problems, short term and long term, show up in China fully as much as in the other countries in the region, needless to say, but China is fundamentally different in important respects: China is the only country in the region both with a hinterland of its own to draw on and with a huge pool of its own domestic savings to fuel its growth. The inflow of foreign capital to supplement domestic resources is still important to China, of course, but much less so than for the other countries of the area. To Southeast Asia, foreign investment is a necessity; to China, it is something of a luxury – an important and useful luxury, but still a luxury.
Those countries in Southeast Asia currently agonizing over their choice of exchange rate strategy face essentially three alternatives: fixed exchange rates, floating exchange rates or arbitrary exchange rates with government controls over capital flows like those enacted recently in Malaysia. None of these three possibilities is ideal, of course, but of the three, by far the worst, I will argue, is the capital controls strategy of Malaysia.
*This paper was previously presented as a lecture at Tsinghua University, Beijing, People’s Republic of China, 17 November 1998.

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Financial Structure, Corporate Finance and Economic Growth
Rene M. Stulz (The Ohio State University and NBER)

This paper examines how a country’s financial structure affects economic growth through its impact on how corporations raise and manage funds. We define a country’s financial structure to consist of the institutions, financial technology and rules of the game that define how financial activity is organized at a point in time. We emphasize that the aspects of financial structure that encourage entrepreneurship are not the same as those that ensure the efficiency of established firms. Financial structures that permit the development of specialized capital by financial intermediaries are crucial to economic growth.
*I am grateful for useful comments from Stijn Claessens, Asli Demirguc-Kunt, Ross Levine, Lemma Senbet, Sheridan Titman and participants at the 1999 ABCD World Bank Conference in Washington. I also thank the World Bank for financial support.

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Long-term Investments and Financial Structure
Noriyuki Yanagawa (Faculty of Economics, The University of Tokyo)

This paper examines how the financial structure of a firm affects the incentives of managers to act myopically. The paper shows that managers tend to choose investments that pay off too quickly if there is a possibility that shareholders will fire the managers in the future. However, this problem can be avoided if firms are appropriately financed. Since the gains from firing the managers accrue first to the creditors, the shareholders’ incentive to fire the managers is reduced when the firm increases its debt ratio. The firm should thus choose an optimal financial structure to ensure that the level of incentive for shareholders to dismiss managers is appropriately controlled.
*I thank an editor, Neal Stoughton and a referee for helpful comments. Of course, all remaining errors are mine.

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On the Information Content of Bank Loan-loss Disclosures: A Theory and Evidence from Japan
Scott Gibson (Carlson School of Management, University of Minnesota)

We develop a model in which banks use loan-loss disclosures to signal private information about the credit quality of their loan portfolios. The cross-sectional predictions generated by the model are shown to help to explain previously documented counterintuitive empirical regularities for US banks. We also take advantage of a recent Japanese regulatory policy shift, which first forbade the reporting of restructured loan balances and then forced full disclosure. This policy shift allows us to address a common difficulty in testing signalling theories, in that we are able to construct a timely proxy for the private information that we allege is being signalled. Consistent with our signalling model, we find that banks taking the largest write-offs turn out later to be the strongest banks, with the fewest restructured loans.
*I am grateful for valuable help and comments from Sheridan Titman (the Editor), Lawrence Benveniste, Walid Busaba, Robert Hagerman, Ravi Jagannathan, Edward Kane, John Kareken, Hamid Mehran, Assem Safieddine, William Wilhelm, an anonymous referee and seminar participants at Boston College, Dartmouth College, the Federal Reserve Bank of St Louis, Rice University, SUNY at Buffalo, the University of Arizona and the University of Minnesota. I also thank James Fiorillo of Baring Securities (Japan) Ltd and Warren Heller of Varibanc Inc. for helpful discussions regarding institutional details of the Japanese banking sector. Finally, I thank Mieko Kanemoto of Salomon Brothers (Asia) Ltd for her help in providing Japanese bank data.

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