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Heterogeneous Patterns of Financial Development: Implications for Asian Financial Integration Linh Bun and Nirvikar Singh

Heterogeneous Patterns of Financial

Development:

Implications for Asian Financial Integration Linh Bun and Nirvikar Singh

Department of Economics, University of California, Santa Cruz

14th Research Meeting NIPFP-DEA Research Program Alwar, Rajasthan, India December 11-12, 2015

Outline

Introduction

Financial integration and financial development

Measuring financial development: Levels and

patterns

Data

Results

Conclusion

Introduction

Economic dynamism of Asia Pacific region

“East Asian miracle”

Regional production networks

Financial crises

1997-98 vs. 2007-09

Challenges and responses

Financial integration and financial development  Much less consensus on the net benefits of financial

Financial integration and financial development

Much less consensus on the net benefits of

financial openness vs. trade openness

East Asian financial integration

Increasing

Still not strong, especially relative to links to other regions

Financial development is seen as a precondition (or a positive) for financial integration

December 11, 2015

regions  Financial development is seen as a precondition (or a positive) for financial integration December

4

Financial integration and financial development  Financial development itself may have mixed implications for growth

Financial integration and financial development

Financial development itself may have mixed implications for growth

Maybe “too much finance”

Mostly measured as financial depth

Interactions

Institutional quality

Trade openness

Financial openness

Financial development  World Bank (2012)  Depth  Access  Efficiency  Stability 

Financial development

World Bank (2012)

Depth

Access

Efficiency

Stability

IMF (2015)

Depth, access, efficiency

Aizenman, Jinjarak and Park (2015)

Depth (quantity) and efficiency (quality)

Sectoral data

Measuring financial development:

Levels and patterns

N indicators of financial development

Common scale for each indicator

Financial development is a vector, for economy i,

x i = (x i1 ,x i2 ,…,x iN )

Level of financial development is an index

(

)

x w

i

N

1

w x

n in

Principal components is an alternative approach

Level Distance between country i and country j is

x

i

(

w

)

(

)

x w

j

December 11, 2015

approach  Level Distance between country i and country j is x i ( w )

7

Measuring financial development:

Levels and patterns

Average Level Distance is

LD

i

1 2  [ x w ( )  x w ( )] i j
1
2
[
x w
(
)
x w
(
)]
i
j
I  1
j
 i

Pattern Distance between two economies is

PD   corr x x

ij

i

,

1

(

j

)

Introduced by Kaur and Singh (2014)

Average Pattern Distance is

PD

i

1

I 1

I 1

j 1

PD

ij

Measuring financial development:

Levels and patterns

Idea is to see how close an economy is to other economies in a particular region

(individually or on average), in terms of

Levels of financial development Patterns of financial development

World Bank (2012) distance measure combines level and pattern differences

D ij

N 2  ( x  x ) in jn 1
N
2
(
x  x
)
in
jn
1
Data December 11, 2015 10

Data

Index Components

World Economic Forum: Global Competitiveness Index

Category Indicator Trustworthiness and confidence Affordability of financial services Venture capital

Category

Indicator

Trustworthiness and

confidence

Affordability of financial services

Venture capital availability

Soundness of banks

Regulation of securities exchanges

Legal rights of investors

Availability of financial services
Availability of financial services

Availability of financial services

Efficiency

Efficiency

Financing through local equity market

Ease of access to loans

Ease of access to loans

Additional Index Components

Main Results

Institutional Environment

Business Environment

Based on WEF Financial Development Report 2012

Appendix

Business Sophistication

Technology Sophistication

Openness

Institutional Environment 2

Economies

Economies in the Analysis

Australia

New Zealand

Cambodia

Hong Kong

Indonesia

Japan

Malaysia

Philippines

Singapore

South Korea

Taiwan

Thailand

Vietnam

China

Fin Dev Index Levels

 

