Financial Liberalisation and Integration in East Asia

Anumber of studies on the European economic integrationprocess have shown that an expansion of trade among a group of countries over time could lead to synchronisation of business cycles across the members of the group.1 Synchronisation of business cycles would be more pronounced, if intra-industry trade accounts for most trade. This finding suggests that regional trade integration within similar industries could then develop conditions favourable for establishing a common currency area for the regional trading partners. A similar development has taken place in East Asia, where the ongoing trade liberalisation has contributed to a substantial increase in intra-regional trade, raising expectations that the recent movement toward free trade would generate market pressures for policy coordination for stable exchange rates of regional currencies and eventually for adopting a common currency for the region. With the spread of the liberal ideology of the Washington Consensus, many countries in East Asia, in particular more advanced ones including Thailand, Indonesia, and Malaysia, have been reducing restrictions on capital account transactions and barriers to entry of foreign financial institutions into local markets and to trade in financial services since the early 1990s (Eichengreen and Mussa 1998). After the 1997-98 crisis, the speed and scope of penetration of foreign financial institutions, except for Malaysia, has increased i