HAS INTERNATIONAL CAPITAL MOBILITY INCREASED IN ASIA? EVIDENCE FROM THE POST‐1997 FINANCIAL CRISIS PERIOD

I. INTRODUCTION The purpose of this paper is to examine a changing trend of international capital mobility and the extent of financial market integration in Asia in recent years. We give a specific focus on the ten selected Asian countries with economic significance during the post-1997 Asian financial crisis period, compared to the pre-1997 Asian financial crisis period. (1) To measure the degree of international capital mobility and financial market integration in the region, we estimate the Feldstein-Horioka (FH) coefficients applying panel cointegration methodology and the dynamic OLS (DOLS) estimator to panel data. Since the 1997 Asian financial crisis, the magnitude and pattern of capital flows between the Asian region and the rest of the world have changed in significant ways. First, more international capital has come into the Asian economies during the post-1997 Asian crisis period. The Asian crises in 1997 forced many countries in the region to reform their financial and economic systems drastically. One of the most critical macroeconomic conditionality measures imposed by the International Monetary Fund (IMF) on those economies was to reform and open their financial markets further. Although Malaysia did not ask for financial assistance from the IMF and chose a different path toward an economic recovery by imposing strict regulations on speculative foreign capital flows and adopting the fixed exchange rate system, many other Asian countries including Thailand, Indonesia, and South Korea had to accept the IMF conditionality in order to bail out their economies from the crisis. The further opening-up of the financial markets during the post-crisis period enabled more foreign capital to flow into the Asian markets because, compared with other regions, such as Latin America and Eastern Europe, the Asian markets could provide higher returns along with good fundamentals and more open economies due to lesser entry barriers for foreign investors. (2) Second, Asian countries, especially East Asia (ASEAN+3; China, South Korea, and Japan), have been exporting capital to the rest of the world in substantial amounts since the recovery from the 1997 Asian crisis. Most of the excess capital was financed by large current account surpluses which were facilitated by the recovery from the Asian crisis (3) (see Figure 1). An increase in external demand for Asian capital, especially from the United States, to finance budget deficits and trade deficits, has also contributed to Asia's role switching from net international debtors to net international creditors. [FIGURE 1 OMITTED] Another noteworthy change in the region during the post-1997 crisis period is that the Asian countries have been providing the rest of the world with safe capital, while importing riskier capital. Foreign direct investment and portfolio equity flows have been the main types of risky capital infusion into Asia. On the other hand, Asian capital has flowed out of Asia into low-risk securities, such as U.S. treasuries. The sovereign wealth funds of Asia, in particular, have made this type of foreign investment in recent years. The Asian countries have benefited non-Asian regions by providing additional liquidity and opportunities for diversifying risk in the international investment portfolio. (4) One of the other important factors which contributed to an increase in international capital mobility in Asia is the economic transition and high growth in China. After more than 30 years of economic transition and reform, the Chinese economy increasingly opened itself to foreign investors and became an integral part of global finance as one of the major receivers and providers of international capital. (5) The effective implementation of the export-oriented economic growth strategy in China resulted in significant increases in its current account surplus and international reserve assets held by its monetary authority. …