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The Conference on Institutional Development in Finance in East Asia
31 October - 1 November 2003
Executive Summary
Conference on
Institutional Development in Finance in East Asia
31 October –1 November 2003
At the Siam City Hotel, Bangkok
 
Institutions for Financial Development and Cooperation
 
  • Despite the great diversity that exists in East Asia (EA), the regional economies generally share common problems. Lack of appropriate domestic infrastructure and institutions, such as, legal and governance systems, prudential regulatory and supervisory mechanisms in the financial sector (particularly concerning risk management issues), corporate governance (such as information disclosure and law to protect investors) in the private sector, and adequate microfinance for the “unbanked majority” have hampered financial sector development in the EA economies, thereby hindering their economic development.
  • Various factors contributing to the EA economies' greater support for regional financial cooperation emerged from the discussions. These include the “economic paradigm shift,” resulting from the strong economic performance, particularly of China, and the increased economic interdependence within the EA region. The phenomenon has allowed EA to recover from the Asian financial crisis and experience high economic growth, in spite of the relative slowdown in the growth of the major economies – namely, those of the US, EU, and Japan.
  • The regional initiatives that were discussed and highlighted include those that had emerged from the CMI, such as, the ASA, BSA, and regional surveillance mechanisms to minimize the probability of a financial crisis recurring, and those that had emerged from the most recent ACD meeting, such as, the CMD on the development of an Asian bond market. Participants also made proposals and discussed the possibilities of going beyond these existing initiatives and of strengthening regional financial cooperation.
  • To accommodate the implementation of regional financial initiatives, some obstacles are to be overcome relating to such issues as the development of derivative markets to facilitate hedging against currency and interest rate risks, of domestic bond markets especially secondary markets to minimize liquidity risks, and of regional rating agencies for the issuance of Asian bonds.
  • While there are regional fora that facilitate economic and financial policy dialogue between the East Asian economies' policy makers, such as, the ASEAN+3, ACD, APEC, and EMEAP, and that have led to some landmark regional financial initiatives, the development of regional institutions with adequate financial and human resources is essential to ensure the effective maintenance and implementation of these initiatives.
  • While the detailed designs of the appropriate regional institutions, as may be required for East Asian financial cooperation, have yet to be decided upon, participants acknowledge that, for the success and sustainability of such regional cooperation, the institutions must be allowed to exercise a leadership role, allow each member to have a fair share in decision making, and avoid dominance of such large members as Japan or China. It is suggested that political tensions between China and Japan will need to be resolved for them to play an effective leadership role together, in a way simila r to which France and Germany have done in the EU.
  • The regional institutions should also facilitate reforms and harmonization of the economic, political, and institutional structures of the EA economies to narrow down their differences to accommodate further cooperation and integration of the new ASEAN economies, such as, the further Lao PDR, Vietnam, and Cambodia.
  • The institutions should reinforce the political will and commitment of the leaders of the EA economies, which are crucial for sustaining the momentum for reforms and the effective enforcement of regional cooperation, by improving the communications and dialogues among networks of think tanks, academic establishments and policy makers, as well as between the public and the private sectors.
 
 
Surveillance and Policy Dialogue
 
The session covers policy-making assessment and review of three economies namely, Thailand, Republic of Korea, and the Philippines.
 
Republic of Korea
 
  • Despite the promising financial sector restructuring and export performance, Korea’s economic slowdown has been brought about by both internal factors, including a credit card boom last year leading to household debt problems and investors’ lack of confidence due to uncertainties regarding the policy directions of the new government, and external factors, such as, SARs, political instability due to the North Korea issue, and the US economic slowdown.
  • The government has pursued various short term and long term policy measures to enhance economic growth. These include pro-active fiscal and monetary policies to increase consumption and investment, a deregulation and provision of tax incentives to promote foreign investments, and measures to strengthen the financial sector. The longer term measures consist of upgrading the IT industries, especially digital appliances, bio-and nano-technology sectors, and labor reforms to enhance competitiveness. Korea is also negotiating free trade arrangements (FTAs) with Japan and Singapore and conducting a joint study for FTAs with the ASEAN countries.
 
The Philippines
 
  • On the trade policy side, the Philippines has pursued policies to improve its industries’ competitiveness, such as, those on investment deregulation, gradual trade liberalization, privatization of government corporations, the shifting of the export composition from agriculturebased to manufacturing, and a increasing trade with East Asian economies, especially China.
  • In the financial sector, although the regulatory power s of the Securities and Exchange Commission (SEC) have been enhanced and the level of non-performing loans (NPLs) has been declining, the level of NPL is still considered high, and institutional developments in the financial and capital market are still in their very early stages.
  • On the governance issue, the government has implemented policies to improved the judiciary systems, legal and enforcement systems, and government accounting process to meet international standards, reduce corruption, and increase accountability.
  • The deterioration of the fiscal position of the government due to reducing ratio of revenue to GDP, high level of public debt to GDP, and loss-making of the state owned enterprises (SOEs), is the main concern for the Philippines’ economy. This has resulted in low capital expenditure which is important for the development of infrastructure necessary to attract foreign direct investment (FDI). The problems have been created by over reliance of local government on the internal revenue allotment from central government, and lax control on tax administration. To tackle the problems, the government has implemented such measures as privatization of SOEs, creation of new tax instruments, improving tax administration process, and improving debt management by lengthening the duration of debts.
 
Thailand
 
  • Under the framework of ASEAN Surveillance Process (ASP), Thailand has set up its National Surveillance Unit (NSU) since 2000-1 and has given priority to the development of early warning systems (EWS) to be used complementarily with other measures to assess macroeconomic fragility and sectoral vulnerability in order to allow prompt policy responses to avoid potential future financial crisis. The Fiscal Policy Office has developed the EWS model known as the Fiscal Policy Office Early Warning System 1 (FEWS_1) based on the standard model (used by the US and IMF) but with data content coming only from ASEAN+3.
  • The model represents one of the tools to be used for development of an EWS at the regional level. It still faces challenges concerning the recognition of political and behavioral factors, which usually play crucial roles behind the financial crisis, the inclusion of more sophisticated variables to allow early detection of other types of crises apart from the currency crisis, and the policy implications for the policy makers once the ‘flag is up’. Whether regional surveillance mechanisms can be effective depend upon the member countries’ willingness to raise concerns and warn each other. Regional cooperation on crisis management is another crucial issue considering the fact that the future crises might be unanticipated.
 
Discussions
 
There is a general concern about the possible risks of these economies facing another banking and currency crisis after a period of rapid credit expansion since the recovery from the last crisis. Effective surveillance systems both at national and regional levels can play a crucial role in minimizing the risk of a future crisis erupting by allowing policy makers to perform pre-emptive corrective policy measures to prevent a crisis from occurring. The emphasis has been put on more integration and cooperation both in economic and finance by building from the existing financial cooperation under the framework of ASEAN+3 and ACD to facilitate dissemination of technology and exchanges of ideas among policy makers to enhance the surveillance system in the region.
 
 
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The interpretations and conclusions given represent those of the authors. They do not necessarily reflect the view of the Royal Thai Government, its departments or other related institutions.


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