FDIndex8

FDIndex8
  FDIndex8 FDIndex7 FDIndex10 FDIndex9

FDIndex7

  FDIndex8 FDIndex7 FDIndex10 FDIndex9

FDIndex10

FDIndex10
  FDIndex8 FDIndex7 FDIndex10 FDIndex9
  FDIndex8 FDIndex7 FDIndex10 FDIndex9

FDIndex9

FDIndex9
 

2010

  2010 2014 2010 2014 2010 2014 2010 2014

2014

  2010 2014 2010 2014 2010 2014 2010 2014

2010

2014

  2010 2014 2010 2014 2010 2014 2010 2014

2010

  2010 2014 2010 2014 2010 2014 2010 2014

2014

  2010 2014 2010 2014 2010 2014 2010 2014

2010

  2010 2014 2010 2014 2010 2014 2010 2014

2014

AUS

5.24

5.18

5.07

4.92

5.27

5.20

5.14

5.00

CHN

4.22

4.26

4.17

4.29

4.17

4.21

4.12

4.23

HKG

5.60

5.77

5.41

5.60

5.56

5.74

5.40

5.60

IDN

4.23

4.44

4.43

4.50

4.14

4.35

4.29

4.39

JPN

4.44

4.86

4.33

4.82

4.53

4.94

4.46

4.91

KHM

3.63

3.63

3.31

3.32

3.54

3.55

3.29

3.30

KOR

3.75

3.65

3.54

3.34

3.90

3.83

3.75

3.61

MYS

5.22

5.48

4.97

5.26

5.09

5.39

4.88

5.21

NZL

4.91

5.53

4.70

5.32

5.05

5.58

4.90

5.42

PHL

3.94

4.33

4.11

4.46

3.82

4.24

3.93

4.33

SGP

5.51

5.67

5.30

5.48

5.55

5.68

5.39

5.54

THA

4.35

4.54

4.49

4.62

4.27

4.43

4.37

4.48

TWN

4.73

4.88

4.92

5.01

4.76

4.91

4.92

5.02

VNM

4.03

3.65

3.77

V N M 4.03 3.65 3.77 3.35 3.96 3.63 3.75 3.39

3.35

V N M 4.03 3.65 3.77 3.35 3.96 3.63 3.75 3.39

3.96

V N M 4.03 3.65 3.77 3.35 3.96 3.63 3.75 3.39

3.63

V N M 4.03 3.65 3.77 3.35 3.96 3.63 3.75 3.39

3.75

V N M 4.03 3.65 3.77 3.35 3.96 3.63 3.75 3.39

3.39

Patterns of Financial Development, Developed Economies, 2014 Affordability Availability Investor legal rights Reg of sec.

Patterns of Financial Development, Developed Economies, 2014

Affordability

Development, Developed Economies, 2014 Affordability Availability Investor legal rights Reg of sec. exchanges

Availability

Investor legal rights

Reg of sec. exchanges

Equity mkts

Soundness of banks

Access to loans

Venture capital

AUSexchanges Equity mkts Soundness of banks Access to loans Venture capital HKG JPN KOR NZL SGP

HKGexchanges Equity mkts Soundness of banks Access to loans Venture capital AUS JPN KOR NZL SGP

JPNexchanges Equity mkts Soundness of banks Access to loans Venture capital AUS HKG KOR NZL SGP

Equity mkts Soundness of banks Access to loans Venture capital AUS HKG JPN KOR NZL SGP

KOR

NZLexchanges Equity mkts Soundness of banks Access to loans Venture capital AUS HKG JPN KOR SGP

SGPexchanges Equity mkts Soundness of banks Access to loans Venture capital AUS HKG JPN KOR NZL

TWNexchanges Equity mkts Soundness of banks Access to loans Venture capital AUS HKG JPN KOR NZL

Patterns of Financial Development, Emerging Economies, 2014 Affordability Availability Investor legal rights Reg of sec.

