fraction of their capital may be flowing into the inter-regional countries, including Hong Kong and Singapore. Meanwhile, since the 1980's, ASEAN countries have been financing their shortage of domestic long-term capital using foreign savings, the major source of which is still the capital inflow from DAC countries. Since the late 1980's, however, the correlation between the change in capital inflow from DAC countries and the total amount of capital imports has gradually weakened. These facts suggest that the importance of international financial markets as a source of foreign capital has been increasing for ASEAN countries.

### 3.3 International Capital Flow amongst Southeast Asia

In the 1970's all NIEs and ASEAN countries, excluding Hong Kong, Singapore and Taiwan, had a negative external balance. Therefore, during the 1970's, the international financial markets in Hong Kong and Singapore functioned as the channels through which foreign capital was imported from outside Asia to NIEs and ASEAN countries. To summarize roughly, these markets worked as a recycling channel $ ^{22} $ ; First, Singapore's Asian Dollar market imported oil money from the Euro market, through inter-bank tradings, and then exported it into the Hong Kong market. Next, this imported capital was supplied, generally in the form of syndicated loans, to various countries all over the world, including Asian countries.

This pattern of international capital flow through the Hong Kong market has remained basically unchanged since the 1980's (see Figure 10). One major change that emerged in the 1980's, was the establishment of the Tokyo off-shore market which resulted from a series of financial reform policies in Japan. The international flow of funds, between Hong Kong and Tokyo, drastically increased during the mid 1980's, and created a strong inter-influence between the two $ ^{23} $ .

Another characteristic in the international capital flow in this region in the last 20 years, was the strengthening international integration of financial markets in ASEAN countries. The first reason for this was considered to be the financial liberalization policies adopted in all ASEAN countries, which rapidly increased the international liquidity of capital across borders $ ^{24} $ . It was also considered that the second reason was the macroeconomic stability and rapid economic development of these Asian countries, which increased the creditworthiness of these countries significantly and gave them easier access to international financial markets. Under these circumstances, the international integration of financial markets in ASEAN countries has been progressing. However, while for some countries, such as Singapore and Malaysia, the international interest rate parity has being relatively well observed in these days, for other countries, such as Korea, Indonesia, and Philippine, there have been still significant interest rate gap between domestic and international markets (see Figure 11).

### 4. SUMMARY

The long-term changing pattern of the external balance of NIEs and ASEAN nations can be explained by the “debt cycle hypothesis”. This reflects that NIEs and ASEAN nations have achieved their FWG pattern of economic development, using foreign capital as the source of extra funds to cover the shortage of investment capital.

However, the forms of importing foreign capital vary from one country to another and