Consumption Risk Sharing and Its Implications for Financial Integration: The Case of Nine East Asian Countries

Using three easily measured variables – growth in aggregate output, change in net factor income and change in national saving – this paper estimates the degree of consumption smoothing by a group, East Asia. Using the Penn World Tables data for nine East Asian countries, we provide evidence that about 22 percent of shocks to GDP are smoothed via a credit market channel while the international capital market is almost insignificant. Furthermore, we find that around 75 percent of shocks to GDP remain unsmoothed. Portfolio investment intensity calculations suggest that, of this already small degree of smoothing achieved by access to international capital markets, a disproportionately small share is coming from within the region for many countries, although some countries are achieving a more balanced geographical spread of their portfolio investments. Given these results, we argue that countries in the region may benefit from having more open financial systems, which they could use as means of increasing the consumption risk sharing.