Why Has There Been Less Financial Integration In Asia Than In Europe? Geography matters

Why Has There Been Less Financial Integration In Asia Than In Europe? Professor Barry Eichengreen has a geographic explanation.  His study shows that: distance between countries, whether they share a common language, and whether they share a land border, explain a good deal of the difference in financial integration between the two regions.

He also points out that recent surge of intra-regional trade in Asia is a good sign for further financial integration, because evidence that finance follows trade suggests that Asia is less financially integrated than Europe because it has done less to promote the growth of intra-regional trade.

You may also want to check out our previous commentary in the Bulletin: "A single Asian common currency?"

Why Has There Been Less Financial Integration In Asia Than In Europe? (PDF file)
Abstract: This paper asks why there is less financial integration in Asia than in Europe, taking as a case study the cross-border lending and investment activities of national banking systems. Our results suggest that different levels of economic development in Asia and Europe, along with other differences in regional circumstance that are largely predetermined from the point of view of policy (distance between countries, whether they share a common language, and whether they share a land border), explain a good deal of the difference in financial integration between the two regions. The rest of the gap is explained by policy variables. Evidence that finance follows trade suggests that Asia is less financially integrated than Europe because it has done less to promote the growth of intra-regional trade. Our results also suggest that controls on capital account transactions can have a lingering effect on the volume of cross-border claims and that their shadow is longest where those controls were maintained for the greatest number of years. The underdevelopment of financial markets and institutions in some potential lending countries also appears to be an impediment to financial integration in the region.