Geoscience Reference
In-Depth Information
repercussions on the rest of the world not only in terms of macroeconomic impact
but also on income inequality. The crisis also put the standard framework of
economic thinking on the spot, where the validity of some fundamental concepts
is now questioned. Three stand out: (1) the virtue of integration; (2) the risks of
financial liberalization; and (3) how finance affects income inequality.
To deal with the first, I revisit the concept of regional integration by taking a
more balanced view—not just the benefits but also the risks of integration. On the
second and third, I offer a model to show the mechanism how seemingly unrelated
financial phenomena are in fact closely interlinked with income inequality. I use the
case of capital flows intermediated by banks (bank-led flows) in emerging Asia,
given their importance to a region where integration has been accelerating since the
late 1990s. Capital inflows helped the financial sector grow, but it can also increase
the risk of instability and worsen the income inequality.
9.2
Regional Integration Revisited
9.2.1 Benefits and Opportunities of Integration
Proposition 1
Regional integration expands markets and input sources, better
allocating resources across the region and accelerating economic growth.
Regional economic integration is used by countries to achieve national interests—
only this time in concert with others. It expands national markets to the region.
Like globalization, it can be thought of as an alternative to international
embeddedness—or how one relates to the rest of the world. But unlike global-
ization, regional integration is geographical, and in some cases political.
1
It is
institutionally stronger than globalization, as rules tend to be tighter and peer
pressure can be more intense.
Expanding markets and input sources beyond national boundaries is one of the
most compelling arguments for integration. With an expanded market for goods and
services, for both output and inputs, higher economic growth and improved welfare
can be expected (Fig.
9.1
). Integration helps more efficient resource allocation
across the region (or globally) in line with the principle of comparative advantage.
If, as a result, productivity growth is enhanced, regional integration can accelerate
economic growth and increase employment.
Asia's strong economic performance and resilience despite the recent global
financial crisis was largely supported by the region's openness. The drop in external
demand from Europe and the US, the 'traditional' market for Asia's final goods
1
When integration is promoted for political reasons and to build trust, the political windfall that
follows can also lead to significant economic benefits.
