This would in turn be reflected in an international convergence in the prices of financial products and assets, with low transaction costs that encourage the institutions, issuers and investors to venture beyond the domestic markets into foreign markets. Essentially, the end goal of financial integration is to establish a free flow of finance and capital, akin to trade integration which aims for the unrestricted mobility of goods and services. Deeper financial integration would further enhance the competitiveness and dynamism of Asia. Broadly, greater financial integration would bring about three key benefits. First, financial integration fosters greater competition and economies of scale in the financial system, thereby improving the efficiency in the allocation of capital within the region and thus increase the capacity of the financial system to meet the differentiated and growing demands of investors. While the individual Asian financial markets, on their own, are small in size and fragmented, an integrated market would raise Asia's attractiveness to both regional and  10  BIS Review 130/2009  global investors. Second, financial integration would facilitate a more efficient transfer of surplus funds for investments within the region, with lower intermediation costs and thus more optimal returns. Through the greater opportunity for risk-sharing and diversification across a wider geographical area, country-specific shocks and financial vulnerabilities would be reduced, thus contributing towards enhanced regional financial stability. Third, financial integration enables countries to build on the complementarities between countries. Individually, different financial systems can leverage on the comparative advantages of the different markets that exist in the region.

BIS Review 130/2009  3  4  BIS Review 130/2009  Fourth, the immense heterogeneity and diversity of the Asian economies have not been a restraint on progress, but have complemented and facilitated the region's economic development. The vast differences in the stage of development of the individual economies, such as from the advanced Japan to emerging China to developing Vietnam, together with the rich variety of natural resources and endowments throughout the region, have enabled Asia to capitalise on a multitude of strengths and comparative advantages. In particular, there are the region's different development levels and consequent technological capabilities, known commonly as the “Flying Geese Model”. Such specialised division of labour is evident in the 1970s when Japan relocated the more labour-intensive stages of production processes to the newly industrialised Asian economies, such as South Korea and Singapore, and subsequently in the 1980s, to emerging Asia, including Malaysia, Indonesia and Thailand. The emergence of China in the recent decade has further provided significant impetus to this pattern of vertical specialisation, which has effectively resulted in a globalisation of the production chain across the network of regional economies. Whilst Asia's fragmented industrialisation has led to a considerable strengthening of trade links within the region, the transfer of capital, knowledge and technologies that are crucial for strengthening industrial capabilities have also been enhanced. Asia after the Asian financial crisis The 1997-98 Asian financial crisis represents a significant juncture in the history of Asia.