mr latter gives an overview from hong kong of eight asian economies keynote address by mr tony latter, a deputy chief executive of the hong kong monetary authority, at the asian financial markets conference held in hong kong on 26 - 27 april 1999. thank you for inviting me to address your conference today. it is encouraging to see such a wide and distinguished representation here from the financial and commercial communities. indeed, when i looked down the advance attendance list, i quickly realised that there would be very little which i could tell you about market developments in hong kong that you didn ’ t know already. so, if you will allow me, i should like to spend some of my time standing back a little from specific market topics and looking instead of some of the macroeconomic forces which shape their development. i shall focus my analysis on eight asian economies [ see table ]. you will note that the list does not include japan, hong kong or singapore. that is because they can already be regarded as having relatively mature financial infrastructures and they are largely free of capital controls. thus, for reasons which will become apparent as i proceed, they do not fit into the story. the table shows the level of physical capital investment within each economy ( specifically, gross domestic fixed capital formation as a percentage of gross domestic product ) for the ten years to 1997. in most cases this was at a very respectable level ; all figures fall in the range 22 - 38 % of gdp on average for the period ; by way of comparison, 1997 figures for usa, japan and germany were 18 %, 26 % and 19 % respectively. also shown is the level of total domestic savings ; this is the sum of savings by the household, corporate and government sectors ( and may of course include dissaving by one or more of those ). for certain purposes i would have liked to show the household component of the total, but sufficient data are not available. the third column displays second minus the first - i. e. the excess of savings over investment on these measures. for all but two of the economies, domestic saving has outstripped fixed capital investment - in some cases by a substantial margin. but these figures tell us nothing about the intermediation process between saving and investment or about the role of financial institutions and markets. much of the investment may take place within the same economic unit as where the savings arise, or be directed by government, without any requirement for third - party intermediation. of course, if domestic saving is channel

##led into domestic investment mainly through government or other routes which are not subject to market discipline, allocative efficiency within the economy is likely to be impaired. but a significant amount of investment may have no identifiable link at all to domestic saving, because savings have flowed out of the country through one channel and investment funds have flowed in through a completely different one. i shall return to this point in a minute. returning to the behaviour of domestic saving and investment, the chart shows the excess of saving over investment in graphic form. i have then added a column representing the recorded inflow of foreign direct investment. the latter may perhaps be regarded as the category of inflow likely to be most closely associated with physical investment. if you add that to the surplus of saving over investment ( i. e. the two columns together ), you can visualise in the majority of instances a significant potential over - funding of investment, even before taking account of any inflows of portfolio funds or bank finance which may head to the same destination. does this mean that there has in practice been more than enough money around in these countries to finance all desired investment? of course not. as hinted earlier, i have failed so far to take any account of capital outflows. part - in many cases perhaps a substantial part - of domestic savings is exported. unfortunately i do not think that it makes much sense to try to show specific statistics for such outflows, since in this field data are notoriously unreliable - the more so in instances where controls exist which encourage outflows through what are euphemistically called informal channels. but in general terms the existence of such outflows is strongly implied, if not actually identified, in the overall balance of payments figures. regarding capital outflows, allow me, for purposes of exposition, to make the following exaggerated distinction. in respect of advanced economies, outflows of direct investment tend to reflect the global workings of comparative advantage, as businesses seek to exploit particular strengths or niches ; and portfolio outflows tend to reflect the search by each investor for a balanced international portfolio, within the total of which, however, domestic investments will typically tend to predominate. by contrast, in the less advanced economies there will be less wealth to provide the springboard for a large amount of direct overseas investment, and a large part of the leakage of funds from the country will be through what i have referred to as informal channels - which others may describe as