Abstract
Postcrisis policy responses tilted in favor of strengthening the global regulatory system and financial stability have limited the attention paid to the role of finance in supporting sustained economic growth and development. This has special implications for Asia which, despite being the new engine of growth to the world economy, continues to be challenged by the persistent gap between developments in its financial and real sectors. This paper examines how Asia’s financial and economic landscapes have improved under the wave of regional macroeconomic and financial management reform, yet continue to be beset by highly bank-dominated local financial systems, financial infrastructures anemic in proper legal and regulatory frameworks, and shallow regional financial markets. The situation compromises Asia’s ability to respond to the financial needs of its vast small and medium enterprise sector, infrastructure deficits, and poor households, constraining prospects for sustained high growth, development, and poverty reduction. The paper concludes that the financial development policy agenda in developing Asia should be focused on: (i) supporting economic growth and development, (ii) promoting financial inclusion, (iii) balancing regulation and innovation, and (iv) strengthening crisis prevention and management mechanisms.
Highlights
Surviving the Lehman collapse in September 2008 and the postcrisis recession, the global economy struggles to regain strength
A well-functioning financial system has an important role to play in promoting economic growth and reducing poverty
Development of the financial sector reduces the cost of information collection, contract enforcement, and transaction, thereby increasing allocative efficiency and promoting economic growth
Summary
Surviving the Lehman collapse in September 2008 and the postcrisis recession, the global economy struggles to regain strength. The G-20 reforms have far focused more on strengthening the global regulatory system and restoring financial stability rather than on financial sector development, paying limited attention to the role of finance in supporting sustainable global growth. The role of finance in achieving strong, sustainable, and balanced global growth seems crucial more than ever as persistent weakness in advanced economies threatens the postcrisis global economic and financial stability. G20 members with sustained, significant external surpluses pledged to strengthen domestic sources of growth, including (depending on circumstances) increasing investment and/or consumption, reducing financial market distortions, boosting productivity in service sectors, improving social safety nets, and lifting constraints on demand growth. Experience and research demonstrate that an appropriately designed institutional framework for finance is crucial to achieve the twin objectives of supporting economic growth and financial stability.
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