Financial reforms in emerging economies

1. FINANCIAL REFORMS IN EMERGING ECONOMIES
WITH REFERENCE TO ASIAN COUNTRIES
Author : Abhishek Pande
Institute : Orange School of business,Nagpur
ABSTRACT
Developing countries also known as the emerging markets are fast becoming
the driver of global growth.To cash in where the growth is today, and for the
foreseeable future,emerging economies are expected to grow two to three
times faster than developed nations like the United States of America.
1
International Monetary Fund estimates emerging markets or emerging
economies are nations with social or business activity looking for the
continuous process of rapid growth and industrialization.The diversification
that emerging markets provide is they tend to perform differently than
developed markets and have been successful at decoupling from the greater
longer term woes of the mature economies.
KEYWORDS – emerging economies,fiscal consolidation,sustainable
growth.
1
International Monetary Fund is an organization of 188 countries, working to
foster global monetary cooperation and secure financial stability.

2. INTRODUCTION
After a subdued economic performance in emerging Asia in 2012, growth in
the region is set to pick up gradually in 2013 helped by external demand and
accommodative monetary policy.At about 5½ percent, Asia’s growth in 2012
is estimated to have been about ½ percentage point below 2011, although the
region still expanded about 2 percentage points faster than the global average.
Weaker external demand was the main factor, but China’s efforts to engineer a
soft landing and supply constraints in India also weighed on Asian economies.
However, recent activity indicators suggest economic momentum is
stabilizing. A modest growth pickup to about 6 percent in 2013 would result
mostly from strengthening external demand, with accommodative monetary
stances across the region also playing a role. In fact, many economies in
emerging Asia have now reached a development stage that in principle
exposes them to the risk of falling into a ―middle-income trap.‖ Historically,
the odds of a sustained growth slowdown have been 1/7 for a fast-growing
middle-income country versus 1/11 for frontier, that is low-income, economies
in the region.
SAMPLE DESIGN
Morgan stanley's Emerging Markets Index consists of
China,India,Indonesia,Lebanon,Malaysia,Pakistan,Philippines,Thailand,Vietna
m.The ASEAN2–China Free Trade Area, launched on January 1, 2010, is the
largest regional emerging market in the world.
2 The Association of Southeast Asian Nations is a geo-political and economic
organization of ten countries located in Southeast Asia.

3. RESEARCH OBJECTIVES
To sustain economic growth over the medium term and make growth more
inclusive, a diverse policy agenda will be required in different parts of Asia,
ranging from economic rebalancing to strengthening the sources of private
sector–led investment to reforms in goods,labor markets.The existing
opportunities and challenges from rapid demographic change have also
contributed to the growth factor of Asian economies.
Following are some important objectives of this research paper :
1. The policy agenda for advanced economies—and the implications for
Asian economies.
2. The virtues and benefits of further economic cooperation within Asian
economies.
3.Importance of fiscal consolidation and sustaining growth in Asian
economies.
CONTINENT COUNTRIES
China
India
Indonesia
Lebanon
ASIA Malaysia
Pakistan
Philippines
Thailand
Vietnam

4. 1.POLICY AGENDA IN ADVANCED ECONOMIES AND
IMPLICATIONS FOR ASIAN COUNTRIES
In the the global economy, where momentum continues to slow,the expected
global growth of 3.3 percent in 2012 and 3.6 percent in 2013 is expected to
slowdown,it is also spreading to regions that have previously performed well.
This year, growth in emerging Asia fell to its lowest level since 2008—partly
from domestic slowdowns in China and India, but also because of strong
gusts from storms in the west.
These financial links are very strong,demand from Europe and the United
States each account for about a third of emerging Asia’s net exports. Foreign
participation in local sovereign debt markets has nearly doubled over the past
five years. So from all sides, Asia is exposed to sudden shifts in
sentiments.Going forward, we believe that growth will pick up again, and that
Asia will retain its position as a growth leader—expanding 2 percentage
points faster than the world average next year.But none of this can be taken
for granted,it depends on the actions of global policymakers, especially in the
United States and Europe.
In short, Asia’s economic foundations became safer, sounder, and more
resilient—but still open to the world and open for business. This has
important lessons for the advanced economies currently facing severe
challenges.
The main concern is the policymakers must avoid the so-called ―fiscal cliff‖
at all costs. If expiring tax provisions and spending cuts were indeed to come
into play, growth in the developed nations would fall to zero or below—and
the rest of the world will not be immune. This policy uncertainty must be

5. resolved.The Eurozone, which is still facing crisis, must also deliver on its
policy commitments at the national and regional level—fiscal, financial,
structural. And again, all players must play their part.
Europe must forge ahead with greater economic cooperation—especially
through deeper fiscal and financial integration. A major priority for the
Eurozone is a true banking union to complement its monetary union. As a
first step, this means a single supervisory framework and ultimately there also
needs to be a pan-European deposit guarantee scheme 3and a bank resolution
mechanism with common backstops.
2. INCREASED ECONOMIC COOPERATION WITHIN
ASIAN COUNTRIES
The virtues of further economic cooperation within Asian countries can be
improved by economic cooperation in two areas in particular—trade and
finance.
Trade integration
In terms of trade integration, Asia has already made great strides. Over the
past decade, trade within Asia tripled, and regional trade among emerging
Asia grew even faster.With Asian trade, many tributaries flow together as a
single great river. A typical pattern is that Asian economies send intermediate
goods to China, which assembles them into final goods for exports. In fact,
intermediate goods now account for over 70 percent of all Asian exports.
3 Pan European Deposit Guarantee Schemes reimburse a limited amount of
deposits to depositors whose bank has failed.

