FINANCIAL DEREGULATION : THE ASEAN EXPERIENCE

Abstract

One of the most dramatic economic developments emerging in the 1970s to 1990s is the deregulation of financial markets which has reduced the segmentation of domestic financial markets and at the same time increased the integration of major national markets into a single world market. And most of the ASEAN countries have begun their financial deregulation since the late 1970s. Against this background, this paper reviews the rationales for and the developments in the deregulation of ASEAN's financial markets and ex,m1ine the impact and implications of financial deregulation in the ASEAN countries, in particular with respect to Singapore, Malaysia, Thailand, Indonesia and Philippines for the period 1970 to 1994. Close examination has revealed that there are great similarities in their respective rationale and objectives. That is, the financial systems in the ASEAN countries were tightly regulated and administratively controlled, making them largely inflexible and unresponsive to their specific needs, in the 1970s and early 1980s. And deregulation would mean better allocation of resources, more competition and consequently, more output and faster growth. Despite the wide diversity in the degree of financial structure, the deregulatory measures of the regulatory authorities in the ASEAN region have frequently followed a similar pattern:- increasing movement toward a financial framework that allowed market forces a greater role in fund mobilization and its allocation. And most of the deregulatory moves were mainly reflected in the revision and relaxation or elimination of interest rate ceilings, removal of entry restrictions to the foreign and joint-venture banks, relaxation of credit ceilings and statutory reserve requirements. The study of financial repression and financial deregulation was done by using the partial equilibrium analysis of demand and supply of loanable funds approach. The proposition was that the effect of deregulation of a "previously repressed" financial deregulation is an immediate increase in interest rates and an increase in the supply of loanable funds (or financial deepening). An analysis of the empirical results of the average deposit and lending rates and some key financial deepening indicators in a country - by - country basis were presented to investigate the validity of this proposition, in the context of the various Asean countries. It was found that there have indeed been signs of financial deepening. However, most countries have not experienced increases in interest rates. Finally, a comparison of correlation coefficients before and after deregulation has indicated a growing financial integration in the Asean financial markets.