The People's Republic of China's Financial Policy and Regional Cooperation in the Midst of Global Headwinds

Although growth deceleration in the People’s Republic of China (PRC) is inevitable, if the country’s new direction of financial policy (on exchange rate, capital flows, banking, capital market) can be achieved, it will be good not only for the country but also for the rest of Asia. This is consistent with the increased degree of Asia’s integration and interdependence. But given the nature of financial contagion and spillovers across countries and asset classes, the financial headwinds from global crisis may require regional cooperation in safety nets provision, as the domestic policy in the PRC and other Asian countries is likely insufficient. Equally essential is the cooperation among Asian regulators to secure financial stability and enhance market liquidity. If coordinated well, such cooperation can also strengthen Asia’s collective voice to ensure that harmonization of international rules does not mean applying the same laws in all jurisdictions, and that the global debates on bank-centric regulations do not have adverse consequences on Asian capital markets

Complex Interplay of Factors in the Institutional Model of Decentralization: Theory and Application

The Institutional Model of Decentralization (IMD) is elaborated and used to explain two things: first, how the hypothesized improvements in efficiency and growth after decentralization may fail to materialize; second, how the interplay among economic, administrative and institutional factors affect the welfare outcome of decentralization, given the widespread local capture following political decentralization. Rather than exerting direct effects, however, the mechanism is complex, involving intangibles and feedback effects. When applied to actual cases in some regions, a particular method capable of capturing complex inter-relations and quantifying intangibles is therefore used. It is revealed that people’s participation plays the most critical role in reducing capture while simultaneously maximizing welfare. As the quality of local leaders is found to be decisive in influencing the outcome, a typology of leaders is subsequently constructe

Periphery and Small Ones Matter

This open access book analyzes the dualism and inequality insofar as how it is manifested in interregional disparity and small enterprises. Using the case of Indonesia, the author considers how the general direction of policy should be to mitigate the effects of agglomeration forces leading towards concentration, and exploit the same forces by encouraging small businesses to operate in a cluster for collective action. The book addresses these issues by focusing on the role of interactions between policies and institutions, of which social capital is an important part. This is an open access book

How Capital Flows Affect Economy-Wide Vulnerability and Inequality: Flow-of-Funds Analysis of Selected Asian Economies

In contrast to the situation that preceded the 1997–1998 Asian financial crisis, Asia today is a region with excess savings where corporate savings dominate. In the mid-2000s, the extent of liquidity was further amplified by massive capital flows, particularly bank-led flows. The flows were briefly interrupted by the global financial crisis, before debt-led flows began to dominate, following the Quantitative Easing (QE) policy in the United States. Using flow-of-funds data, this study determines that the surge in liquidity in Asian financial systems has changed the behavior of agents and institutions. The general trend shows that agent references for investing in financial instruments have increased as financial liberalization provides more opportunities to do so. This can have economy-wide repercussions, ranging from financial instability to widening income disparity and falling employment elasticity. In the banking sector, an increase in non-core sources of funding influences banks’ asset allocation, with loans increasing rapidly, escalating the risks of pro-cyclicality and asset bubble creation

Managing Elevated Risk: Global Liquidity, Capital Flows, and Macroprudential Policy - An Asian Perspective

Finance/Investment/Banking; Economic Policy; Development Economic

Modeling Crisis Evolution and Counterfactual Policy Simulations: A Country Case Study

This study is using the case of one country, i.e., Indonesia. It describes how that country’seconomic policies evolved and why some of them may have planted the seeds for the subsequent crisis.The paper also discusses the dynamics and sequence of events that took place during the episode. Themechanisms of the process are explained using a comprehensive financial sector general equilibriummodel, in order to help one better understand how various variables and indicators interacted duringthe crisis. In the benchmark run, the values of all exogenous variables (including policy variables) andexogenous events that precipitated the crisis are set equal to their actual (observed) values, and themodel is used to derive the resulting values of the endogenous variables. The results of the simulationclosely replicate the changes and trends that actually occurred

Institutional Model of Decentralization in Action

Applying the Institutional Model of Decentralization, the paper argues that the presumption that local democracy will impose accountability pressure on elected officials does not always hold. Even in a democratic system like in Indonesia, decentralization policy is welfare-enhancing only for the developed regions, not for all, exacerbating interregional welfare disparity. This "captured democracy" is largely due to the presence of "negative local capture". Where welfare has not improved, limited participation, low initial welfare combined with poor quality of local leaders are found to be the most critical determinants

Inadequate Regional Financial Safety Nets Reflect Complacency

To the extent that financial contagion from the United States and the euro area crisis has occurred in Asia, this paper focuses on the importance of strengthening the regional financial safety nets. By conjecturing that efforts to prevent and manage a crisis are the essence of providing such safety nets, I argue that efforts made by ASEAN+3 officials, especially in the provision of liquidity support during a crisis, are far from adequate. The collapse of Lehman Brothers in the autumn of 2008 could be a game-changer in the global financial market, making the probability of financial contagion higher than ever before. Even with improved financial conditions and stronger regulations in ASEAN+3 member countries, contagion can and will strike. Making the Chiang Mai Initiative Multilateralization more effective is therefore urgent and critical