Financial Evolution, Regulatory
Reform and Cooperation in Asia
Session 3: Asian Financial Cooperation
Doowon Lee
Financial Sector in Korea:
Competitiveness & Problems
• Relatively Weak Competitiveness Index
• Low Productivity
• Growing Size
Ranks of Korean Economy and
Financial Market
0
10
20
30
40
Rank
50
60
70
80
90
2006-2007
2007-2008
2008-2009
GCI
2009-2010
2010-2011
Financial Market Development
2011-2012
2012-2013
China
0
20
40
60
80
100
120
140
GCI
Financial Market Development
Japan
0
10
20
30
40
50
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
GCI
Financial Market Development
Disadvantage
Rank
0
10
20
30
40
50
60
Commercial access
58
Banking system stability
52
Financial sector liberalization
43
Currency stability
42
Corporate governance
34
Taxes
34
Size index
70
31
Advantage
Rank
0
Securitization
5
15
2
Insurance
3
Equity Market development
3
IPO Activity
10
6
Financial Information disclosure
8
Infrastructure
8
Efficiency index
10
Human capital
10
20
25
30
Labor Productivity by Sector
2010 Value added labor productivity
USA
Korea
Japan
600
500
400
300
200
100
0
Total
Agriculture & Fishery
Manufacturing
Construction
Doowon Lee, School of Economics, Yonsei University
Services
Retail Sales & Food &
Insurance &
Accomodation &
Communication &
Transportation
Financial
Intermediation
Financial Freedom & Financial
Development Index in East Asia
6
5
Japan
FDI 2012
4
Korea
Malaysia
China
Hongkong
Singapore
Thailand
3
Indonesia
Vietnam
Philippines
Bangladesh
2
1
0
0
10
20
30
40
50
60
Financial Freedom 2012
70
80
90
100
Financial Inter-relations Ratio(FIR)
25.00
20.00
15.00
10.00
5.00
0.00
1987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011
Korea
Japan
U.S.A.
U.K.
Asian Financial Cooperation
• 2008 Global Financial Crisis and Korea
• Need for Financial Cooperation in East
Asia
• Ways to Promote Financial Cooperation
in East Asia
Exchange Rate Fluctuation (won/$)
1,500
1,400
1,300
1,200
1,100
1,000
900
800
Source : Bank of Korea
700
600
Growth Rates of OECD Countries
8.0
6.0
4.0
France
Germany
Japan
Korea
United Kingdom
United States
2.0
0.0
-2.0
-4.0
-6.0
-8.0
2006
2007
2008
2009
2010
2011
2012
Arguments on Economic Integration
of East Asia
• Why does East Asia need Economic
Integration?
• Steps for Economic Integration
• Current Status of Economic Integration
: 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 members
Web of Bilateral Deals
New Structure of CMI
($120 bn, %, 2010)
Contribution
Draw
Vote
Ways to Promote East Asian
Financial Cooperation
• Establishing Financial Safety Net in East
Asia
• Promote Intra-Regional Links: Bond
Market
• Reduce Financial Market Volatility in East
Asia: Capital control and
Internationalization 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 Regulation
- Restore taxes on interest income and
transfer gains from foreigners’ bond
investment
- tighter regulations on banks' foreign
exchange (FX) derivatives positions.
- levy on foreign loan
Developing Korean Won into
International Transacted Currency
• Lessons from financial crisis and cases of developed
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 Assets
(Real Estate, Stock, Bond)
- Complete Convertibility & free flow