Concluding Remarks

The unfolding of the crisis of 2008–9 may be a watershed of financial globalization. Emerging markets that embraced rapid financial integration before the crisis found that they were overly exposed to deleveraging propagated from the US. The crisis vividly illustrated that even a very large IR war chest did not seem to provide efficient self insurance against contagion, and that the fear of losing IR constrained the adjustment of EMs more than the fear of floating. The risk is that some EMs would opt out of financial globalization. In this paper I outline a menu of options that deserves further exploration. Focusing on the challenges of each country in isolation, a tax-cum-subsidy policy is a plausible option. Such a scheme deals with the fire-sale congestion externalities induced by foreign borrowing financing longer term investment in the presence of deleveraging risks. Looking at the regional challenges, deepening trade networks and deeper trade dependency implies possible gains from IR pooling arrangements, and the formation of swap-lines among countries in Asia. The hope is that such schemes would alleviate concerns about the cost and the inefficiency of hoarding IR and would also reduce the susceptibility of Asia to deleveraging shocks, thereby preventing even more drastic policies that may curtail future financial integration.

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