Cambodia's Persistent Dollarization: Causes and Policy Options

Cambodia's economic and social achievements over the past ten years have been the most impressive in its history. Nevertheless, Cambodia today is still as dollarized, if not more so, than it was ten years ago. What is this so, and what, if anything, should the Government do? This paper attempts to answer both these questions, by examining the reasons behind the apparent paradox between a decade of economic and political improvements and continued dollarization, and drawing policy implications from it. We advise against pursuing enforced dedollarization, and advocate a policy option that focuses instead on accelerating accommodative reforms, especially in the financial sector and on legal and institutional reforms. We also identify a host of institutional barriers that need to be overcome to prepare the groundwork for a natural process of de-dollarization.Cambodia; dollarization; exchange rates; currency board; hysteresis

Trade Intensity and Business Cycle Synchronization: The Case of East Asia

This paper examines whether increasing trade intensity among East Asian countries has led to a synchronization of business cycles. It extends the work of Shin and Wang (2004) in two ways: by (i) improving the specification of their business cycle correlation equation, and (ii) extending the sample to cover the period after the Asian financial crisis. The study finds that intra-industry trade, rather than inter-industry trade, is the major factor explaining business cycle co-movements in East Asia, with important implications for the prospects for a single currency in the region.economic integration; trade intensity; intra-industry trade; business cycle synchronization; East Asia

Does Trade Integration Contribute to Peace?

This paper investigates the effect of trade integration on military conflict. Our empirical analysis,based on a large panel data set of 290,040 country-pair observations from 1950 to 2000, confirms that an increase in bilateral trade interdependence and global trade openness significantly promotes peace. It also suggests that the effect of trade openness varies depending on the geographical proximity of countries. The peace-promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflicts. The analysis shows, however, that an increase in global trade openness reduces the probability of conflict more for countries far apart from each other than it does for countries sharing borders. The results also show that military conflict between countries significantly reduces not only bilateral trade interdependence but also multilateral trade integration. The main finding of the peace-promotion effect of bilateral and global trade integration holds robust when controlling for the natural and geopolitical characteristics of dyads of states that may influence the probability of military conflict and for the simultaneous determination of trade and peace.Trade; Globalization; Military conflict; Peace

What Drives Different Types of Capital Flows and Their Volatilities in Developing Asia?

Understanding the determinants of capital inflows is essential to designing an effective policy framework to manage volatile capital flows and their disruptive potential. This paper aims to identify factors that explain the size and volatility of various types of capital flows to developing Asia with regard to other emerging market economies. The estimates for a panel dataset show that per capita income growth, trade openness, and change in stock market capitalization are important determinants of capital inflows to developing Asia. Trade openness increases the volatility of all types of capital inflows, while change in stock market capitalization, global liquidity growth, and institutional quality lowers the volatility. A regional factor plays an important role in determining the size and volatility of capital inflows in emerging Europe and merging Latin America, suggesting that regional economic cooperation and policy coordination may be an important element in designing a policy framework to manage capital inflows in merging economies.capital flows; volatility of capital flows; panel data; developing Asia; push and pull factors

Liberalizing Cross-Border Capital Flows: How Effective Are Institutional Arrangements against Crisis in Southeast Asia

This paper examines capital controls in two ways. First, it assesses whether capital controls have an economic justification within the context of an economyâÂÂs and, in particular, its financial sectorâÂÂs stage of development. It concludes that capital controls can be justified in countries with an immature financial sector and macroeconomic imbalances. Second, it presents survey of current capital controls in ASEAN+3. It identifies three avenues for making controls more efficient: (i) a tax on capital inflows, or alternatively, a Tobin tax; (ii) a replacement of extensive administrative controls with stricter prudential standards for financial institutions; and (iii) a special treatment for Asian currency unit (ACU) operations, implying selective capital flow liberalization.Economic integration; capital controls; Southeast Asia; ASEAN+3

ASEAN-5 Macroeconomic Forecasting Using a GVAR Model

This paper examines and evaluates macroeconomic forecasts for the original ASEAN-5 members in the context of a global vector autoregressive (GVAR) model covering 20 countries, grouped into nine countries/regions. After estimating the GVAR model, we generate 12 one-quarter-ahead forecasts for the next quarter including real GDP, inflation, short-term interest rates, real exchange rates, and real equity prices over the period 2009Q1–2011Q4, with four out-of-sample forecasts over the period 2009Q1–2009Q4. Forecast evaluation results based on the panel Diebold-Mariano (DM) tests show the GVAR forecasts tend to outperform forecasts based on the benchmark country-specific models, especially for short-term interest rates and real equity prices, emphasizing the interdependencies in the global financial market.Macroeconomic Forecasting; Global vector autoregressive model (GVAR); Southeast Asia

