nep-sea New Economics Papers
on South East Asia
Issue of 2013‒01‒19
eight papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Impact of diagonal cumulation rule on FTA utilization : evidence from bilateral and multilateral FTAs between Japan and Thailand By Hayakawa, Kazunobu
  2. Globalized Banking Sectors: Features and Policy Implications amidst Global Uncertainties By Siregar, Reza
  3. The Middle-Income Trap: Comparing Asian and Latin American Experiences By Anna Jankowska; Arne Nagengast; José Ramón Perea
  4. A New Regime of SME Finance in Emerging Asia: Empowering Growth-Oriented SMEs to Build Resilient National Economies By Shinozaki, Shigehiro
  5. China, the USA and Asia's Future By Saich, Tony
  6. Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real-Estate Market By Agarwal, Sumit; Ben-David, Itzhak; Yao, Vincent
  7. Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program By Agarwal, Sumit; Amromin, Gene; Ben-David, Itzhak; Chomsisengphet, Souphala; Piskorski, Tomasz; Seru, Amit
  8. Have We Solved the Idiosyncratic Volatility Puzzle? By Hou, Kewei; Loh, Roger

  1. By: Hayakawa, Kazunobu
    Abstract: In this paper, we empirically investigate the effect of diagonal cumulation on free trade agreement (FTA) utilization by exploring Thai exports to Japan under two kinds of FTA schemes. While the one scheme adopts bilateral cumulation, the other scheme does diagonal cumulation. Comparing trade under these two kinds of FTAs, we can examine the effect of diagonal cumulation without relying on not only the variation in cumulation rules across country pairs but also the variation across years. In short, our estimates do not suffer from biases from time-variant elements and country pair-specific elements. As a result, our estimates show around 4% trade creation effect of diagonal cumulation, which is much smaller than the estimates in the previous studies (around 15%).
    Keywords: Thailand, Japan, Trade policy, International economic integration, International agreements, FTA, Tariff, Diagonal cumulation, Trade creation effect
    JEL: F13 F15 F23
    Date: 2012–11
  2. By: Siregar, Reza
    Abstract: Amidst the global financial uncertainties since 2007, the East and Southeast Asian economies continued to attract a significant bulk of the global banks’ loans to emerging markets, albeit at a decelerating rate. The alleged advantages of these lending are wellknown. Yet the recent interruption to this spectacular rise in international bank lending during the 2007/2008 global financial crisis serves as a stark reminder that international bank lending can rapidly transmit adverse shocks from developed markets to emerging markets. The objective of this study is to identify key features and characteristics of foreign banks’ activities in East and Southeast Asian economies, particularly during the post 2007 global financial crisis period, and to weigh their implications on the local economies, including policy challenges for the central banks and banking supervisors in the region.
    Keywords: Foreign Banks; Interconnectedness; Financial Stability; Branch; Subsidiary; Financial Crisis
    JEL: F34 G15 C23 N25 F36
    Date: 2013–01–10
  3. By: Anna Jankowska; Arne Nagengast; José Ramón Perea
    Abstract: <ul> <li>Chinese Taipei; Hong Kong, China; Korea and Singapore (the East Asian Newly Industrialised Countries or NICs) have been successful in attaining income convergence with high-income countries while Latin American countries remain caught in the Middle-Income Trap.</li> <li>The East Asian NICs pursued export-led growth by targeting strategic industries which facilitated gradual diversification and upgrading into new products that required similar skills and inputs.</li> <li>Comparing the experience of the NICs to Latin American economies reveals that successful diversification and upgrading of a country’s export structure requires coherent and complimentary policies in the areas of education, infrastructure, innovation and access to finance.</li></ul>
    Date: 2012–05
  4. By: Shinozaki, Shigehiro (Asian Development Bank)
    Abstract: Small and medium enterprises (SMEs) stimulate domestic demand through job creation, innovation, and competition; thus, they can be a driving force behind a resilient national economy. In addition, SMEs involved in global production supply chains have the potential to encourage international trade. Prioritizing SME development is therefore critical for promoting inclusive economic growth in most economies in Asia. Adequate access to finance is crucial for SMEs to survive and eventually grow beyond their SME status. In Asia, the reality is that SMEs have poor access to finance. It is one of the core factors impeding SME development. Information asymmetry between lenders and SME borrowers increases adverse selection and moral hazard risks for financial institutions, and is responsible for widening the supply–demand gap in SME financing. Given the diversified nature of SMEs, there is no one-size-fits-all financing solution. The improvement of lending efficiency and the diversification of financing modalities can help expand SMEs’ access to finance, particularly given the largely bankcentered financial system in Asia. This paper discusses a new regime of SME finance amid an era of global imbalances, with empirical analyses of bank financing for SMEs in select Asian countries.