Patterns of Financial Development, Emerging Economies, 2014

Affordability

Development, Emerging Economies, 2014 Affordability Availability Investor legal rights Reg of sec. exchanges

Availability

Investor legal rights

Reg of sec. exchanges

Equity mkts

Soundness of banks

Access to loans

Venture capital

KHMexchanges Equity mkts Soundness of banks Access to loans Venture capital CHN IDN MYS PHL THA

CHNexchanges Equity mkts Soundness of banks Access to loans Venture capital KHM IDN MYS PHL THA

IDNexchanges Equity mkts Soundness of banks Access to loans Venture capital KHM CHN MYS PHL THA

MYS

Equity mkts Soundness of banks Access to loans Venture capital KHM CHN IDN MYS PHL THA

PHLexchanges Equity mkts Soundness of banks Access to loans Venture capital KHM CHN IDN MYS THA

THAexchanges Equity mkts Soundness of banks Access to loans Venture capital KHM CHN IDN MYS PHL

VNMexchanges Equity mkts Soundness of banks Access to loans Venture capital KHM CHN IDN MYS PHL

Results December 11, 2015 17

Results

Level and Pattern Differences FDIndex8, 2010 Level Difference Pattern Difference C o u n t

Level and Pattern Differences FDIndex8, 2010

Level Difference

Pattern Difference

FDIndex8, 2010 Level Difference Pattern Difference C o u n t r y Average Range Min
FDIndex8, 2010 Level Difference Pattern Difference C o u n t r y Average Range Min
FDIndex8, 2010 Level Difference Pattern Difference C o u n t r y Average Range Min
FDIndex8, 2010 Level Difference Pattern Difference C o u n t r y Average Range Min
FDIndex8, 2010 Level Difference Pattern Difference C o u n t r y Average Range Min

Country

Average

Range

Min

Max

Average

Range

Min

Max

AUS

0.27

1.98

-0.37

1.61

0.24

0.96

0.02

0.98

CHN

0.21

1.98

-1.38

0.59

0.22

0.68

0.08

0.76

HKG

0.35

1.89

0.09

1.98

0.26

1.09

0.04

1.13

IDN

0.20

1.98

-1.38

0.60

0.90

1.18

0.18

1.36

JPN

0.18

1.98

-1.16

0.82

0.23

0.76

0.06

0.82

KHM

0.32

1.85

-1.98

-0.13

0.37

1.31

0.05

1.36

KOR

0.29

1.98

-1.85

0.13

0.26

1.04

0.03

1.07

MYS

0.26

1.98

-0.38

1.59

0.34

1.30

0.03

1.33

NZL

0.21

1.98

-0.69

1.29

0.27

1.04

0.02

1.06

PHL

0.25

1.98

-1.66

0.32

0.42

0.68

0.01

0.69

SGP

0.33

1.98

-0.09

1.89

0.29

1.20

0.03

1.23

THA

0.19

1.98

-1.25

0.72

0.40

0.68

0.01

0.69

TWN

0.19

1.98

-0.87

1.11

0.58

0.81

0.10

0.91

VNM

0.24

1.98

-1.58

0.40

0.33

1.24

0.03

1.27

FDIndex8 2010

1.00 0.90 IDN 0.80 0.70 0.60 TWN 0.50 0.40 PHL THA KHM 0.30 MYS VNM
1.00
0.90
IDN
0.80
0.70
0.60
TWN
0.50
0.40
PHL
THA
KHM
0.30
MYS
VNM
SGP
NZL
KOR
HKG
0.20
AUS
JPN
CHN
0.10
0.00
Pattern Distance

0.00

0.05

0.10

0.15

0.20

0.25

Level Distance

0.30

0.35

0.40

0.45

0.50

FDIndex8 2014

0.5 VNM TWN PHL 0.45 IDN KHM 0.4 CHN 0.35 MYS THA KOR 0.3 0.25
0.5
VNM
TWN PHL
0.45
IDN
KHM
0.4
CHN
0.35
MYS
THA
KOR
0.3
0.25
AUS
SGP
0.2
JPN
NZL
HKG
0.15
0.1
0.05
0
Pattern Distance

