Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang
Chapter 3: Financial Liberalization and Capital Market Integration in East Asia
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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