East Asian Economic Integration:

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Fourth ISIS East Asia Congress, Kuala Lumpur, 3-5
December 2006 Session II Enhancing East Asian
Economic Integration Strategic Issues, Critical
Imperatives
East Asian Economic Integration Finance to
Catch Up Trade
Yonghyup Oh KIEP
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Trade integration in East Asia has been
strengthening.
Not only trade openness of East Asian economies
has been increasing, but the importance of East
Asia in their trade relations is significant.
Export/GDP by destination
ASEAN Taiwan
China
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Trade Integration in East Asia has been
strengthening.
Export/GDP by destination
Korea
Japan
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Trade integration in East Asia has been
strengthening.
Import/GDP by destination
ASEAN Taiwan
China
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Trade integration in East Asia has been
strengthening.
Import/GDP by destination
Japan
Korea
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Financial integration in East Asia is lagging
behind.
The lack of it is regarded as one of the culprits
of the crisis in 1997-1998. Since the crisis,
East Asian financial markets show more
integration with the US market, than with each
other. East Asia is financing US deficits. East
Asian foreign reserves are high. Much of
financial outflows from East Asia head for the US.
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Financial integration in East Asia is lagging
behind.
Pre-crisis financial market interdependency not
very high, either between EA markets or with the
US
Correlations of stock index between 1991-1997
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Financial integration in East Asia is lagging
behind.
Post-crisis financial market interdependency
stronger US linkage
Correlations of stock index between 1999-2004
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Financial integration is lagging trade
integration, then
Real economic shocks can transmit faster
cross-border, while capital markets are
vulnerable to insure against these risks. While
business cycles may co-move more tightly as
economic interdependency increases via trade
channels, capital markets fail to provide
effective risk sharing scheme to members. It is
difficult to draw concerted efforts in the
financial sector, and regional monetary and
financial cooperation is difficult to attain.
(when the regional market is integrated, regional
level initiatives are easier to be accepted) A
sound regional market is a safety buffer for a
member market. With financial integration, East
Asia will be less prone to another financial
crisis. This in turn will help national markets
develop faster. And financial integration can
help resolve global imbalances.
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Imperatives for deepening financial integration
in East Asia
Creation of regional market Circulation of EA
capital within East Asia
Political commitments similar to EMU
Efforts to lift institutional barriers
New financial infrastructure for EA
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Institution building for East Asia an example
Notes The higher the figure is, the better the
investors are protected.
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Concluding remarks
East Asia achieved a high degree of real economic
integration via trade. However there is no
visible sign of financial market deepening within
East Asia. This disparity in regional economic
developments has costs such as still being
vulnerable to external financial shocks that can
sweep away the savings these economies have built
through real economic activities. Deepening
financial integration would provide a better
safety net for East Asia against external as well
as internal shocks. To achieve balance between
trade integration and financial integration, East
Asia urgently needs to create a regional
financial market that is capable of attracting
financial capital originating from the region.
Furthermore efforts to minimize the
institutional differences, amongst other, should
follow. ..
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Thank you!