Estimating Cost Functions of Malaysian Commercial Banks: The Differential Effects of Size,Location, and Ownership*

Bank integration and competition policies are a core part of current financial reforms intended to strengthen the financial sector in Malaysia. This paper intends to clarify the production technology employed in Malaysian banks and indicate important policy implications for current bank consolidation policy. While it is essential to conduct a microeconomic analysis of the banking sector to appraise financial reform policy, Katib and Mathews (2000) is the only formal study in this area that uses micro level data on Malaysian banks. Our analysis expands on Katib and Mathews’ study in three aspects. Firstly, while Katib and Mathews employed Data Envelopment Analysis, we use estimation analysis based on a parametric approach. Secondly, we examine technological differences among Malaysian banks according to the size of operations, location of branches and ownership structure. Thirdly, we also explicitly incorporate the existence of hidden bad loans in estimating cost functions. According to our estimation analysis, there is a difference in production technology between large‐sized banks and small or medium‐sized banks. While economies of scale are observed for large‐sized banks, no economies of scope and technological progress are observed for any banks. The results of our analysis suggest that, while the current reform policy is basically appropriate, serious problems remain regarding bank consolidation and the lack of market competition.     

Bayesian model selection using encompassing priors

This paper deals with Bayesian selection of models that can be specified using inequality constraints among the model parameters. The concept of encompassing priors is introduced, that is, a prior distribution for an unconstrained model from which the prior distributions of the constrained models can be derived. It is shown that the Bayes factor for the encompassing and a constrained model has a very nice interpretation: it is the ratio of the proportion of the prior and posterior distribution of the encompassing model in agreement with the constrained model. It is also shown that, for a specific class of models, selection based on encompassing priors will render a virtually objective selection procedure. The paper concludes with three illustrative examples: an analysis of variance with ordered means; a contingency table analysis with ordered odds-ratios; and a multilevel model with ordered slopes.     

Specialization Pattern and Multistaged Growth: Korea and Taiwan Compared

The sustained rapid growth of Korea and Taiwan represent two alternative paths of successful development. The difference between these two paths is reflected in industrial concentration, macroeconomic management, and export mix. During the 1997 crisis, Korea absorbed severe shocks and then scored a quick recovery, while Taiwan proceeded at a more or less constant pace. Taiwan has followed a "usual progression" experienced by Netherlands or Switzerland before; Korea has struck out on a different path, under a more active government policy. Before the current, ongoing reform, the development policy of Korea dates back to President Park, and fits his style of personal management over the economy. It has its own rationale, but also entails greater financial risks. The different roles played by the small and medium enterprises in the two economies provide food for thought in development economics.     

Current accounts of Japanese airports

The paper examines the current account of 41 major airports. When we exclude depreciation costs, only seven airports are profitable. When depreciation is excluded, only three airports are making profits. Airports managed by local governments are very difficult to sustain financially without subsidies. Airports with more than 5.2 million passengers are profitable when depreciation is taken into account, however most local airports have fewer than 2.5 million passengers. When depreciation costs are excluded, airports need at least 2.7 million passengers to be viable.     

Asymmetric loss and herding behaviour of exchange rate forecasters: evidence from South Africa

This study examines the asymmetry of the loss function for private forecasters in exchange rate forecasts of the South African rand. It tests rationality under the possibility of an asymmetric loss function. The results indicate less evidence of asymmetry for a horizon of 1 month but considerable evidence of asymmetry for a horizon of 3 months. However, the shapes of the distributions formed by estimated asymmetry parameters of sub-samples for each forecaster are symmetric, regardless of the forecast horizons, which implies that these forecasters do not herd or antiherd. In fact, the results of our empirical herding test show that forecasters neither herd nor antiherd, which is in sharp contrast to recent findings on antiherding for foreign exchange rates in emerging market economies. Our findings provide consistent evidence for a recent suggestion that antiherding might result in the rejection of rationality, even under asymmetric loss functions. Our findings also suggest that central bank transparency might be associated with herding behaviours.     

Soil and water conservation technologies: a buffer against production risk in the face of climate change? Insights from the Nile basin in Ethiopia

This study investigates the impact of different soil and water conservation (SWC) technologies on the variance of crop production in Ethiopia to determine the risk implications of the different technologies in different regions and rainfall zones. Given the production risks posed by climate change, such information can be used by decision makers to identify appropriate agricultural practices that act as a buffer against climate change. Results show that SWC investments perform differently in different rainfall areas and regions of Ethiopia and that the effectiveness of technologies such as irrigation, fertilizer, and improved seeds often depends on whether these investments are coupled with SWC measures. These results underscore the importance of the selection of appropriate combinations of technologies and careful geographical targeting when promoting and scaling up SWC technologies for adaptation to climate change.     

Health insurance reform and economic growth: Simulation analysis in Japan

This paper evaluates the drastic reforms of Japanese public health insurance initiated in 2006. We employ a computable general equilibrium framework to numerically examine the reforms for an aging Japan in the dynamic context of overlapping generations. Our simulation produced the following results: first, an increase in the co-payment rate, a prominent feature of the 2006 reform, would promote economic growth and welfare by encouraging private saving. Second, the ex-post moral hazard behavior following the increase in co-payment rates, however, reduces economic growth. Third, Japan's trend of increasing the future public health insurance benefits can mainly be explained by its aging population, and increasing the co-payment rate does little to reduce future payments of public health insurance benefits. Fourth, the effect on future economic burdens of reducing medical costs through efficiencies in public health insurance, emphasis on preventive medical care, or technological progress in the medical field is small. Finally, a policy of maintaining public health insurance at a fixed percentage of GDP will require reducing public health insurance benefits, perhaps up to 45% by 2050. Such a policy also reduces economic growth until approximately 2035. Our simulation indicates that the reform does not significantly reduce future public health insurance benefits, but it can enhance economic growth and welfare by encouraging private saving.