Importance of stock markets

I received a review copy recently of a new book by Frank B. Cross and Robert A. Prentice, LAW AND CORPORATE FINANCE.

I'm not going to review it here, but I would like to quote one passage from the first chapter that piqued my interest and that relates to the issues I discuss on this blog.

"The value of stock market financing was disputed for some time, when East Asian countries' success was fueled by bank lending and cross-ownership arrangements for investment, without much in the way of freely traded national equity markets. Some even suggested that the developed equity markets of countries such as the United States could be counter-productive, by creating demands for short-term performance at the expense of long-run economic success. Time has not been supportive of these theories, though, and empirical research generally bears out the importance of developed and free equity markets, although the incentive for short-term focus by American companies remains a concern."

He gives no citation for the ideas he's referencing there. As I understand it, though, he's referencing the 1980s and the first half of the 1990s, when the term "the four tigers" [sometimes, confusingly, the four dragons instead] became popular for South Korea, Taiwan, Hong Kong, and Singapore. There are also in a further confusion of the metaphor, "aspiring Tigers" in Malaysia and Indonesia.

It was in 1994 that Foreign Affairs posted an interview of the long-time prime minister of Singapore (then in retirement) Lee Kuan Yew which has been much-quoted in this line.

Eastern societies are different from Western ones, he said, because easterners believe "the individual exists in the context of his family. He is not pristine and separate. The family is part of the extended family, and then friends and the wider society."

Tu Wei-Ming, a philosophy professor at Harvard University, is one of the scholars who has helped promulgate similar arguments about the connection between "Confucian values" and the dynamism of certain societies such as Singapore.

While it's too easy to bloviate in these areas, it may be safe to say there was a dispersion after 1949. The entrepreneurial segment of China's population left ahead of the communist takeover. The sizeable Chinese minorities in several adjacent countries have become relatively prosperous and politically influential there. This in turn has left them open to periodic bouts of race-baiting, but it has proved beneficial in terms of the growth of the host societies.

Two of the dragons, of course, ARE Chinese. Hong Kong and Taiwan. The other two, Singapore and South Korea, have benefitted from this dispersion, as have the aspirants.

The post-1949-dispersion model appeals better to my own intuitive sense of how the world works than does the sort of Kiplingesque East/West dichotomies of former prime minister Lee.

At any rate, it does seem likely that amidst the dispersants and their descendants there would develop interpersonal connections that would be more important than the impersonal market operations one experiences through a stock exchange. When a company borrows money from a bank, one person speaks directly to another, they discuss the terms, they fill out the forms together. In issuing stock to raise money, abstraction of a different order is at work. So we're bank to the passage in the Cross and Prentice book with which we began -- a preference for bank lending over stock market financing might have become a feature of the development of some nations, and might even have been praised as an element in their success.

The crisis of 1997-98 would naturally have put the kibosh on such talk. Can we infer, then, that stock exchanges have become more important in the countries I've named over the last ten-eleven years?

Yes, we can. We can also see as a matter of fact that some of the phenomena that come with public markets for equity, including proxy fights, have become more prominent in east Asia recently. I'll say something about South Korea in particular tomorrow.