those that have underdeveloped financial systems and those that have<sup>developed</sup> systems.<sup>1</sup> 75 This is done to avoid classifying two countries in the same bank-based<sup>(or</sup> market-based) category if one has poorly developed banks (or capital markets)<sup>andthe</sup> other has highly developed banks (or capital markets) by international<sup>standards.(See</sup> "Notes" at bottom of Table 5.10 above for classification criteria.) According to this classification, there are more East Asian economies<sup>thatare</sup> market-based (i.e., the Philippines, Thailand, Australia, Korea, Singapore,<sup>HongKong,</sup> and Malaysia) than bank-based (i.e., Indonesia and Japan). In fact, Hong<sup>Kongand</sup> Malaysia have higher Structure Indices (2.10 and 2.93, respectively) than<sup>thatof the U.S.</sup> and Switzerland (1.96 and 2.03, respectively).<sup>176</sup> The Hong Kong<sup>and Malaysianstock</sup> markets are quite large and active; however, their high Structure Indices mean<sup>that their</sup> stock market development is high relative to their own banking-sector development,<sup>but</sup> not relative to the level of stock market development in other countries.<sup>In another</sup> example, the Philippines is classified as market-based because its banks<sup>are small and</sup> underdeveloped, not because its stock market is very well developed.

When viewed in this way, the classification for most countries (in Table 5. 10)<sup>is</sup> consistent with the information provided in the prior tables where<sup>it was revealed thata</sup> number of East Asian economies had a larger proportion of equity financing than<sup>bank</sup> financing (e.g., Singapore, Malaysia and the Philippines). On the other<sup>hand, Thailand</sup> and Korea are shown in the earlier figure to have a larger proportion of bank-sector financing whereas Demirgii'-Kunt and Levine classify them as<sup>market-based.The</sup> Demirgii9-Kunt and Levine classification, however, adds another<sup>dimensionthrough its</sup> representation of the relationship between stock market and bank sector development based on a number of ratios,1<sup>77</sup> as opposed to a simple proportionate<sup>breakdown of</sup> financing sources.

In the case of Korea, the authors point out that although it is usually viewed as large-bank dominated, it is classified in their study as having a market-based<sup>financial</sup> system. They explain that this is not only because Korea has a very<sup>active and efficient</sup> equity market (based on _Turnover_ and _Total value traded/GDP_ ratios<sup>-seeTable S. 13 in</sup> the Statistical Appendix) but also because nonbanks play a role as substantial as that of banks in Korea and this is reflected in the ratios.'<sup>7 8</sup> The Demirgiig-Kunt and Levine structure classifications incorporate data for banks and stock markets but not for bond markets.'<sup>79</sup> However, the<sup>chartsappearing</sup> earlier in this section reveal that the corporate bond markets in East Asian economies<sup>are</sup> not at all well developed.

# **Developing Financial Markets in East Asia**

Recommendations for the best course of action to reach the goal of "welldeveloped financial markets" in East Asia have generally focused on two approaches. One approach is to look at financial market structure and assess<sup>whethera bank-based</sup> financial system or a market-based system is more advantageous<sup>for emerging</sup> economies. Since the Asian crisis, discussion of this approach has intensified, particularly surrounding the issue of developing local-currency corporate bond markets as a means of lessening the chance of another crisis.

73