Academic journal article Journal of International Business Research

Revisiting Financial Integration of Interest Rates of Asean5+3, 2000 - 2011

Academic journal article Journal of International Business Research

Revisiting Financial Integration of Interest Rates of Asean5+3, 2000 - 2011

Article excerpt

ABSTRACT

The first decade of the new millennium saw the Global Financial Crisis affect many economies in ASEAN 5+3, including the degree and pace of financial integration, particularly interest rates. Recent events in the European Union and its potential impact in ASEAN 5+3 point to a revisiting on the importance of stability of currencies and interest rates as an integral part of financial integration. Using China and the Philippines as an initial study point, the results reveal increasing levels of integration within the region as a whole, but bilateral initiatives that will develop the capital and investment flows should be pursued vigorously.

INTRODUCTION

The European Commission has defined financial integration as "a process, driven by market forces, in which separate national financial markets gradually enter into competition with each other and eventually become one financial market, characterized by converging prices, product supply and converging efficiency/profitability among the financial services providers." (Jang, 201 1). Following this definition, it is expected that several distinct and parallel channels can further financial integration, namely, cross-border ownership, establishment of cross-border service provision (Ibid, 201 1). A key feature of this definition is that it is a market-driven process and that this process can be hastened or hampered by several drivers that often extend beyond the borders of a defined financial and economic market. This is even made more complicated when we consider the various measurements that have been developed over the years to determine the relative success or even failure of attempts of countries to integrate.

While the measurement of financial integration and globalization vary, Quinn, Schindler, and Toyoda (2011) have identified three major categories: de jure, de facto, and hybrid (combination of de jure and de facto). Examples of de jure factors are those found in the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) which are published every year and are often-referred to as table indicators. De facto indicators, on the other hand, contain elements of intensity, magnitude, and/or breadth and depth of financial controls, an example of would be Schindlers 2009 KA index. Hybrid measurements combine de jure and de facto indicators. For instance, Bekeart, and Harvey's 2005 "Equity" measure does not rely on the IMF table indicators in analyzing financial integration. Their recent study noted that among de jure indicators, sample differences account for much of the variation in growth results, with a weaker impact found in more recent data and among advanced economies, which allows for other possible measurements. Attempts of the Association of Southeast Asian Nations (ASEAN) in the past years to become fully integrated have been cautious and deliberate, especially after the Asian Financial Crisis and more recently, the Global Financial Crisis. And as the Euro Zone struggles, Asia looks to the lessons of recent events as it moves forward with its own integration efforts.

As a guide to increase integration, citing Cowen, et al., Mayes (2008) suggests seven channels of increasing financial integration for East Asian economies. These are the 1) removal of capital controls; 2) removal of internal controls such as the direction of lending for all purposes other than prudential regulation, anti-competitive practices and consumer protection; 3) adoption of harmonised non-discriminatory international standards; 4) creation of a cross-border infrastructure enabling the easy flow of payments, settlement and securities transactions; 5) mutual recognition to allow cross-border operation of financial institutions, local establishment and the interchange of skilled staff; 6) harmonization of detailed requirements; and 7) development of financial institutions. These are channels that have been used in the past by individual ASEAN5+3 countries but at various degrees which could explain why as a regional bloc, there have been differences in terms of integration. …

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