The following is the provisional minutes of the Forum #8 prepared by Secretariat of ESRI Economic Policy Forum (for details see the whole record of the discussion in our Japanese HP).
| Date | June 11, 2002, 14:00-17:00 | ||
| Panelists | Kazuhito Ikeo | Professor, Faculty of Economics, Keio University | (keynote speech) |
| Yasushi Iwamoto | Professor, Graduate School of Economics,
Hitotsubashi University |
||
| Sayuri Kawamura | Senior Research Fellow, Japanese Research Institute | ||
| Naohiko Jinno | Professor, Graduate School of Economics,
Tokyo University |
(Keynote speech) | |
| Moderator | Shunichiro Ushijima | Vice president, Economic and Social Research Institute, Cabinet Office,
Government of Japan |
|
| Language | Japanese only | ||
At the beginning of the discussion, Prof. Ikeo and Prof. Jinno made the keynote speeches. Then panel discussion was held, including questions of general public and opinion exchange.
R. La Perta and others provide two kinds of views concerning the functions of government-affiliated financial institutions. The first one is "development view" and the second is "political view". Both have common idea that government-affiliated financial institutions provide funds to the projects that cannot be financed by private institutions. But they differ in the purpose of services."Development view" says that it is to contribute to economic development through providing financial resources to the socially significant projects due to externalities. "Political view" stipulates that possession of financial institutions is a realization of political target to provide benefits to supporters.
In Japan the most representative policy financial institution was Japan Development Bank. Before World War II there we are special banks named Nihon Kogyou (develop industry) Bank and Nihon Kangyou (encourage industry) Bank. These names suggest that Japan intended to promote economic development through these public financial institutions.
The market failures exist not only in developing countries, but in developed countries as well. There is no economist who believes that market does not fail. However whether public institutions can make up the failures hinges on the reasons of the failures. If failures come from constraints of information which government can gain, government can overcome the failures. But if the information is hard to get also for government, government also fails. I think that in reality the possibility of the government to make up market failures is rather limited.
Furthermore, among the cases that can be complemented by government policy, cases that monetary measures are suitable are even more limited.
Although some public financial institutions may be justified, huge public institutions cannot be justified in the developed countries like present Japan. Huge public financial institutions can only be justified at the developing stage when government intervention to market economy may be helpful for economic development. Japan's policy finance might have been also helpful at its developing stage as emphasized by the Gerschenkron's thesis or the development doctrine of Prof. Murakami.
However, at least 25 years has already passed after Japanese economy has surmounted the developing stage. Old-fashioned institutions tend to remain exist even after achievement of the goal. We should argue now whether these old-fashioned institutions are combined with "political view".
At the developing stage, it is difficult to distinguish "development view" and "political view". After finishing development stage, the amount of projects that cannot be accomplished through the market because of externalities gradually decrease. In Japan policy finance may be explained from the viewpoint of development till accomplishment of the high growth period, but after that it must be attributed to the political view.
Among the contents of the policy finance, the importance of development finance has decreased, while the importance of individual housing finance has increased. The housing finance may be socially desirable. But if we look at the contents, it supports middle-income household. It does not support the poorest low-income workers who cannot afford to buy their houses. These reminds me of "political view".
I would like to present two more issues. First one is the present malfunction of private financial institutions. Many argue about credit crunch. There arises an issue whether it can be complemented by public institutions.
If the malfunction is quantitative problem, the public financial institutions can complement private ones. But under current circumstances of excess money, the problem is not absolute supply deficiency. It is pricing problem; i.e. financial institutions can not evaluate risk of projects or companies properly to provide funds at the adequate price. Do the public financial institutions excel private ones in pricing? I am skeptical about the capability of public financial institutions. I think the ability of public financial institutions to make risk assessments does not exceed that of private financial institutions.
Logic distinguishes two types of errors. The first error is the misperception of a right thing as a wrong. The second one is the misperception of a wrong thing as a right. The former is an error of undersupply of funds into the institutions or projects that have to be funded. The latter is an error of supply of funds into institutions or projects that must not be funded. To reduce the first error it is enough to supply funds to every institution or project. However in this case, the second error is highly likely to arise. Present debt outstanding of small- and medium-sized companies is very high compared with that in 1980s. We should radically review which error should be emphasized.
Second one is a government function of time distribution of risk. The government exists permanently, while each private financial institution is not permanent. Accordingly government has more ability to give loans at long-term fixed interest rate.
