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Keywords:

  • F30;
  • F36;
  • G15;
  • F41

Park and Lee (2011) examine the degree and nature of financial integration in emerging Asia. These issues are of importance because financial integration offers many benefits including better consumption smoothing through international risk sharing, more efficient allocation of capital for investment, and enhanced macroeconomic and financial discipline. Despite these beneficial impacts, deeper financial integration generates a higher risk of cross-border financial contagion. The existence of a trade-off relationship between the benefits and the costs of deeper financial integration makes it difficult for policymakers to formulate appropriate policies regarding financial integration.

Park and Lee's findings suggest that emerging Asian equity markets are increasingly integrated both regionally and globally, while its local currency bond markets remain generally segmented from the overseas markets. Despite the progress of regional integration in emerging Asia, the region's equity markets remain integrated more globally than regionally. Park and Lee identify some hurdles to financial integration in emerging Asia, which include the absence of an anchor country or financial centers in the region, a low level of capital market liberalization, and limited financial and monetary cooperation for exchange rate stabilization. To overcome these hurdles, they argue that emerging Asia needs to further liberalize its capital markets and promote financial/monetary cooperation to deepen financial integration. In order to reduce the risk of cross-border financial contagion, Park and Lee advocate active steps to foster deeper and more liquid domestic capital markets, and effective financial supervision. The development of vibrant local currency bond markets is essential to more efficiently channel the region's abundant resources.

I would like to take up three issues. One issue has to do with the benefits and the risks involving global financial integration on the one hand, and regional financial integration on the other. Park and Lee seem to give an impression that for the East Asian emerging economies, regional financial integration is more desirable than global financial integration. I wonder if this view can be vindicated. In terms of the benefits in the form of the depth of the market or the availability of financial resources and their efficient use, global financial integration may surpass regional financial integration because of the latter's limited coverage. In terms of avoiding risks, regional financial integration may be more favorable. However, this observation may be correct if the probability of the emergence of risk is lower in emerging Asia compared to the rest of the world. This was the situation for global financial crisis, but was not so for the Asian financial crisis in 1997–1998. Considering these points, one may conclude that regional financial integration may be favorable if the probability of the emergence of risks is lower in the emerging Asian economies than in other parts of the world. In order to reduce financial risks in emerging Asia, further development of financial markets is necessary by implementing and enforcing appropriate prudential regulation and liberalization.

Second, considering that further regional integration is desirable, one would be interested to know the type of approach that should be pursued in emerging Asia. One could think of two approaches. One is a top-down approach, and the other is a bottom-up approach. The top-down approach is a region-wide approach such as the development of an Asian bond market under the Asian Bond Markets Initiatives, currency swap arrangements under the Chiang Mai Initiative, and the development of a common currency. The bottom-up approach is built on the policies that are applied at the individual country level such as financial liberalization and deregulation. Considering the wide differences in the levels of financial market development in emerging Asia, the bottom-up approach appears preferable. Specifically, as for regional cooperation, capacity building for developing financial market should be useful.

I have posed some questions regarding the desirability of regional financial integration and the effectiveness of approaches to promote regional financial integration. One important question is the appropriate indicator for evaluating these issues. I would like to know if any empirical studies on these issues have been conducted. Possible indicators that I can think of include consumption smoothing and business cycles, which are real economic activities as opposed to financial activity.

Finally, I would like to bring up the issue of financial and real regional integration, although the paper does not address this issue. Several studies including Kim and Lee (2008) found that in East Asia, financial integration lags behind real integration based on their analysis using both price and quantity measures for the assessment of the extent of integration. In the case of real integration, the price measure looks at the convergence of prices across countries, while the quantity measure generally looks at the magnitude of trade integration. According to Kim and Lee, in Europe, regional integration moved forward from trade integration to financial integration. But they did not explain the reasons for this sequential pattern. I wonder if there is an expected sequencing, because real and financial integration seems to move forward in tandem rather than in one direction from real to financial integration. Having indicated my doubts about the sequential pattern, I wonder if we can expect a similar development in East Asia as was observed in Europe.

References

  1. Top of page
  2. References
  • Kim S. & Lee J.W. (2008). Real and financial integration in East Asia. Working Paper Series on Regional Economic Integration no. 19. Manilla: Asian Development Bank.
  • Park C.Y. & Lee J.W. (2011). Financial integration in emerging Asia: Challenges and prospects. Asia Economic Policy Review, 6 (2), 176198.