A potential rationale for Government intervention in financial markets - Evidence from East Asian countries

As the global crisis has pointed out, the failure of financial regulators to monitor the risks associated with financial innovations can be the major leading cause of the instability of financial systems and the real economy. However, it is understood that innovations can sustain the soundness and the efficiency of financial markets if they are kept under control through supervisory policies. There is a consensus that efficient and developed financial systems, including banks, equity markets and bond markets, are essential for economic growth as they allocate scarce resources to their most efficient uses. Sound financial systems are especially beneficial for promoting growth in developing East Asian economies where today the driver of growth is the efficiency of investments rather than their quantity. Indeed, there are no doubts that the financial development has impacted the economy of East Asian countries to a very large extent until the spread of the global financial crisis. In particular, the Asian crisis of 1997-1998 resulted from a progressive worst quality of investments which, in turn, was the consequence of huge capital inflows into underdeveloped financial systems that were not able to allocate them in an efficient way. For countries which have based their rapid growth on high investment rates, the Asian crisis can be viewed as a sobering example that the quality of investments should always be taken into account. As it is clear that financial systems are significantly involved in laying the foundations for rapid and sustainable growth, the first step to reach higher levels of economic productivity in the post-crisis period is improving the efficiency of investments by shifting from an accumulation-led growth to a productivity-led one. The reason why efficient financial systems are pivotal to enhancing the growth of East Asian countries is their need for healthy investments for a stable and robust long-term growth. This analysis would not be complete if it did not re-examine the role of the State and provide a potential rationale for Government regulatory interventions in financial markets which, as a matter of principles, aim at guaranteeing the provision of information, supporting strategic goals and ensuring that the financial system be both stable and sound.