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Regional Policy Coordination in Asia

Tokyo Workshop

November 31 and December 1, 1998

Co-organized by the World Bank and
the Overseas Economic Cooperation Fund (OECF) of Japan

Abstracts of Papers Presented

Regional Policy Coordination in Asia
Toru Yanagihara, Asian Development Bank Institute

Professor Toru Yanagihara, in his paper on Regional Policy Coordination in Asia, identifies the causes of the East Asia crisis and the desirable directions of domestic reform. He examines the causes of the crisis, pointing to the effects of "moral hazard" on both the borrowing and lending side. Given that the poor and semi-poor are the groups most vulnerable to the effects of the economic contraction, the paper explains the social implications of the crisis. In the absence of a social safety net, Professor Yanagihara argues, crises could cause political instability and a further deterioration in investor confidence. While the benefits of open goods and capital markets are well recognized it appears that the lack of suitable institutions at national and regional level can undermine their positive effects. Institutional building and structural changes are required to exploit the new possibilities of globalization and at the same time to avoid the possible pitfalls. The paper emphasizes improvements in the domestic banking sector, development of capital markets, and increased transparency at different levels of the financial system as the main factors likely to reduce the emerging risks of integration into the global economy. Among different sources of capital flows, foreign direct investment (FDI) has shown the lowest volatility and therefore risk. In addition, the paper looks into possible regional arrangements and their benefits for preventing future crises. These arrangements could contribute to better regional governance in East Asia, particularly in the areas of macroeconomic policy, financial regulation, and the interaction with foreign financial entities.

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