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A New Financial Market Structure for East Asia

A New Financial Market Structure for East Asia

Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang

This book contends that the East Asian financial constitution lacks an appropriate infrastructure, resulting in inefficient allocation of high savings and an over-inflated short-term debt market. It goes on to point out that despite high savings, East Asia’s dependency on financial centers outside the region is also relatively high, and that there is no strong region-wide network to connect various financial centers in East Asia.

Chapter 3: Financial Liberalization and Capital Market Integration in East Asia

Barry Eichengreen and Yung Chul Park

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation


Barry Eichengreen and Yung Chul Park 1. INTRODUCTION Since the early 1990s East Asian countries have been relaxing their restrictions on capital account transactions and their barriers to the entry of foreign institutions. They have been removing controls and ceilings on interest rates and eliminating other restrictions on the operation of domestic financial markets. By the mid-1990s, it is fair to say, this process of financial liberalization had gathered considerable momentum. Following the crisis of 1997–98, the speed and scope of these policy adjustments, if anything, accelerated still further (with the notable exception of Malaysia). How far has East Asian financial liberalization proceeded as a result? Kaminsky and Schmukler (2002) construct a monthly index designed to capture three essential aspects of the financial liberalization process: the decontrol of interest rates, the removal of restrictions on capital account transactions, and opening the financial services industry to foreign competition. Their index takes on values from 1 to 3, where 1 means fully liberalized, 2 means partially liberalized, and 3 means repressed. The authors track the evolution of the regulatory regime from 1973 through 1999.1 As shown in Figure 3.1, the Kaminsky-Schmukler index suggests that by the mid-1990s the seven East Asian economies had achieved, on average, roughly the same level of domestic financial liberalization as the nine European countries in the sample.2 This chapter analyses this experience with financial liberalization with a view to assessing the extent to which these policies have encouraged financial integration in the East Asia region. In...

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