Can you resist financial globalization?

Yes you can, and Asia has been doing it.  I am in Bangkok for a Bank of Thailand conference, and among other interesting contributions (by Jose Antonio Ocampo, Raghu Rajan, and Arvind Subramanian) is a nice paper by the BIS's Robert McCauley and Guonan Ma called "Resisting financial globalization in Asia."  The paper documents how fours countries (China, India, South Korea, and Thailand) have thrown "sand in the wheels of finance" to varying extents. Interestingly, those countries that have done the most resisting are the ones that are the least affected by the crisis. 

The paper makes the following points in particular:

• Asian-style resistance to financial globalization has taken the form of limiting the role of foreign banks in the domestic banking system and of restricting cross-border arbitrage in foreign currency, money, bond and equity markets.
• Evidence from prices and quantities shows the most limited globalization in China, followed at a distance by India, followed in turn by Thailand and then Korea.
• The extent to which countries have been hit by the recent crisis follows this ranking (in reverse order) almost exactly. In particular, Korea has been the country hardest hit despite many other preventive policies (including large reserve build-up) before the onset of the turmoil.

The following chart, taken from Chinn and Ito's work, and using an entirely different data source (IMF indexes on capital account policies), shows the same broad trend for East and Southeast Asian countries:

 

Following the Asian financial crisis these countries experienced a reversal from their exceedingly high levels of international financial integration. As a result, they are now less globalized financially than Latin America by a wide margin.

And if you think all of this is just academic stuff which does not capture what is really going on on the ground, I would recommend a short conversation with the governor of Taiwan's central bank. You would quickly shed any doubts you may have harbored on the ability of determined policy to manage their capital accounts.

Comments

[Quarrel]

With all due respect to the Governor of the Taiwanese CB, I suspect that before the crisis hit the US Bernanke would have strenuously defended his policies too...

(and similarly for Iceland or Korea, or wherever)

--Q

[Henri Tournyol du Clos]

Er? May I remind you that the continuous failure of Asian countries so far to build an even remotely efficient financial system and their constant need to export their excess liquidity to the US and Europe is at the very root of the present capital market crisis?

I frankly cannot see anything to rejoice about in what is a major source of international imbalances and has led to so much grief over the years, starting with Japan in the late eighties.

[Rachit]

Dear Sir,

Aren't capital controls (or FX intervention) flexible and important policy tools to manage emerging market economies? Agreed that smaller economies highly reliant on trade or foreign capital lack the credibility or the scale to effectively intervene in markets. But the same may not hold true for India and China.

Also, what is the problem with countries taking strategic long term views to build their local banking system before opening up completely? From an India perspective, it seems to have worked out well.(even ignoring this crisis)

I believe many blogs/readers have a heavy ideological bent and refuse to acknowledge the good things that have come out of non-market solutions that Governments have taken to promote long term interests. When markets are nascent, and domestic firms lack ability, has it been proven wrong in literature, that long term strategic moves by Govts are bad (examples abound)? I would welcome your reply Sir.

Thanks,
Rachit

[EnglishForDirtyForeigners]

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[JKY]

YES YOU CAN! YES YOU CAN!

[Rahul Deodhar]

Very true - here in India Reserve Bank (central bank) and SEBI (~SEC) are wary of large money movements - Indian bank has been promoting FX deposits -but avoiding P-notes (mechanism for big money - FII to come into India)

It was initiated because the impact was very high in terms of local currency.

But its worked only partly. There are ways and means how big-money tends to move into these countries. The regulations slow things a bit but dont fully eliminate it.

Rahul

[rob hart]

Will the papers be 'released' to the public or only conference goers get to see it? The pdf links all have a prompt for a password.

[JM]

Yes, I want to read the papers too but the pdfs are password protected...

[Rachael]

Thanks for the information...I bookmarked your site, and I appreciate your time and effort to make your blog a success!