Capital Mobility and financial Integration in Emerging markets

• The economic mantra of the 1990s, taught by leading economists and institutions alike, was financialopenness and capital account convertibility. The echoes are now dying out after the East Asian crisis andthe popular approach prevailing is to go in for a kind of tempered financial liberalization where the floodports are thrown open only after the domestic economy has been put through the paces of internal financialreforms and judicial prudential regulations.The point being held aloft is that there are benefits, but also costs associated with financial globalization,and that the costs for the individual economy diminish if the ground is well-prepared prior to opening up.Put in other words, financial integration is beneficial, just as trade liberalization is, if the sequencing is right– and then it is not just a question of the sequencing of trade and financial reforms. The inference is thatfinancial integration does not mean merely opening up for capital in- and out-flows. Such a distinctionbetween financial ‘openness’ and ‘integration’ is strongly made in Le (2000). He argues, in the context ofthe crises of the 1990s that unstable capital market developments occur when there is a mismatch betweenfinancial openness and financial integration. A stable equilibrium can be re-attained if this gap is removed,which can be achieved in quite different ways. Thus, Malaysia tackled such a problem of financialimbalance by placing restraints on capital movements so that the degree of financial openness was cutdown towards the level of financial integration. On the other hand, Thailand and Korea took the harderalternative of undertaking reforms and increasing the level of financial integration to remove the imbalance.The foregoing discussion implies that a country may find itself at different positions on an internationalcomparison of the extent of financial liberalization depending on which of these two measures of financialliberalization is used. An estimate of financial openness can be obtained by looking at the growth in directinvestment and financial flows, and the changes in the regulations – and the barriers – associated with theseflows. A measure of financial integration is clearly a more involved one, requiring more information. Thispaper makes an attempt to develop and compare indices of financial openness and integration of some17 emerging or newly industrialized countries.It may be noted that even between countries with avowed intentions of a speedy process of financialliberalization, there are considerable differences in actual achievement in this regards. Verdier1 (1998)makes an enquiry into the characteristics of OECD countries which have embraced financial globalizationmost enthusiastically. Some of his results may seem counter-intuitive, but are rigorously derived, and itmay be of interest to see whether they are applicable to countries outside the OECD group.This study seeks to distinguish the factors determining the DEGREE of financial integration of countries.Variables representing the basic economic structure and chosen development paths, as well ascharacteristics often reflecting political choices or the influence of dominant pressure groups are tried out.Such a choice of a broad spectrum of variables is especially crucial in a study involving Asian countriesamong which inter-country differences reign far more than is the case within the OECD family.The scheme of the study is as follows: The section that follows makes a comparison of the indices offinancial openness and integration, highlighting the fact that the concepts are quite different. This section(II) also includes a brief, but fairly comprehensive survey of earlier work on tests of financial integration.The subsequent section (III) conducts tests for the factors that influence the EXTENT or degree of financialintegration, using a sample of 17 emerging economies, working with data for the 1990s. There is a finalsection which brings together the conclusions and suggestions for further research.

Ämnesord

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

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Business and economics

Ekonomi

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