0

0.05

0.1

0.15

0.2

0.25

Level Distance

0.3

0.35

0.4

0.45

0.5

FDIndex7 2010

0.5 0.45 0.4 0.35 0.3 0.25 0.2 KHM 0.15 TWN IDN NZL 0.1 VNM JPN
0.5
0.45
0.4
0.35
0.3
0.25
0.2
KHM
0.15
TWN
IDN
NZL
0.1
VNM
JPN
AUS
SGP KOR
CHN
HKG
THA
PHL MYS
0.05
0
Pattern Distance

0.00

0.05

0.10

0.15

0.20

0.25

Level Distance

0.30

0.35

0.40

0.45

0.50

FDIndex7 2014

0.5 0.45 0.4 0.35 0.3 KHM 0.25 VNM 0.2 0.15 0.1 CHN TWN IDN PHL
0.5
0.45
0.4
0.35
0.3
KHM
0.25
VNM
0.2
0.15
0.1
CHN TWN
IDN
PHL THA JPN AUS
KOR
SGP
MYS NZL
HKG
0.05
0
Pattern Distance

0

0.1

0.2

0.3

Level Distance

0.4

0.5

FDIndex10 2010

1 0.9 IDN 0.8 0.7 TWN 0.6 0.5 0.4 PHL THA KHM MYSKOR NZL VNM
1
0.9
IDN
0.8
0.7
TWN
0.6
0.5
0.4
PHL
THA
KHM
MYSKOR
NZL VNM
SGP
0.3
HKG
JPN
AUS
CHN
0.2
0.1
0
Pattern Distance

0

0.05

0.1

0.15

0.2

0.25

Level Distance

0.3

0.35

0.4

0.45

0.5

FDIndex10 2014

1 0.9 0.8 0.7 0.6 TWN VNM 0.5 PHL IDN KOR KHM CHN MYS 0.4
1
0.9
0.8
0.7
0.6
TWN
VNM
0.5
PHL
IDN
KOR
KHM
CHN
MYS
0.4
THA
0.3
JPN
AUS
NZL SGP
HKG
0.2
0.1
0
Pattern Distance

0

0.05

0.1

0.15

0.2

0.25

Level Distance

0.3

0.35

0.4

0.45

0.5

FDIndex9 2010

0.5 0.45 0.4 IDN 0.35 0.3 KOR 0.25 NZL TWN KHM 0.2 JPN SGP PHL
0.5
0.45
0.4
IDN
0.35
0.3
KOR
0.25
NZL
TWN
KHM
0.2
JPN
SGP
PHL
MYS
AUS
0.15
THA
CHN
VNM
HKG
0.1
0.05
0
Pattern Distance

0

0.05

0.1

0.15

0.2

0.25

Level Distance

0.3

0.35

0.4

0.45

0.5

FDIndex9 2014

0.50 0.45 KOR 0.40 0.35 KHM VNM 0.30 0.25 IDN CHN MYS 0.20 TWN PHL
0.50
0.45
KOR
0.40
0.35
KHM
VNM
0.30
0.25
IDN
CHN
MYS
0.20
TWN
PHL
THA
JPN
NZL
0.15
AUS
SGP
HKG
0.10
0.05
0.00
Pattern Distance

0

0.05

0.1

0.15

0.2

0.25

Level Distance

0.3

0.35

0.4

0.45

0.5

Level Distances vs. Levels, FDIndex8, 2014 0.5 0.45 0.4 HKG KOR VNM 0.35 KHM SGP

Level Distances vs. Levels, FDIndex8, 2014

0.5 0.45 0.4 HKG KOR VNM 0.35 KHM SGP NZL 0.3 MYS 0.25 CHN AUS
0.5
0.45
0.4
HKG
KOR
VNM
0.35
KHM
SGP
NZL
0.3
MYS
0.25
CHN
AUS
PHL
0.2
TWN
IDN THA
JPN
0.15
0.1
0.05
0
Level Distance

