Economic and Financial Integration in South Asia

Economic and Financial Integration in South Asia

Piyadasa Edirisuriya (Monash University, Australia) and Abeyratna Gunasekarage (Monash University, Australia)
Copyright: © 2016 |Pages: 18
DOI: 10.4018/978-1-5225-0004-9.ch014
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Many countries in the South Asia region are global players in many aspects due to the nature of emerging markets as well as being democratic countries irrespective of the fact that many people in the region are troubled by higher level of poverty. Many years of regulation in the South Asian region has hampered economic growth and reduced the level of efficiencies in almost all economic activities. However, implementation of market deregulations since the early 1980s in many sectors has benefited the majority of countries in the region in a number of ways. Among others, one of the most significant benefits is the integration of markets in the financial as well as other economic sectors generating better economic achievements. In this study, we examine the process of economic and financial market integration as well as cost/benefit of such a process. We find significant benefits of economic and financial market integration to the region.
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1. Introduction

Examples from the European Union have brought to the attention of many academics, politicians and policy makers that integration of economic activities among countries may in fact, deliver economic benefits. There are many types of economic integration activities such as free trade agreements to closer economic relationships among many nations. Many economic and trade alliances such as Association for South East Asian Nations (ASEAN), Asia-Pacific Economic Cooperation (APEC), Common Market for Eastern and Southern Africa (COMESA), Gulf Cooperation Council (GCC) and Southern Common Market (MERCOSUR) are examples for alliances established mainly for economic benefit of nations. Globalisation has encouraged many countries to participate in efficient economic activities throughout the world. Widely accepted such benefits of successful examples of globalisation have created continued support for economic integration among regions and countries around the world. In most cases, the process of integration basically comes from political agreements which are multilateral, regional or bilateral in nature. These agreements allow countries to do economic and business activities in a freer market environment. As mentioned above, the European Union is one such successful example that goes even beyond economic integration to a more powerful political block. ASEAN is another successful example. Going in a similar path, counties in South Asia have formed an alliance called South Asian Association for Regional Corporation (SAARC) in 1985 with the objective of improving economic corporation and economic growth in the region. Going further in the path of economic integration, in 2002, leaders of SAAARC have agreed to accelerate cooperation in the core areas of trade, finance and investment to realise the goal of an integrated South Asian economy in a step-by-step manner. They have also agreed to the vision of a phased and planned process eventually leading to a South Asian Economic Union (SAEU). Furthermore, they also have formed the SAARCFINANCE group which has been entrusted the responsibility of studying and making recommendations on the early and eventual realisation of SAEU, a development bank for the region, single payment system and ultimately a single currency. Though it may take a very long period to achieve all of these objectives, we can be satisfied that at least we are heading in the right direction.

All countries in the South Asian region have already begun reforming their financial markets to lay down a better foundation for achieving higher economic growth. Speeding up financial sector reforms is one major requirement to establish a deep financial sector. When countries in a region have deep financial markets, financial integration should take place naturally subject to government interferences. With financial market integration, investment and growth will improve through identifying opportunities for successful business activities by economic agents. Financial market integration generally could synchronise economic activities of countries in a region due to the impact of consolidation. Furthermore, financial integration will mobilise and pool savings in a more efficient way. When financial markets are integrated, corporate governance could improve further. All of these activities will result in a more efficient allocation of resources supporting the fundamental economic theory.

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