Roadmap to an ASEAN Economic Community

12. Financial Integration in ASEAN and Beyond: Implications for Regional Monetary Integration

246 Ramkishen S. Rajan 12 Financial Integration in ASEAN and Beyond: Implications for Regional Monetary Integration Ramkishen S. Rajan 1. Introduction The post-1997 period has not been very kind to Southeast Asia in general. The list of bad news that has recently hit the region has been daunting and appears never-ending. A non-comprehensive list includes: 1. the regional financial crisis in 1997–98 and its lingering after-effects; 2. the socio-political turmoil in ASEAN’s largest member, Indonesia, and consequent fears of regional instability; 3. continued recessionary environment in Japan and consequent curtailment of capital flows to the region from Japan; 4. intensified competition for foreign direct investment (FDI) and export markets from the emerging Asian giants, China and India;1 5. the sharp downturn in capacity utilization in the United States (Baily 2003) and consequent decline in external demand for ASEAN exports; 6. the seemingly more volatile international electronics cycle (IMF 2001); 7. the concerns about regional and international terrorism; and most recently 12 Roadmap2AEC Ch 12 7/9/05, 3:47 PM 246 Financial Integration in ASEAN and Beyond 247 8. the Severe Acute Respiratory Syndrome (SARS) outbreak and consequent decimation of the tourism industries, decline in business and consumer confidence, rise in health-care costs and their consequent budgetary impacts, not to mention the unfortunate loss of human lives.2 All these factors have worked in tandem to generate lower and more volatile post-crisis growth rates in the more-developed ASEAN members (Singapore, Malaysia, Thailand, the Philippines, and Indonesia), some economies being more adversely affected than others (Figures 12.1 and 12.2). During and immediately following the East Asian financial crisis of 1997–98 there were widespread concerns that ASEAN as an organization was disjointed, unco-ordinated, and altogether ineffective (Chang and Rajan 1999, 2001; Khoo 2003). To its credit, ASEAN has done remarkably well since then to rebuild its image, and is being actively courted by the larger economic powers once again. For instance, apart from the proposed ASEAN– China Free Trade Agreement (ACFTA), Japan, India, and South Korea have also sought out various types of trade pacts with ASEAN. In addition, the U.S. President, George W. Bush, launched the Enterprise for ASEAN Initiative Figure 12.1 Annual GDP Growth Rates of Original ASEAN Members, 1987–2001 Note: Data for Brunei are unavailable. Source: CEIC Database. -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year Percentage Philippines Thailand Indonesia Malaysia Singapore 12 Roadmap2AEC Ch 12 7/9/05, 3:47 PM 247 248 Ramkishen S. Rajan (EAI) during the Asia-Pacific Economic Co-operation (APEC) Summit in October 2002 to strengthen bilateral trade linkages with ASEAN.3 All of this in turn has offered ASEAN the potential to act as a hub with the consequent benefits of being one. In addition to this, many ASEAN members, such as Thailand and Singapore, are actively sourcing trade pacts with non-ASEAN members on a bilateral basis (Rajan and Sen 2002). Nonetheless, the ASEAN leaders recognize that current extra-regional initiatives ought not to distract ASEAN from furthering its own regional integration; renewed efforts are needed to deepen intra-ASEAN interactions. In view of this, the recently mooted ASEAN Economic Community (AEC) initiative by Singapore’s then Prime Minister, Goh Chok Tong, takes on particular relevance (ISEAS 2003). While a number of other papers have focused on trade integration and institutional mechanisms to further real sector economic integration in ASEAN, this chapter concentrates on the financial dimension of regional integration in ASEAN and the larger East Asia and its implications for regional monetary integration. Figure 12.2 Annual GDP Growth Rates of New ASEAN Members (CLMV), 1987–2001 Note: Growth rate for Myanmar in 2001 refers to fiscal year beginning in April. Source: CEIC Database. -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year Percentage Cambodia Lao PDR Myanmar Vietnam 12 Roadmap2AEC Ch 12 7/9/05, 3:47 PM 248 Financial Integration in ASEAN and Beyond 249 The outline of this chapter is as follows. The next two sections explore the extent of intra-East Asian financial integration. Despite several empirical studies examining various facets of the...