    Keywords: Global imbalances; financial inclusion; access to finance; growth-oriented SMEs; SME finance; supply–demand gap; diversified financing
    JEL: F43 G01 G21 M13
    Date: 2012–12–01
  5. By: Saich, Tony (Harvard University)
    Abstract: The relationship between the US and China is at the core of both economic and geopolitical trends that will define the future of Asia in this century. China's economic rise and its more assertive diplomacy have created a new environment for neighboring countries to react. This has necessitated other powers in Asia to work within a regional order that is no longer based on US primacy as the key guarantor of global and regional public goods. Despite relative decline, the Obama administration, first with its unwieldy phrase of a pivot to Asia and the later notion of rebalancing, has indicated clearly that it intends to retain a key role in Asia. The potential danger that this can give rise to is shown by the tension that arises periodically over territorial disputes. Most recently, there have been three unsettling trends. First, is the dispute between the Philippines and China over the Scarborough Shoal, which falls within the long tongue of the South China Seas that China claims as a "core interest." Second, in mid-June 2012, China announced that it had set up a prefectural city, Sansha, to oversee three South China Sea islands. Third, there has been yet another escalation of sovereignty claims over the Senkaku islands between China and Japan. There have also been territorial spats between Japan and South Korea. Whether the US will be drawn into an avoidable conflict by its allies in the region or whether it will renege on its alliances to maintain a viable relationship with China heightens the insecurity. It is even more important for the US and China to find a way to cooperate in the Asia region than it is for the other countries within the region. There is no alternative leader within the region or group of countries that can provide the kind of balance that will enable the necessary public goods to be produced. This will entail modification of behavior by both the US and China, and it will not be easy. China's strategic goals are directed to the defense of a continental power with growing maritime interests, as well as to Taiwan's unification and other sovereignty claims and are largely conservative, not expansionist from their own perspective. China's continued economic rise may nevertheless spawn a new security dilemma in East Asia, increasing regional instability and undermining China's attempts at the diplomacy of reassurance. China has always shown itself willing to use force to protect what is sees as "legitimate" territorial claims. To be effective, both the US and China will have to make accommodations. China will have to define its national interest more clearly, and this will mean acknowledging that other principles of its foreign policy may be overridden under certain circumstances. China's commercial activities have become a major issue in the domestic politics of a number of countries in the region. China needs to feel comfortable with the framework for international governance of which it is now a key member; reduce its suspicion of hostile foreign intent; and adjust its outdated notion of sovereignty to accept that some issues need transnational solutions and that international monitoring does not have to erode the Chinese Communist Party's power.
    Date: 2012–11
  6. By: Agarwal, Sumit (National University of Singapore); Ben-David, Itzhak (OH State University); Yao, Vincent (Fannie Mae)
    Abstract: Financially-constrained borrowers have the incentive to influence the appraisal process in order to increase borrowing or reduce the interest rate. The average valuation bias for residential refinance transactions is above 5%. The bias is larger for highly leveraged transactions, and for transactions mediated through a broker, especially where competition is high. Mortgages with inflated valuations default more often; however, lenders partially account for the valuation bias through pricing.
    JEL: G01 G21
    Date: 2012–12
  7. By: Agarwal, Sumit (National University of Singapore); Amromin, Gene (Federal Reserve Bank of Chicago); Ben-David, Itzhak (OH State University); Chomsisengphet, Souphala (US Office of the Comptroller of the Currency); Piskorski, Tomasz (Columbia University); Seru, Amit (University of Chicago)
    Abstract: The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an increase in the intensity of renegotiations while adversely affecting effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in rate of foreclosures but did not alter the rate of house price decline, durable consumption, or employment in regions with higher exposure to the program. The overall impact of the program will be substantially limited since it will induce renegotiations that will reach just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers cannot be accounted by differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, their low renegotiation activity--which is also observed before the program--reflects servicer specific factors that appear to be related to their preexisting organizational capabilities. Our findings reveal that the ability of government to quickly induce changes in behavior of large intermediaries through financial incentives is quite limited, underscoring significant barriers to the effectiveness of such polices.
    JEL: E60 E65 G18 G21 H30
    Date: 2012–11
  8. By: Hou, Kewei (OH State University); Loh, Roger (Singapore Management University)
    Abstract: We propose a simple methodology to evaluate a large number of potential explanations for the negative relation between idiosyncratic volatility and subsequent stock returns (the idiosyncratic volatility puzzle). We find that surprisingly many existing explanations explain less than 10% of the puzzle. On the other hand, explanations based on investors' lottery preferences, short-term return reversal, and earnings shocks show greater promise in explaining the puzzle. Together they account for 60-80% of the negative idiosyncratic volatility-return relation. Our methodology can be applied to evaluate competing explanations for a broad range of topics in asset pricing and corporate finance.
    JEL: G12 G14
    Date: 2012–12

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