Comment on “Financial Integration in Emerging Asia: Challenges and Prospects”

Abstract

Park and Lee (2011) examine the degree and nature of financial integration in emerging Asia. These issues are of importance because financial integration offers many benefits including better consumption smoothing through international risk sharing, more efficient allocation of capital for investment, and enhanced macroeconomic and financial discipline. Despite these beneficial impacts, deeper financial integration generates a higher risk of cross-border financial contagion. The existence of a trade-off relationship between the benefits and the costs of deeper financial integration makes it difficult for policymakers to formulate appropriate policies regarding financial integration. Park and Lee’s findings suggest that emerging Asian equity markets are increasingly integrated both regionally and globally, while its local currency bond markets remain generally segmented from the overseas markets. Despite the progress of regional integration in emerging Asia, the region’s equity markets remain integrated more globally than regionally. Park and Lee identify some hurdles to financial integration in emerging Asia, which include the absence of an anchor country or financial centers in the region, a low level of capital market liberalization, and limited financial and monetary cooperation for exchange rate stabilization. To overcome these hurdles, they argue that emerging Asia needs to further liberalize its capital markets and promote financial/monetary cooperation to deepen financial integration. In order to reduce the risk of cross-border financial contagion, Park and Lee advocate active steps to foster deeper and more liquid domestic capital markets, and effective financial supervision. The development of vibrant local currency bond markets is essential to more efficiently channel the region’s abundant resources. I would like to take up three issues. One issue has to do with the benefits and the risks involving global financial integration on the one hand, and regional financial integration on the other. Park and Lee seem to give an impression that for the East Asian emerging economies, regional financial integration is more desirable than global financial integration. I wonder if this view can be vindicated. In terms of the benefits in the form of the depth of the market or the availability of financial resources and their efficient use, global financial integration may surpass regional financial integration because of the latter’s limited coverage. In terms of avoiding risks, regional financial integration may be more favorable. However, this observation may be correct if the probability of the emergence of