6. Malaysia is part of this flow—especially through exporting valuable
electronic goods up the chain. Malaysia’s intermediate exports to China have
increased fourfolds.
ASEAN countries themselves, of course, will also need to support domestic
consumption. After all, the shift toward high-income status can only come
through a strong middle class. And again, further regional integration can help
with this, by offering new avenues for mutual gain.
Looking ahead, the formation of the ASEAN Economic Community in 2015
offers the vast possibilities of a common market. The Trans-Pacific
Partnership 4can also deliver great benefits, especially by emphasizing service
markets—a sector that has been too protected for too long.
Financial integration
More than 90 percent of ASEAN cross-border portfolio investment flows are
with advanced economies outside Asia.Certainly, we do see FDI flows within
the region. Malaysia, for instance, is a big direct investor in Cambodia,
Indonesia, Thailand, and Vietnam.
Greater regional financial integration could open up a host of new benefits. It
can boost domestic demand—partly by making it easier for small businesses
in countries to gain access to credit. It can make economies safer, by allowing
more insurance against volatility and adverse developments. And one other
important benefit is greater access to financial services by the poor can reduce
4 The Trans-Pacific Partnership Agreement (TPP) is a viable pathway for
realising the vision of a free trade area of the Asia-Pacific.

7. inequality.On a practical level, financial integration is eased by making local
banking systems more open and competitive. The integration of ASEAN
stock markets would help, as would a larger regional bond market, as
envisaged by the Asian Bond Market Initiative.
With Economic Transformation Program, emerging asian countries can lead
the way in boosting productivity and growth to become a vibrant, high-per
capita income generating nations by 2020.
Malaysia already has a history of innovative finance. It has become a world
leader in sukuk, or shari’ah-compliant bonds—accounting for two-thirds of
the sukuk market.Further economic cooperation—despite the very different
span of countries, cultures, and systems across Asia.
Making integration work
More financially-integrated economies are more exposed to storms. In
particular, while capital flows can bring great benefits, they can also
overwhelm countries with damaging cycles of crescendos and crashes.At the
same time, deeper financial market development allows an economy to put
down strong roots and weather storms well.
Economic management is the key for success. If the flows are coming through
the banking system, then macroprudential tools make sense—such as
tightening conditions for housing loans or having banks hold more capital. In
other circumstances, temporary capital controls might prove useful making
the most of financial integration.Despite the tremendous fall in poverty over
the past few decades, income inequality is on the rise.Even emerging markets
which made great strides in reducing inequality in the 1970s and 1980s, has
not seen further reductions.

8. 3.IMPORTANCE OF FISCAL CONSOLIDATION AND
SUSTAINING GROWTH IN ASIAN ECONOMIES
Country circumstances will also determine the appropriate pace of fiscal
consolidation. Higher structural deficits imply the need to rebuild fiscal space
in many asian economies.Strengthening fiscal policy frameworks can also play
an important role in reprioritizing spending and mobilizing adequate revenue
in support of new sources and more inclusive growth.Coordinated and
collective action by asian policymakers will also help in particular, by
pursuing ongoing initiatives to maintain and deeper strong regional trade
integration.
Automatic stabilizers––that is, automatic tax revenue declines and spending
increases that dampen the impact of the shock––should be the first line of
defense. However, in reflecting a narrow tax base and lack of social safety
nets, automatic stabilizers are small in many regional economies, which would
prevent them from cushioning the blow of a sharp downturn. This calls for
contingency plans for discretionary spending, especially in countries with
more fiscal space.Calibrating the appropriate near-term support for growth
without fanning inflationary and financial stability risks is the key near-term
challenge for policymakers.But the need and scope for monetary policy action
differs substantially across economies, mainly reflecting different exposures to
growth and inflation risks, and risks to financial stability from past stimulus.In
addition, macroprudential measures will have to play an important role where
credit growth remains too rapid and could pose problems for financial
stability, especially if accompanied by persistently strong capital inflows.

9. DIRECTIONS FOR POLICY FRAMING
Making growth more inclusive means moving on many fronts:
There is room to spend more on healthcare and education, which are at
relatively low levels in Asia.
There is room to cover more people under pension and unemployment
insurance schemes—only 20 percent of the working-age population is
covered in emerging Asia, as opposed to 60 percent in the OECD5.
There is room to raise minimum wages for the poor, which are relatively
low in Asia.Introduction of minimum wage policy should be made
compulsory for all emerging nations in Asia.
And there is room to improve access to financial markets—right now,
nearly 60 percent of the people in East Asia are excluded from the
formal financial system.
CONCLUSION
The financial stability makes it imperative to refine rather than retreat from the
objectives and avenues of financial development. Mobilizing savings and
effectively channeling them into productive investment remains a key
challenge for financial systems in emerging markets. In economies like China
and India that have high private saving rates, effective financial intermediation
is a key not just for promoting growth but also for improving the welfare
5 Organisation for Economic Cooperation and Development International
organisation helping governments tackle the economic, social and governance
challenges of a globalised economy.

10. impact of that growth.The financial reforms is likely to shift the emphasis of
the financial development agenda toward the basics of strengthening systems,
developing financial markets and working towards sustainable growth in the
region. There is an increasing impetus in different economies to establish an
institutional framework to coordinate the work of different regulatory agencies and to
provide oversight of the future.
This papers attempts to recommends setting up a financial sector oversight
agency in emerging asian economies to redefine the objectives and avenues of
financial development in light of recent events in major Asian emerging
economies.
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