Whither Financial and Monetary Integration in East Asia?

The 1997 Asian financial crisis has helped to further regional financial and monetary cooperation. The purpose of this paper is to examine these efforts, their recent developments, and to predict the prospects of such cooperation. In order to deepen financial and monetary integration, the region must overcome several difficulties. The region's appetite for financial market liberalization has been dampened by the crisis and countries are building up foreign exchange reserves instead of reforming domestic financial markets. The diverse structures and development levels of the financial sector among the members is another obstacle. The fact that Japan does not have strong incentives for monetary integration and that the business cycle of member countries is not synchronized are obstacles to monetary integration. Also, the proliferation of FTAs has turned attention away from regional cooperation. Finally regional cooperation needs a leader that can bring impetus to institution building. As the two possible candidates, China and Japan, have been competitors rather than collaborators, the most realistic scenario for regional cooperation is that the ASEAN + 3 countries will muddle through and that the process will be painstakingly slow.