• Financial liberalisation

Financial liberalisation

Over the past two decades, Asia’s share of world trade has risen substantially, and intraregional trade has risen even faster. By comparison, financial integration has been more sluggish, particularly regionally.

This working paper examines recent trends in, and future possibilities for, Asian intraregional trade and financial integration. It brings together three papers prepared as background for discussions at the Second High-Level Conference on Asian Integration cohosted by the Monetary Authority of Singapore and the IMF on May 25, 2006.

The first documents recent trends in the intraregional flow of goods and capital and explores linkages between real and financial integration. It finds that, generally speaking, interregional links appear to be stronger for Asian countries than intraregional links, suggesting that regional policymakers need to further strengthen economic ties. The author cautions that the proliferation of preferential trade agreements runs the risk of being economically inferior to nondiscriminatory trade liberalisation on a most-favoured-nation basis and slowing any movement toward a larger Asian common market. There is also a risk that regional trade agreements could become a substitute for multilateral trade liberalisation. The paper also finds that potential challenges are looming in the area of financial integration, including the limited complementarity of the region’s economies, excess reliance on bank financing, and protecting their local systems’ political interest.

The second paper focuses on the institutional and regulatory reforms needed for financial integration in Asia. It focuses on the reforms required to:

• strengthen capital markets so as to increase investor sophistication and improve the investment climate
• build regional infrastructures to facilitate trading
• minimise risks associated with greater integration
• remove impediments to cross-border activities
• harmonise rules and practices across the region, as well as with global norms and best practices, to instill confidence

This paper argues that the region needs to further develop domestic and regional markets, improve oversight, and strengthen mechanisms for financial sector cooperation and coordination, liberalise capital accounts, and financial services and prudential regulation.

The third paper considers the implications of economic integration for the choice of the exchange rate regime and the conduct of macroeconomic policies. It argues from the premise that policies that hold out the hope of fostering regional integration are also the ones that promise strong economic performances in each country. It dismisses the notion that intraregional rigidity of exchange rate’s has been key to Asia’s stunning growth over the last three decades and should continue to be considered as a viable policy framework. Instead, it recommends fiscal prudence and policies to support exchange rate flexibility.

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