The Future of ASEAN’s Financial Integration

In addition to its assessment of ASEAN economic integrationeconomic integration of trade and investment, this chapter attempts to analyze the enlargement framework of ASEAN of the ASEAN+3 ASEAN Plus Three (APT)as this framework is established to support ASEAN to have financial integrationfinancial integration in the future. Historically, the ASEAN Plus Three APT was established in December 1997 and later institutionalized in 1999 by 10 ASEAN member states and 3 East Asian countries (China, Japan, and South Korea). It was established as a response to the Asian Financial Crises (AFC) which led ASEAN and East Asian countries of Japan and South Korea to enhance their economic cooperation from trade, investment, and finance. Therefore, to fully analyze financial and monetary integration, it is necessary for this study to discuss the APT. This discussion will focus on variable of inflation rate similarity (Fleming, 1971) because of: (1) ‘Similarity in inflation rate’ represents both short-run (trade and investment) and long-run equilibrium (financial integration) between ASEAN’s founding members and its counterpart and (2) For the short-run equilibrium, the inflation similarity was analyzed using the Error Correction Mechanism (real sector integration of trade and investment) while the long-run equilibrium was analyzed using stationarity and cointegration methods (monetary sector integration). These analyses are important to assess ASEAN’s capacity and potential success in achieving financial integration by shifting its regional economic integration from trade and investment to finance.