Regional Integration in East Asia : Challenges and Opportunities - Part Ii: Trade, Finance, and Integration

Sakakibara and Yamakawa analyze the patterns of East Asia's trade and foreign direct investment (FDI) from a global and intraregional perspective, taking into account the importance of trade and FDI interlinkages. They propose two regionally-focused approaches to promoting trade and FDI in East Asia - regional agreements and regional production networks.The East Asia crisis strengthened appeals for regional cooperation in the financial area. As a result, a number of financial arrangements and initiatives have emerged since the crisis, the most prominent of these, the Chiang Mai Initiative. (The Association of Southeast Asian Nations plus China, the Republic of Korea, and Japan decided at their meeting in Chiang Mai, Thailand, in May 2000, to establish a regional network of swap arrangements.) While opening of the capital account is considered desirable in the long run, it is associated with considerable risk, particularly if macroeconomic policies are not sound and financial supervision and regulation is weak. Because of the potential volatility associated with floating regimes and the desire to avoid another crisis in the region, the authors discuss a number of options.This paper - a product of the Poverty Reduction and Economic Management Sector Unit, East Asia and Pacific Region - is part of a larger effort in the region to analyze integration through trade. Policy Research Working Paper 3078 on History and Institutions is part I of this paper