Beyond the Crisis: Financial Regulatory Reform in Emerging Asia

The main objective of this paper is to suggest reform measures to address the gaps and weaknesses in emerging Asia's financial regulatory and supervisory systems, on the basis of lessons drawn from the global crisis. For emerging Asia, the direct impact of the global financial crisis has been limited, thus generating substantially less pressure for financial restructuring and regulatory reform than is the case in developed economies. However, the underlying causes of the current turmoil—such as the dynamics of financial innovation and globalization—remain relevant for the region. As the world embraces wide-ranging financial reforms, emerging Asia will face dramatic changes in the global financial landscape. The region's authorities need to be prepared for the changing regulatory environment and proactive in strengthening their national regulatory and supervisory frameworks, in line with higher regulatory standards emanating from global reforms. Financial regulators will also need to design an effective and coherent framework for cross-border crisis management, and work towards a potential international regulatory and surveillance system.Financial regulation; regulatory reform; asia; global financial crisis

Securitization in East Asia

Securitization offers a range of benefits for Asiaâs financial systems and economies as a mechanism to assist funding and investment. As a form of structured finance, reliable and efficient securitization can assist development by enabling financial systems to deepen and strengthenâthus contributing to overall economic growth and stability. It must be recognized, however, that there are both overt and more subtle risks in certain uses of securitization. The credit and liquidity crisis that began in the United States and spread to other developed financial systems in mid-2007 exposed the danger associated with securitization: excessive risk-taking or regulatory capital arbitrage rather than a tool to assist more conventional or conservative approaches to funding, risk management, or investment. Securitization has also been criticized for rendering financial markets opaque, while contributing to a growing emphasis in the global economy of credit intermediation conducted in capital markets rather than through banks. This study examines the institutional basis of these concerns by investigating the use of securitization in East Asia, questioning both the growth in regional activity since the 1997/98 Asian financial crisis, and the reasons for it remaining constrained. The paper concludes with a discussion of proposals to support proper development of securitization in the region, including institutional mechanisms that could better allow securitization to enhance development and financial stability. If East Asia begins to make fuller use of securitization, its motive will be to meet funding or investment needs in the real economy rather than balance sheet arbitrage of the kind that peaked elsewhere in 2007.Securitization; East Asia; debt markets; risk transfer

Re-considering Asian Financial Regionalism in the 1990s

A common view holds that the trend toward Asian financial regionalism is a relatively new phenomenon that became significant after the Asian financial crisis of 1997/98. This paper challenges this view by exploring and analyzing financial regionalist projects in Asia throughout the 1990s. As they demonstrate, Asian countries, especially Japan, have held a strong desire to establish an Asia-only regional cooperation framework at least since the early 1990s. The basic policy stance of the United States (US), in contrast, was to participate in Asian forums and/or itself to propose and establish regional groupings with itself as a member. This competition is crucial to understanding the rise and fall of various regionalist projects. The analysis of Asian financial regionalism from the standpoint of the membership sheds new light on studies of regionalism. Among the important theoretical implications of this empirical study is that by exercising "blocking power" over a regionalist project, an outside power is not simply killing the proposal, but is participating in the proposed regional framework and seeking to influence it. Regionalism can be best understood as a project under which a relatively minor power seeks to establish a framework that excludes more influential states in order to increase its influence within the group.Regionalism; regional cooperation; Asian Monetary Fund (AMF); Chiang Mai Initiative (CMI); membership; blocking power

Thinking About LGBT Diversity in the Workplace

[Excerpt] Today, according to a May 13, 2011 report by the PEW Research Center, “a majority of Americans, 58%, now say that homosexuality should be accepted, rather than discouraged by society.” There are many reasons for this more inclusive shift in attitudes. Inclusion of sexual orientation, and increasingly gender identity, in workplace inclusion initiatives and diversity awareness dialogue is likely one. The workplace, driven by the pragmatic need for improved productivity, talent recruitment, and retention of a motivated workforce, has become a powerful environment for social change and learning