chapter  10
28 Pages

East Asian governance: implications for policy cooperation, regionalism and financial integration

ByDOUGLAS W. ARNER, PAUL LEJOT, WEI WANG

The extent of financial integration among East Asia’s newly industrialised and developing states matches neither the rhetoric expended in its support since the region’s financial crisis of 1997-98, nor the degree of economic integration among the same states and with their highly industrialised neighbours, Australia, Japan and New Zealand. Regional trade flows and cross-border direct investment have long been greater and faster growing than other capital flows, while regional institutions that bear on financial markets are scarce or insubstantial. The interplay between national and international financial markets is limited, even among states that maintain relatively sophisticated financial systems, such as Korea or Singapore. No existing market can be considered regional: Asian actors freely enter global capital market transactions denominated in major currencies, but regional markets are underdeveloped and price-opaque. This dichotomy persists, despite several influences since the early 1990s that suggested that Asian financial integration would accelerate, and in apparent contradiction of the development of regional organisations such as the Association of Southeast Asian Nations (ASEAN) and of the enthusiasm of the region’s states for the World Trade Organisation (WTO). Above all, it differs from post-crisis expectations that greater financial integration would help to guard against new shocks. In reviewing the main elements of Asian financial integration to date, this

chapter will suggest that two explanations relating to governance underpin the paradox of modest financial integration accompanying generally successful economic growth and economic integration. First, the long-standing cultural norms that have been expressed regularly within ASEAN and similar bodies which are characterised as the mild and quiescent ‘ASEAN Way’ have tended to militate against regional innovation in financial markets and systems, insofar as meaningful reforms in transnational institutions or organisations would represent sacrifices in state autonomy. This need for strict consensuality at best encourages incremental or pedestrian reform at a regional level. Second, similar cultural and socio-economic norms provide

resistance to transparent market-oriented regional solutions, even when they may arise through cooperation among states. In particular, the primacy of banking systems within all East Asian national economies and close symbiotic relationships between state and banking-sector actors have slowed the progress of regional financial integration, with neither group prepared to have its role in financial governance weakened by countervailing regional institutions or organisations. Throughout this chapter, references to economic or financial integration

are intended to signify no transnational political objectives unless stated. Shortly before the 1957 Treaty of Rome created the original European Economic Community, economic integration was regarded by one influential libertarian scholar as: ‘[T]he establishment of a condition which makes possible the free and reciprocal flow of trade between the various national economies’,1 requiring the free trade in goods and free movement of capital funds.2

Thus, to assess integration by the permissiveness of cross-border regional trade and capital flows seems entirely fitting to contemporary East Asia.3