If government uses this ability cautiously, it is highly desirable. But present government overuses the ability. Floating huge national bonds does not work to smooth intergenerational risk burden. Rather it increases intergenerational inequality. When I think of the risk burden of future generation which present social security put, there is a limited scope of risks that can be covered by government-affiliated financial institutions.
Government makes financial activity as a borrower in some case and a lender in other case. In case of the government as a borrower, there are two kinds of debt, namely, the debt arising from fiscal operations such as issuing of government bonds and debt arising from administrative activities such as post-office saving.
Today I would like to talk about government as a lender.
Hansmeyer defines policy finance as "provision of national credit as a subsidy". In other words, policy finance is identified as special form of subsidy package. It started amid the depression of the 19th century as a bailout plan from distress situation that is beyond individual control. National credit was provided first to agriculture and then extended to industry. The scheme spread all over the world after the World War II and was also used as a tool for foreign aid such as Marshall Plan.
Fiscal science gives policy finances the status of subsidy provision, more specifically, one form of spending. If spending in cash is done to household, it is social security. If it is done to business enterprises, it is subsidy. Policy finance is an intermediate form between subsidies and private finance.
Government has three methods to provide financial assistance, namely, subsidies, preferential treatment of taxes as a minus subsidy and policy finance.
Policy finance has a merit to economize tax resources necessary to achieve a policy target. The demerit is a wide room for policy discretion.
Subsidies can be controlled by nation through budgetary debates of the Diet and has little room for administrative discretion. Special taxation measures have little room for administrative discretion, but the Diet can hardly put it under control. Because it is regulated by law but their beneficiaries are not so obvious.
From a historical angle many countries launched special taxation measures during postwar reconstruction period. However, their performance was poor due to low profits of enterprises during that period. For this reason, the main measures were shifted from special taxation measures to policy finance.
Fiscal finance has become to take root in countries, at the same time it has given rise to contradictions little by little.
The first problem was increasing costs of policy finance. Policy finance incorporates private finance with subsidies. But procurement of tax resources became difficult. When we look at resources of policy finance in 1953 fiscal year, more than 30% of funds did not require repayment (procured from government budget). However, in recent years these funds with zero cost have declined. It means that budget principle became less important in government-borrower aspect.
On the other hand, policy finance in 1953 reallocated funds in priority basic industries such as power supply, shipbuilding, iron and steel industry. The effect of this is extremely big. For example, during 1955-65 CIF price of steel has declined to half, although its FOB price has not changed. Decline of freight costs reflected development of shipbuilding.
Since then, financing has shifted to housing loans, maintenance of living environments and other sectors. Evaluating the government as a lender, finance decreases in the sector where subsidy is suitable measure and increases in the sector where budgetary expenditure can be used. It means that budget principle became important in government-lender aspect.
The changes in government-borrower aspect conflict with the changes in government-lender aspect. This conflict is the main reason why policy finances have to be restructured. The issue is not to privatize government-affiliated financial institutions. There are two choices. One choice is to change measures for social purpose from policy finance to budgetary expense. The other is to economize tax resources.
As it was in the end of 19th century and as it is now, when economy reaches a turning point, industrial policy and regional policy become extremely important. But both sectors involve too much risk. Combination of market principle and budgetary principle is useful in these situation. Market mechanism can press the accelerator, but fiscal policy has to turn the steering wheel.
It is necessary to strengthen the democratic control. To achieve this there is two methods; "bottom-up" method and "top-down" method. The former is to delegate authority to departments responsible for loans and to strengthen authority of staff directly dealing with customers. The latter is that the Diet takes a tough control of administrative discretion. In my opinion, it is necessary to use both methods in combination.
We heard the speeches of two panelists: Prof. Ikeo, specializing in monetary science, and Prof. Jinno, specializing in fiscal science. My major field is fiscal science, but my opinion is rater closer to that of Prof. Ikeo.
About fifty years has passed since the establishment of policy finance, but the organization remains almost unchanged regardless changes in the financial systm of Japan.
Public financial institutions have two aspects. The one is a role of financial institutions. It works as a financial intermediary for borrowers that cannot procure funds through the capital market due to information asymmetry. The other is a role of public institutions. It complements private institutions when they cannot provide financial services because of market failures.
Under pressure of the great changes occurring in financial system private financial institutions are forced to reform. Thus, it is natural that government-affiliated financial institutions are forced to reform as well. Public financial institutions should not pursue absolutely the same roles as before.
In the development of capital market, private financial institutions unable to do business without "convoy system" or heavily burdened with non-performing loans are unnecessary from the long-term perspective.
