Pulling Back the Curtain
Asia meets the Information Standard
Far East Economic Review
July 23, 1998

A moment of silence for Ryutaro Hashimoto. One of the first Asian casualties of the Information Standard, Mr. Hashimoto fell on his sword after his ruling Liberal Democratic Party lost 17 seats in Japan's upper house. The elections, however, were merely political confirmation of the verdict delivered each day by the international electorate, in the form of the closing figures for the Nikkei and yen. For several months now, they have been telling Mr. Hashimoto this: We don't buy your reforms.

Welcome to the Information Standard. To most people, this means computers and the Internet, and we readily concede that 200,000 linked terminals in trading rooms across the globe represent a brave new kind of election. But it also means TV images of riots in Jakarta, word-of-mouth reporting about what a condo went for in Hong Kong, investment brochures handed out by Merrill Lynch at its new retail outlet in Tokyo, etc. On the surface Japan exudes little evidence of the effects of this proliferation of information. But in the back rooms of its political and business institutions, leaders increasingly find themselves held to its collective judgment. We saw this in the run-up to Sunday's elections, when the yen was hammered following Mr. Hashimoto's on-again, off-again promises on tax cuts. For better or for worse, for richer or for poorer, the Information Standard means that punishment for bad economic policies will be sure, swift and often brutal.

What makes the Information Standard different from its predecessors is that it is neither a commodity (gold) nor an agreement (Bretton Woods) but a process. It wasn't all that long ago, after all, that central banks were large enough to fix prices and move markets at will. But with the foreign-exchange market now turning over nearly $1 trillion daily, such intervention can be both expensive and useless. What does this mean for Asia? Well, at bottom the crisis that now plagues the region owes itself to a massive mispricing (and hence misallocation) of capital. In consequence, the necessary reforms--mature bond markets, an end to cronyism, sound monetary policy--all hinge on one imperative accurate information.

Information, after all, is another word for pricing. In an address before the Washington-based Cato Institute, Walter Wriston put it this way. "The recent experiences of Thailand and Malaysia are only two of dozens of examples," said the former Citibank chairman. "No matter what the politicians and the spin masters of the world say, the market will remain a giant voting machine that records in real time, real world evaluations of the values of currencies. Increasingly, currency values reflect less the power and privileges of the sovereign as much as a discipline on the economic policies of imprudent sovereigns." In this dynamic, misimpressions can be fatal, and even healthy economies will find it increasingly important to ensure that markets do not lump them together with their more profligate neighbours. That means getting their stories out. But it also means recognizing that good stories depend first on good policies.

Already leaders are feeling the push. Malaysian Prime Minister Mahathir Mohamad has done more harm to the ringgit than George Soros ever could. In Tokyo the government recently created a bank policy board which now includes members from outside the Bank of Japan and publishes the minutes of meetings. Even Hong Kong has felt the need to provide estimates of foreign-exchange transactions daily rather than monthly. Markets work by receiving, processing and refining information in a never-ending cycle. Precisely because they can overshoot, the best way to avoid nasty swings of confidence is to ensure their fundamentals are sound and that markets can see that for themselves.

Whether this is good or bad is beside the point It simply is. And those who hope to prosper from the efficiencies offered by the global economy will find that the quid pro quo is less wiggle room for bad policy at home. Among politicians, the talk naturally revolves around the loss of sovereignty. But outside the doors of Merrill Lynch's brand-new retail outlet just up from Tokyo's Otemachi subway stop, we talked to several new customers who all agreed on one thing They were there because they don't trust their own financial institutions. The Information Standard does not guarantee good returns. But it is the best hope the little guy has of keeping the big guys honest.