Factors behind Regional Financial Cooperation in East Asia

There are several factors behind recent financial cooperation in East Asia.²

Deepening regional economic and financial interdependence. The most important reason behind recent moves towards regional financial cooperation is the deepening regional economic and financial interdependence. Over the past twenty-five years, East Asia has witnessed rapid market-driven economic integration through trade, foreign direct investment (FDI), and finance. Japan, the Asian newly industrialized economies (NIEs), and the middle-income Association of Southeast Asian Nations (ASEAN) countries were early drivers of this process and, more recently, the People's Republic of China (PRC) has been an active participant in the region's trade and FDI activities. In the past few years, India has also been trying to strengthen linkages with East Asia. As a result, macroeconomic interdependence has been rising, with more synchronized business cycles, among major economies in the region. Deepening interdependence has raised awareness among the region's national authorities that they cannot achieve economic and financial stability by themselves and that some collective action is essential for this purpose.

Response to the Asian financial crisis of 1997–98. The Asian financial crisis was the result of a combination of financial globalization and weak national financial systems. Crisis-affected economies have learned several hard lessons from the crisis. First, to strengthen national financial systems there is a need to share information within the region about common issues and concerns, and ways to address them at the national level. Second, in the face of rising financial globalization, there is a need to create regional self-help mechanisms for effective prevention, management, and resolution of financial crises particularly given the revealed shortcomings of the existing global financial architecture and the limited Asian voice in, and for, global financial management. Third, because regional financial stability is a basis for global financial stability, effective regional financial cooperation is complementary to the role of global financial institutions such as the International Monetary Fund (IMF).

European monetary integration. The overall success of European monetary and exchange rate policy coordination, which culminated in the introduction of the euro as a single currency in 1999, has also prompted the East Asian authorities to consider regional financial cooperation as a viable tool of regional selfhelp mechanisms for financial stability. As in the case of Europe, regional cooperation—rather than a regional hegemonic arrangement—is important in East Asia as Japan, PRC, Korea, and ASEAN countries are equally important partners in the region. As the Japanese yen or the Chinese yuan alone cannot fulfill the role of a regional key currency, a basket of regional currencies can potentially play an important role.

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