There is no doubt that public financial institution that greatly change the current shape will become necessary from the long-term perspective. But at the present stage when private financial institutions do not function, it is essential to divide time axis while considering the reform. We should contrive a short-term (complementing the functions of private financial institutions suffered from non-performing loan problems) and long-term stratagem of the reform.
When we study the necessity of government-affiliated financial institutions from the long-term perspectives, the legitimacy of activities must be explained properly. But accountability for the three facts, namely, 1) that loan customers are unable to receive loans from private financial institutions, 2) that the decision of private financial institutions is wrong and 3) that these loans can be socially justified, is not fulfilled rigorously. There is a concern that public financial institutions crowd out loans of private financial institutions. It is possible that the decision of private financial institutions not to extend loans is right.
I would like to criticize three concepts of long-term, fixed and low interest in public financial institutions. Long-term funds at fixed interest rate are now available even from private financial institutions. There are no reasonable explanations why low-interest loans are necessary (verification of external benefit). Regarding capabilities of private sector and government, it is reasonable to admit that information handling capacity is approximately the same. Basing on these assumptions, I think there are poor foundations for low-interest loans.
If we pursue to minimize policy costs, we should dispose public financial institutions. Even if low-interest loans are necessary, direct loans by public financial institutions are not necessarily the only way. The purpose may be accomplished by interest subsidy or credit guarantee. Direct loans may be the desirable method only when these methods do not work (for example, 1) discretionary choice of loan customer is necessary or 2) entrusting public purpose to private institutions causes conflict of interest).
Government has already decided to abolish The Government Housing Loan Corporation and establish its taken-over corporation for securitization of housing loans as an independent administrative institution. But I think Government should withdraw form hosing loan business completely. The taken-over corporation is not necessary.
Development Bank of Japan should be privatized. Public intervention in small business financing is meaningless from the long-term perspective. But it is necessary until private banking sector restores its function.
Government function to take long-term risk is important. But its management is not good enough.
(Sayuri Kawamura, Senior Research Fellow, Japanese Research Institute)
As Prof. Ikeo said, the scale of policy finance in Japan is extremely large. Public financial continue their job although initial target has already accomplished.
Market failures depend on economic and financial environment. But few argue about it. Government annual report on fiscal investment and loan does not explain it clearly.
Accepting the textbook view, market failures result from information asymmetry, externalities, resource constraints, imperfect competition and others. Regarding information mal-transmission, it is commonly believed in the United States that little place has left for the government intervention. The situation is the same for credit scoring. Continued development of information technology helps to eliminate the information transmission problems of individual participants or venture companies and, as a result, business areas that cannot be covered by the private sector are shrinking.
It is necessary to discuss openly and aboveboard whether it is reasonable for the government to provide financial support for small- and medium-sized businesses.
Regarding externalities, education is mainly discussed in the United States as the role Government, although pollution or environmental issues are discussed in Japan. But U. S. Government has changed its position recently and abolished financial aid to construction of education facilities.
Reconstruction Finance Corporation (KFW) in Germany is responsible for a wide rage of activities such as housing loans, assistance to small- and medium-sized businesses, assistance to developing nations and others. This corporation has been extremely flexible in changing object areas. In the 1980s it withdrew itself from housing loans, but with consolidation of Germany it restored housing loans to low income class of East Germany. In 2000 the corporation, considering the mission fulfilled, abolished housing loans to East Germany. I think this is a good example of flexible change of policy finance.
I think neutral institution need to be established to perform ex-ante and ex-post policy-evaluation of public financial institution objectively.
I agree with Prof. Jinno who argues that it is not good to privatize public financial institutions in whole. Necessary reforms depend on fields. Housing loans are the first in the list of business areas that can be provided by private sector. We need to take respective reform measures for public financial institutions with different policy purposes such as finance of primary industries, finance of small- and medium-sized companies, finance of local government and others.
The problem of policy finance is hotly debated in European countries as well. The ideal way of public financial institutions is reexamined by European Competitiveness Committee in the context of harmonization of competition policy. Recently German government is studying legislation to limit the scope of KFW activities where it has competitive advantage over private corporations due to government guarantee.
Listening to the keynote speech of Prof. Jinno I noticed that our opinions are closer than I thought before. Fiscal investment and loans (policy finance) should be considered as fiscal operations involving monetary measures. As it was pointed out earlier the basis of this activity is providing the subsidies. Nevertheless, there is a problem whether these subsidies are exclusively aimed at external economy effect or they are political "give & take" instruments. I think it is extremely important to tighten the democratic control over the fiscal investments and loans in order to prevent usage of them as political "give & take" instruments. In this sense, my opinion is not far from that of Prof. Jinno.
