Can Greater Openness and Deeper Financial Development Drag ASEAN-5 into Another Series of Economic Crises?

Abstract

In the event of economic crises, it is observed that economic volatility becomes more severe. Therefore, the aim of this study is to examine the impact of greater openness and deeper financial sector development in influencing the level of economic volatility which could trigger economic crises in both long-and short-run periods in the case of ASEAN-5 countries, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. Given that more attention is needed to address the issue, the Pooled Mean Group (PMG) estimations developed by Pesaran et al. (1999) and data ranging from 1980 to 2014 were employed to address the issue. With the ability to estimate short-run coefficients at each country level and its speed of adjustment, this study further fills the knowledge gap. Based on the analysis, it is found that greater trade and financial openness may further relax economic volatility in the long-run, suggesting greater international risk sharing which soothes consumption shocks. In terms of the effect of financial development towards economic volatility, it is found that only deeper banking sector development may reduce economic volatility in the long-run, but the same may not apply in the case of greater stock market development. Particularly, it is suggested that it is in the nature of developments in the banking sector to likely provide longer financing options and greater banker capabilities in detecting riskier investments, thus giving a favourable impact on economic volatility. It is a contrast with the stock market sector where it is more likely to be more susceptible towards large and sudden capital outflows. Its tendency to provide capital towards riskier investments may worsen volatility in the longer term. Nevertheless, in the short-run, the effects of greater openness and financial development is not as obvious as in the long-run; financial openness and greater stock market sector development may significantly relax economic volatility. As suggested by the speed of adjustment, the equilibrium from short-run to long-run is corrected by 1.71% and 2.33% in a year. Cumulatively, it can be said that there is no evidence that greater openness and deeper financial development may drag ASEAN-5 into another series of crises except in the case of stock market sector development. Therefore, the source of instability in the region is likely to be driven from greater stock market sector development rather than greater openness and banking sector development.

Financial Performance Evaluation of Islamic Banking System: A Comparative Study among Malaysia’s Banks

“…This paper examines the CAMEL model in examining its long run implications towards Islamic banks performance by comparing it with the conventional banks in Malaysia. Sustaining banks performance is very important in preserving economic volatility and failure in mitigating the risk may result in economics crisis (Aghion et al 2004;Hazman 2016;Kim et al 2009 ;Kose et al 2006;Silva 2002). Therefore, it is very important to understand the effect of CAMEL model in explaining banking sector performance especially on the Islamic banks due to rapid financial reform in recent decades.…”

“…Reforms are usually followed with a change in financial sector system and thus raised the question of financial system reform adequacy. Financial sector development through several reforms may usually come out with the creation of new financial instruments or systems which are usually risk indivisible (Hazman 2016). This situation may in turn trigger the chances of financial crises occurrence.…”

Does Financial Liberalization Foster Economic Growth? Empirical Evidence from ASEAN-6 Countries

“…A notable concern by many developing countries is whether a more liberalized financial system guarantees the volatility of an economy. Despite the fact that trade openness and financial development yield positive gains to economics, it can also be the source of instability due to its susceptibility to volatility (18). Aghion,Bacchetta (19) claims if the United States of America (US) with a well-developed financial system can suffer the backlash of financial development, then developing countries with the intermediary level of financial policies may be exposed to more intensify financial risks which may lead to economic crises.…”