Abstract:
As economies progressively integrate globally, the financial structures of markets and the world of finance changes. One of the definitions of financial globalization is integration of domestic financial system of a country with the global financial markets and institutions. It is now accepted that international financial integration allows the optimizing of inter-temporal consumption path and managing of financial risks by increasing the availability of assets in the local markets. It also has the spillover effect of increasing competition and efficiency throughout the international trade. There are different arguments on the impact of financial globalization on the world trade relations, however the empirical evidence is still scarce. This paper tries to fill this gap partially by studying the effects of financial integration on the trade structure operating in the country members of ASEAN+5. The focus on mutual trade relations of the block is of interest, because some arguments suggest that the trade flows extend with globalization, while others predict limitations in financial integration make trade costly at least in the short-term. It is evident that cross-country financial flows to the emerging market economies were low, at during the mid-1970s. They increased at a healthy clip during the decades of 1980s and 1990s, peaking in 1997. They suffered a sharp decline after that because of the "Asian financial and economic crises". Therefore, the actual impact of financial integration on trade patterns remains an empirical question, which is the main subject of this paper. We analyze whether financial integration contributes to international trade across countries. The analysis focuses on before and after Asian crisis, as a proxy for financial integration, in 1997. We examine how financial integration in both Asian pre-crisis and post-crisis affects the rate of trade flows in the block. To explore this effect on trade, we rely on a dynamic analysis and use a "difference-in-differences" (DID) approach which compares the trade flows among the ASEAN+5 members before and after 1997 Asian crisis. Overall, the results obtained conclude that financial integration makes trade diversion among the ASEAN+5 members.
Machine summary:
"Now we estimate Equation (7) following Slaughter (2001) and Equation (6) as its concept was discussed in the previous section: (7) where LEXjrt denotes the natural logarithm of trade flows, the dichotomous variable Dr equals 1 after the period of financial integration and zero otherwise; the dichotomous variable Dj indicates the ASEAN+5 members group; the dichotomous Djr variable equals one if both j=1 and r=1 and zero otherwise; t denotes a time dummy variable for the period under consideration (1990-2005).
According to the new estimated results obtained by the random effects and reported in Table (4), the gravity variables affect significantly and expectedly trade flows in all Asian-Pacific countries, while GDP has the dominant role in trade creation between economies.
Hence, the finding implies that financial integration in the ASEAN+5 block should make a better effect on the trade flows of all countries if more macroeconomic reforms are conducted to create further economic cooperation implementations.
Post Financial Integration in ASEAN+5 Hausman Test Estimation Method Coefficients of Gravity Variables Trade Rate Intercept Stage LER LPOP LGDP H=101.
However, based on the various specifications of the gravity models available in the literature, in which the specific determinants create bilateral-multilateral trade among the members of a trading block, our findings imply that financial integration in the ASEAN+5 block should make a better effect on the all countries' trade flows if more macroeconomic reforms are conducted to create further economic cooperation implementations."