Government-affiliated financial institutions have accumulated management resources. In a certain sense, these management resources are national property and, thus, should be used more effectively. Privatization is possible as a method of reutilization of management resources preventing them from vanishing like smoke into the air. Depending on particular function, there may be areas that should be undertaken by the government. United States changed security operation for education loan (Sallie Mae) to government loan. I do not think that privatization is the best way in every case.
(Jinno)
I got the same impression that the opinions are similar.
I look at the policy finance in relation to the work that should be conducted with tax revenues. Government has not used tax money even if it is suitable. That is the reason why government-affiliated financial institutions have grown enormously. In the United States, education and housing loans have large share among policy finance. In Europe housing loans are provided as social security. In Germany education loans are not necessary because education is charge-free. In Sweden there is education loan to cover living expenses during educatonal period.
Now is the turning point of Japanese economy. Government should be responsile for long-term orientation. If research and development spending can not be covered by budgetary expenditure, it should be done by policy finance. Usually it is made from the budet. Military budget and NASA fund are huge in the Unitd States. Research and development grants to industrial sector are very large in Sweden.
As pointed by Ms. Kawamura, tasks of public financial institutions need be renewed. I think research and development field should be positioned as a field of policy finance if it cannot be invested from the government budget.
(Iwamoto)
The set-up of a problem as "public financial institutions as they are to be" is probably not good because it ties up fiscal targets with monetary measures. Policy finance is one of the monetary measures to achieve the fiscal policy target. For example, "public financial institutions for small- and medium-sized businesses as they are to be" should be argued in the context of in small-and medium-sized businesses policymaking. Probably, it is dangerous to lump together all the public financial institutions and analyze the reform.
As was pointed out by Ms. Kawamura, it is of paramount importance for public financial institutions to adapt to the circumstances. I think this idea per se is shared by all the panelists. And the panelists have different opinions on how to achieve this.
I have a different opinion from Prof. Jinno about appropriateness of government interventions using subsidies to lead market activities as industrial structure policy, regional policy, social policy or others. I think government should not disturb market mechanism for industrial policy.
Regarding housing problem policy should examine how to provide houses to low-income households. But related policy finance deals with different households who does not need policy support. I think the current object area can be offered by private sector.
It is vital to establish objective policy evaluation. But academic researches on functions of policy finance are not enough both qualitatively and quantitatively. In the field of public works, experiences of policy evaluations using cost-benefit analysis have been accumulated. But similar analysis has not been made for policy finance.
Scientists can prevent confusion through analysis and argument. But policy target should be decided by the responsibly of politicians.
(Kawamura)
I think most Japanese have thought until now that It is no use blaming government for the default of policy loan because government activities have public purposes. Taking account of tax money being used as charge-free funds, government should work out measures to minimize risk and to avoid default.
In the United States the reengineering principle is prescribed in detail for policy finance. The main principle stipulates that finance intervention is implemented if and only if private sector is proved not to be able to supply funds and it is the best method to achieve federal target. Regarding principles of default risk management, there is a condition of existence of incentive of the financial operator, provider of the loan, to minimize risk.
I approve of concern of Prof. Iwamoto that independent administrative institution that is expected to take over the Government Housing Loan Corporation will bring pressure on private commercial activity. From the future perspective the continuous set-up of independent administrative agencies is a problem. However, I think that at the initial stage public involvement is necessary for securitization instruments to take root on Japanese soil.
Credit guarantee is less expensive method, comparing to loans with long-term fixed interest rates. To overcome the problem of conflict-of-interest pointed out by Prof. Iwamoto, government should not guarantee 100% of risk as it is now in Japan, but to guarantee 70-80% or a part (private sector takes the rest of risk).
Securitization is generally a good tool for risk diversification but it is not good for all kinds of loans. It is good for housing loans. But it is difficult in sectors like loans for small- and medium sized companies. Because these loans diversifies in quality and information disclosure problem is serious.
(Iwamoto)
I propose to securitize loans of the Government Housing Loan Corporation in about 5 years and privatize the corporation when securities circulate around the market to some extent. This will be enough support for the development of securitization market.
