FINANCIAL REFORMS IN EMERGING ECONOMIES

WITH REFERENCE TO ASIAN COUNTRIES

Author : Abhishek Pande

Institute : Orange School of business,Nagpur

ABSTRACT

Developing countries also known as the emerging markets are fast becoming

the driver of global growth.To cash in where the growth is today, and for the

foreseeable future,emerging economies are expected to grow two to three

times faster than developed nations like the United States of America.

International Monetary Fund 1estimates emerging markets or emerging

economies are nations with social or business activity looking for the

continuous process of rapid growth and industrialization.The diversification

that emerging markets provide is they tend to perform differently than

developed markets and have been successful at decoupling from the greater

longer term woes of the mature economies.

KEYWORDS – emerging economies,fiscal consolidation,sustainable

growth.

1 International Monetary Fund is an organization of 188 countries, working to

foster global monetary cooperation and secure financial stability.

INTRODUCTION

After a subdued economic performance in emerging Asia in 2012, growth in

the region is set to pick up gradually in 2013 helped by external demand and

accommodative monetary policy.At about 5½ percent, Asia’s growth in 2012

is estimated to have been about ½ percentage point below 2011, although the

region still expanded about 2 percentage points faster than the global average.

Weaker external demand was the main factor, but China’s efforts to engineer a

soft landing and supply constraints in India also weighed on Asian economies.

However, recent activity indicators suggest economic momentum is

stabilizing. A modest growth pickup to about 6 percent in 2013 would result

mostly from strengthening external demand, with accommodative monetary

stances across the region also playing a role. In fact, many economies in

emerging Asia have now reached a development stage that in principle

exposes them to the risk of falling into a “middle-income trap.” Historically,

the odds of a sustained growth slowdown have been 1/7 for a fast-growing

middle-income country versus 1/11 for frontier, that is low-income, economies

in the region.

SAMPLE DESIGN

Morgan stanley's Emerging Markets Index consists of

China,India,Indonesia,Lebanon,Malaysia,Pakistan,Philippines,Thailand,Vietna

m.The ASEAN2–China Free Trade Area, launched on January 1, 2010, is the

largest regional emerging market in the world.

2 The Association of Southeast Asian Nations is a geo-political and economic

organization of ten countries located in Southeast Asia.

RESEARCH OBJECTIVES

To sustain economic growth over the medium term and make growth more

inclusive, a diverse policy agenda will be required in different parts of Asia,

ranging from economic rebalancing to strengthening the sources of private

sector–led investment to reforms in goods,labor markets.The existing

opportunities and challenges from rapid demographic change have also

contributed to the growth factor of Asian economies.

Following are some important objectives of this research paper :

1. The policy agenda for advanced economies—and the implications for

Asian economies.

2. The virtues and benefits of further economic cooperation within Asian

economies.

3.Importance of fiscal consolidation and sustaining growth in Asian

economies.

CONTINENT COUNTRIES

ASIA

  China

  India

  Indonesia

  Lebanon

Malaysia

  Pakistan

  Philippines

  Thailand

  Vietnam

1.POLICY AGENDA IN ADVANCED ECONOMIES AND

IMPLICATIONS FOR ASIAN COUNTRIES

In the the global economy, where momentum continues to slow,the expected

global growth of 3.3 percent in 2012 and 3.6 percent in 2013 is expected to

slowdown,it is also spreading to regions that have previously performed well.

This year, growth in emerging Asia fell to its lowest level since 2008—partly

from domestic slowdowns in China and India, but also because of strong

gusts from storms in the west.

These financial links are very strong,demand from Europe and the United

States each account for about a third of emerging Asia’s net exports. Foreign

participation in local sovereign debt markets has nearly doubled over the past

five years. So from all sides, Asia is exposed to sudden shifts in

sentiments.Going forward, we believe that growth will pick up again, and that

Asia will retain its position as a growth leader—expanding 2 percentage

points faster than the world average next year.But none of this can be taken

for granted,it depends on the actions of global policymakers, especially in the

United States and Europe.

In short, Asia’s economic foundations became safer, sounder, and more

resilient—but still open to the world and open for business. This has

important lessons for the advanced economies currently facing severe

challenges.

The main concern is the policymakers must avoid the so-called “fiscal cliff”

at all costs. If expiring tax provisions and spending cuts were indeed to come

into play, growth in the developed nations would fall to zero or below—and

the rest of the world will not be immune. This policy uncertainty must be

resolved.The Eurozone, which is still facing crisis, must also deliver on its

policy commitments at the national and regional level—fiscal, financial,

structural. And again, all players must play their part.

Europe must forge ahead with greater economic cooperation—especially

through deeper fiscal and financial integration. A major priority for the

Eurozone is a true banking union to complement its monetary union. As a

first step, this means a single supervisory framework and ultimately there also

needs to be a pan-European deposit guarantee scheme 3and a bank resolution

mechanism with common backstops.

2. INCREASED ECONOMIC COOPERATION WITHIN

ASIAN COUNTRIES

The virtues of further economic cooperation within Asian countries can be

improved by economic cooperation in two areas in particular—trade and

finance.

Trade integration

In terms of trade integration, Asia has already made great strides. Over the

past decade, trade within Asia tripled, and regional trade among emerging

Asia grew even faster.With Asian trade, many tributaries flow together as a

single great river. A typical pattern is that Asian economies send intermediate

goods to China, which assembles them into final goods for exports. In fact,

intermediate goods now account for over 70 percent of all Asian exports.

