Financial Evolution, Regulatory Reform and Cooperation in Asia

Session 3: Asian Financial Cooperation

Doowon Lee

Financial Sector in Korea: Competi-tiveness & Problems

• Relatively Weak Competitiveness In-dex

• Low Productivity

• Growing Size

Ranks of Korean Economy and Fi-nancial Market

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

0

10

20

30

40

50

60

70

80

90

GCI Financial Market Development

Rank

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

0

20

40

60

80

100

120

140

China

GCI Financial Market Development

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

0

5

10

15

20

25

30

35

40

45

Japan

GCI Financial Market Development

Commercial access

Banking system stability

Financial sector liberalization

Currency stability

Corporate governance

Taxes

Size index

0 10 20 30 40 50 60 70

58

52

43

42

34

34

31

Disadvantage

Rank

Securitization

Insurance

Equity Market development

IPO Activity

Financial Information disclosure

Infrastructure

Efficiency index

Human capital

0 5 10 15 20 25 30

2

3

3

6

8

8

10

10

Advantage

Rank

Labor Productivity by Sector

Doowon Lee, School of Economics, Yonsei University

Total

Agricu

lture

& Fish

ery

Man

ufactu

ring

Constructi

on

Servi

ces

Retail S

ales &

Food &

Accomodati

on & Tr

ansporta

tion

Insuran

ce &

Communication &

Finan

cial In

termed

iation

0

100

200

300

400

500

600

2010 Value added labor productivityUSA Korea Japan

Financial Freedom & Financial De-velopment Index in East Asia

10 20 30 40 50 60 70 80 90 1000

1

2

3

4

5

6

HongkongSingapore

Japan

KoreaMalaysia

China

Thailand

PhilippinesIndonesiaVietnam

Bangladesh

Financial Freedom 2012

FD

I 2012

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0.00

5.00

10.00

15.00

20.00

25.00

Financial Inter-relations Ratio(FIR)

Korea Japan U.S.A. U.K.

Asian Financial Cooperation

• 2008 Global Financial Crisis and Ko-rea

• Need for Financial Cooperation in East Asia

• Ways to Promote Financial Coopera-tion in East Asia

Exchange Rate Fluctuation (won/$)

2005

220

05 4

2006

220

06 4

2007

220

07 4

2008

220

08 4

2009

220

09 4

2010

220

10 4

2011

220

11 4

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

Source : Bank of Korea

Growth Rates of OECD Countries

2006 2007 2008 2009 2010 2011 2012-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

FranceGermanyJapanKoreaUnited KingdomUnited States

Arguments on Economic Integration of East Asia

• Why does East Asia need Economic Integration?

• Steps for Economic Integration• Current Status of Economic Integra-

tion : Trade, Investment, Finance• Problems of Economic Integration• Decoupling of East Asian Economies

from ROW

Problems for FTA in East Asia

• Diversity in economic size, structure, income level and etc.

• Free trade in agriculture sector• Non-tariff trade barrier• Proportion of intra-trade (decoupling with developed countries)• Labor and capital movement• Concern for Industrial Hallowing-Out• Absence of political leadership: Rivalry bet China and

Japan• Chronic trade imbalance• Relatively Weak Financial Cooperation

Progress of Financial Cooperation & Integration

• Failure of AMF (Asia Monetary Fund) in 1998 (a.k.a. Miyazawa Plan)• Chiang Mai Initiative (CMI) in 2001 : small size, bilateral ($7 bil)• Expansion of CMI in 2010 : big size, multilateral agreement ($120 bil) • Tasks to establish AMF - Contribution Ratio & leadership problem - Supervision of members and Loan conditions - Relationship with the IMF - Gap of economic level and structure between mem-

bers

Web of Bilateral Deals

New Structure of CMI ($120 bn, %, 2010)

Contribu-tion

Draw Vote

Ways to Promote East Asian Finan-cial Cooperation

• Establishing Financial Safety Net in East Asia

• Promote Intra-Regional Links: Bond Market

• Reduce Financial Market Volatility in East Asia: Capital control and Inter-nationalization of Asian Currencies

• AMF

Capital Control Policies

• Need for Capital Control: Dangers of Uncontrolled capital flow

• Examples of Capital Control: - Malaysia (1989-1995, 1998-2001) - Colombia (1993-1998) - Chile (1989-1998) - Brazil (1992-1998, 2009) - Indirect: India, China - Thailand (2010) - Korea (2011)

• Conditions for Successful Capital Control: International Coordination of Policies

The Incompatible Trinity

Capital Control in Korea

• 3 Kinds of Foreign Exchange Regula-tion

- Restore taxes on interest income and transfer gains from foreigners’ bond investment - tighter regulations on banks' for-eign exchange (FX) derivatives posi-tions. - levy on foreign loan

Developing Korean Won into Interna-tional Transacted Currency

• Lessons from financial crisis and cases of devel-oped countries

• Condition for International Key Currency - Stable value of currency (Balanced BOP) - Increasing demand for Korean won (Trade settlement, etc. ) - Active international transaction of Korean As-

sets (Real Estate, Stock, Bond) - Complete Convertibility & free flow