(Ikeo)
The desirable methods (direct or indirect loans) depend on the target. There is no method that is exclusively good. Direct loans by public financial institutions are good at monitoring borrowers and are dominant in government financial support. I can understand that there is an opinion that indirect loans should be used as well. But I can also understand that there is another opinion that there is no need to add purposely indirect practice, because government support is decreasing on the whole.
(Audience)
I would like to ask Prof. Iwamoto. You have argued that social significance should be confirmed from the long-term perspective but explained that policy evaluation is difficult. Please explain how to secure the accountability of policy finance. In addition, you have insisted that public financial institutions are necessary as long as non-performing loan problem persists. But Prof. Ikeo argued that present malfunction does not relate to quantitative shortage of loans. Please explain your viewpoint stipulating necessity of the public institutions in the short term.
(Iwamoto)
Concerning the first question, I meant that objective scientific assessment is difficult. However, the accountability is necessary even in this case. The nation should make judgment about policy assessment even if it is subjective. I think the government should exert effort to make assessment satisfactory from the standpoint of economic theory.
Concerning the latter, if there had been no public financial institutions for small- and medium sized companies in 1998, when the problem of non-performing loans became serious, policy measures should have been restricted. In this sense, we should leave a policy option of direct loans from public financial institutions in case of emergency of financial system.
(Audience)
How will corporate governance change in case of transforming of the public financial institutions into joint stock companies?
(Ikeo)
I think U.S. Gennie Mae and Freddie Mac can serve as a useful reference. These corporations are responsible for the achievement of policy target, although their stocks are publicly traded. To guarantee policy implementation, public functioning is stated as the aim in the articles of incorporation. Moreover, the government can appoint up to 1/3 of the directors in compliance with federal law. This is an example of moderate governance. Structures of joint-stock companies are superior in flexibility that has been working on the market for about 200 years. Basically we should make use of the structures of Joint-stock companies for governance.
(Audience)
I would like to ask Prof. Iwamoto about the short-term cost for the postponement of the reform. The basic problem of the present private financial institutions is risk pricing especially for loans to small- and medium-sized companies. What do you think about the problem of the distortion of risk pricing due to existence of public institutions?
(Iwamoto)
The distortion of the risk pricing due to existence of public institutions is inconsistent with theory. Private institutions should quote a price based on their own risk assessment. As a result, small- and medium-sized companies may turn to public financial institutions. But risk pricing of the private institutions is a different problem. Although the costs of loans to the small- and medium-sized companies are certainly high, it should be improved.
(Audience)
I have two questions. I would like to ask to explain the development of European gyro system in contrast with Japanese post-office deposits. Prof. Ikeo said there are useful management resources in public financial institutions. But do they really exist?
(Jinno)
In Europe, correspondence transactions developed into commercial money order and then turned into post-office deposits. Japan adopted these experiences. I think post-office deposits had large share in United Kingdom, France and Italy. In the United Kingdom fund operation is restricted to government and local bonds.
(Ikeo)
The judgment whether public financial institutions have accumulated useful management resources is beyond my competency. Government-affiliated financial institutions should prove it themselves as a part of their accountability. Inability to do that will testify the lack of competence.
If we look at not an institution, but at people who work there, high-minded outstanding staff is working in the government-affiliated financial institutions as well. I do not think all the staff of the government-affiliated financial institutions is incompetent except for bureaucrats who parachuted into the position of executives. It is similar to private financial institutions where both good and bad specialists work.
It may be good to establish a special team besides Resolution and Collection Corporation (RCC) dealing with disposal of non-performing loans in order to revitalize financial function. Speaking straightly this is quite rough debate, but it is possible to merge temporary RCC and Japan Finance Corporation for Small Business and establish more powerful organization than RCC and then to privatize it when unneeded any more.
(Iwamoto)
Even if it is difficult to keep the company going after privatization because of lack of management resources, this has no relation to the government. It is natural that some firms go out of the business in the market. Going bankrupt is not enough reason for government to retain.
(Audience)
The fiscal investment-and-loan bonds, adopted during the reform of last year, were intended to spur the selection of the fiscal investment institutions by the market. How is it evaluated now?
(Ikeo)
I thought that the selection of government-affiliated institutions by means of fiscal investment-and-loan bonds was impossible. Policy finance should be controlled by democracy. The resolution of this kind of problem is beyond the competency of market. It is only democracy that can solve this problem and the quality of our democracy should be called into question. As I expected, present rating of the fiscal investment-and-loan bonds depends not on business content, but on whether connection with government is strong or weak (whether it is likely to be written off by government or not in the future).