0.00

1.00

2.00

3.00

Level

4.00

5.00

6.00

7.00

Pattern Distances vs. Levels, FDIndex8, 2014 0.5 VNM PHL TWN 0.45 IDN KHM 0.4 CHN

Pattern Distances vs. Levels, FDIndex8, 2014

0.5 VNM PHL TWN 0.45 IDN KHM 0.4 CHN 0.35 MYS THA KOR 0.3 0.25
0.5
VNM
PHL
TWN
0.45
IDN
KHM
0.4
CHN
0.35
MYS
THA
KOR
0.3
0.25
SGP
AUS
HKG
0.2
JPN
NZL
0.15
0.1
0.05
0
Pattern Distance

0.00

1.00

2.00

3.00

Level

4.00

5.00

6.00

7.00

Clustering based on Levels of Financial Development AUS AUS AUS AUS AUS AUS AUS AUS

Clustering based on Levels of Financial Development

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

     

KHM

KHM

KHM

                   

CHN

CHN

CHN

CHN

CHN

CP

CP

CP

CPITh

CPITh

CPITh

   

HKG

HKG

HKG

HKG

HKG

HKG

HKG

HS

HS

       

IDN

IDN

IDN

IDN

IDN

IDN

ITh

ITh

         

JPN

JPN

JTw

JTw

JTw

JTw

JTw

JTw

JTw

JTw

JTwA

JTwACPITh

JTwACPIThMNHS

KOR

KoV

KoV

KoVKh

KoVKh

KoVKh

KoVKh

KoVKh

KoVKh

KoVKh

KoVKh

KoVKh

KoVKh

MYS

MYS

MYS

MYS

MN

MN

MN

MN

MN

MNHS

MNHS

MNHS

 

NZL

NZL

NZL

NZL

                 

PHL

PHL

PHL

PHL

PHL

               

SGP

SGP

SGP

SGP

SGP

SGP

SGP

           

TWN

TWN

                     

THA

THA

THA

THA

THA

THA

             

VNM

                       
Clustering based on Patterns of Financial Development AUS AN ANS ANSH ANSH ANSH ANSH ANSH

Clustering based on Patterns of Financial Development

AUS

AN

ANS

ANSH

ANSH

ANSH

ANSH

ANSH

ANSH

ANSH

ANSHJ

ANSHJKoMV

ANSHJKoMVKh

KHM

KHM

KHM

KHM

KHM

KHM

KHM

KHM

KHM

KHM

KHM

KHM

 

CHN

CHN

CHN

CHN

CHN

CHN

CHN

CHN

         

HKG

HKG

HKG

                   

IDN

IDN

IDN

IDN

IP

IP

IPTh

IPTh

IPThC

IPThCTw

IPThCTw

IPThCTw

IPThCTw

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

     

KOR

KOR

KOR

KOR

KOR

KoM

KoM

KoMV

KoMV

KoMV

KoMV

   

MYS

MYS

MYS

MYS

MYS

               

NZL

                       

PHL

PHL

PHL

PHL

                 

SGP

SGP

                     

TWN

TWN

TWN

TWN

TWN

TWN

TWN

TWN

TWN

       

THA

THA

THA

THA

THA

THA

             

VNM

VNM

VNM

VNM

VNM

VNM

VNM

           
Conclusions (1)  Financial development is considered a beneficial precursor to financial integration  We

Conclusions (1)

Financial development is considered a beneficial precursor to financial integration

We provide a way of separating levels and patterns of financial development

The components of financial development

index matter more for levels than for patterns in our data

Conclusions (2)  We provide a way of measuring closeness in levels and in patterns

Conclusions (2)

We provide a way of measuring closeness in levels and in patterns among countries in a

region and apply it in a cluster analysis

Differences in patterns are less stable over time than differences in levels in our data

These kinds of calculations can be a useful preliminary tool for assessing prospects for beneficial financial integration among a given set of economies.