Engine for Dynamism and Stability
Edited by Masahiro Kawai, Jong-Wha Lee, Peter A. Petri and Giovanni Capanelli
Chapter 6: Governance and Financial Integration in East Asia
Douglas W. Arner, Paul Lejot and Wei Wang The extent of financial integration among East Asia’s emerging and developing economies1 and Japan matches neither the rhetoric expended in its support since the 1997/98 financial crisis nor the degree of regional economic integration. By some measures, it is exceeded by financial integration with Australia, New Zealand and most developed Western economies. Cross-border trade flows, direct investment and cross-border investment in capital goods have long been greater and faster growing than other regional capital flows. Regional institutional structures and organizations concerned with finance are scarce and generally insubstantive. The interplay between national and international finance is limited, even among nations with relatively sophisticated financial systems such as the Republic of Korea (Korea) or Singapore. No existing market can be considered regional: Asian intermediaries freely enter major currency transactions in global capital markets, but regional markets are underdeveloped and price-opaque. This dichotomy persists despite certain developments since the early 1990s that might have encouraged financial integration, and notwithstanding the development of organizations such as the Association of Southeast Asian Nations (ASEAN), which might be expected to favor financial liberalization. It contrasts with financial integration in the European Union (EU), with Asian national enthusiasm for participation in the World Trade Organization (WTO), and with the sophistication of financial intermediation in several Asian centers. Above all, it differs from post-1997/98 crisis expectations that greater financial integration would help guard against new shocks. In reviewing the main elements of Asian financial integration to date, this chapter...