3 Pan European Deposit Guarantee Schemes reimburse a limited amount of

deposits to depositors whose bank has failed.

Malaysia is part of this flow—especially through exporting valuable

electronic goods up the chain. Malaysia’s intermediate exports to China have

increased fourfolds.

ASEAN countries themselves, of course, will also need to support domestic

consumption. After all, the shift toward high-income status can only come

through a strong middle class. And again, further regional integration can help

with this, by offering new avenues for mutual gain.

Looking ahead, the formation of the ASEAN Economic Community in 2015

offers the vast possibilities of a common market. The Trans-Pacific

Partnership 4can also deliver great benefits, especially by emphasizing service

markets—a sector that has been too protected for too long.

Financial integration

More than 90 percent of ASEAN cross-border portfolio investment flows are

with advanced economies outside Asia.Certainly, we do see FDI flows within

the region. Malaysia, for instance, is a big direct investor in Cambodia,

Indonesia, Thailand, and Vietnam.

Greater regional financial integration could open up a host of new benefits. It

can boost domestic demand—partly by making it easier for small businesses

in countries to gain access to credit. It can make economies safer, by allowing

more insurance against volatility and adverse developments. And one other

important benefit is greater access to financial services by the poor can reduce

inequality.On a practical level, financial integration is eased by making local

banking systems more open and competitive. The integration of ASEAN

4 The Trans-Pacific Partnership Agreement (TPP) is a viable pathway for

realising the vision of a free trade area of the Asia-Pacific.

stock markets would help, as would a larger regional bond market, as

envisaged by the Asian Bond Market Initiative.

With Economic Transformation Program, emerging asian countries can lead

the way in boosting productivity and growth to become a vibrant, high-per

capita income generating nations by 2020.

Malaysia already has a history of innovative finance. It has become a world

leader in sukuk, or shari’ah-compliant bonds—accounting for two-thirds of

the sukuk market.Further economic cooperation—despite the very different

span of countries, cultures, and systems across Asia.

Making integration work

More financially-integrated economies are more exposed to storms. In

particular, while capital flows can bring great benefits, they can also

overwhelm countries with damaging cycles of crescendos and crashes.At the

same time, deeper financial market development allows an economy to put

down strong roots and weather storms well.

Economic management is the key for success. If the flows are coming through

the banking system, then macroprudential tools make sense—such as

tightening conditions for housing loans or having banks hold more capital. In

other circumstances, temporary capital controls might prove useful making

the most of financial integration.Despite the tremendous fall in poverty over

the past few decades, income inequality is on the rise.Even emerging markets

which made great strides in reducing inequality in the 1970s and 1980s, has

not seen further reductions.

3.IMPORTANCE OF FISCAL CONSOLIDATION AND

SUSTAINING GROWTH IN ASIAN ECONOMIES

Country circumstances will also determine the appropriate pace of fiscal

consolidation. Higher structural deficits imply the need to rebuild fiscal space

in many asian economies.Strengthening fiscal policy frameworks can also play

an important role in reprioritizing spending and mobilizing adequate revenue

in support of new sources and more inclusive growth.Coordinated and

collective action by asian policymakers will also help in particular, by

pursuing ongoing initiatives to maintain and deeper strong regional trade

integration.

Automatic stabilizers––that is, automatic tax revenue declines and spending

increases that dampen the impact of the shock––should be the first line of

defense. However, in reflecting a narrow tax base and lack of social safety

nets, automatic stabilizers are small in many regional economies, which would

prevent them from cushioning the blow of a sharp downturn. This calls for

contingency plans for discretionary spending, especially in countries with

more fiscal space.Calibrating the appropriate near-term support for growth

without fanning inflationary and financial stability risks is the key near-term

challenge for policymakers.But the need and scope for monetary policy action

differs substantially across economies, mainly reflecting different exposures to

growth and inflation risks, and risks to financial stability from past stimulus.In

addition, macroprudential measures will have to play an important role where

credit growth remains too rapid and could pose problems for financial

stability, especially if accompanied by persistently strong capital inflows.

DIRECTIONS FOR POLICY FRAMING

Making growth more inclusive means moving on many fronts:

There is room to spend more on healthcare and education, which are at

relatively low levels in Asia.

There is room to cover more people under pension and unemployment

insurance schemes—only 20 percent of the working-age population is

covered in emerging Asia, as opposed to 60 percent in the OECD5.

There is room to raise minimum wages for the poor, which are relatively

low in Asia.Introduction of minimum wage policy should be made

compulsory for all emerging nations in Asia.

And there is room to improve access to financial markets—right now,

nearly 60 percent of the people in East Asia are excluded from the

formal financial system.

CONCLUSION

The financial stability makes it imperative to refine rather than retreat from the

objectives and avenues of financial development. Mobilizing savings and

effectively channeling them into productive investment remains a key

challenge for financial systems in emerging markets. In economies like China

and India that have high private saving rates, effective financial intermediation

is a key not just for promoting growth but also for improving the welfare

impact of that growth.The financial reforms is likely to shift the emphasis of

the financial development agenda toward the basics of strengthening systems,

developing financial markets and working towards sustainable growth in the

5 Organisation for Economic Cooperation and Development International

organisation helping governments tackle the economic, social and governance

challenges of a globalised economy.

region. There is an increasing impetus in different economies to

establish an institutional framework to coordinate the work of

different regulatory agencies and to provide oversight of the future.

This papers attempts to recommends setting up a financial sector oversight

agency in emerging asian economies to redefine the objectives and avenues of

financial development in light of recent events in major Asian emerging

economies.

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