Regional Economic Integration in Asia ─ Prospects and Challenges

President Haruhiko Kuroda
Asian Development Bank

New York, September 13, 2005

Ladies and gentlemen,

I would like to thank the Asia Society for inviting me to speak in this Citigroup Distinguished Asian Series, and for the excellent arrangements in this meeting.

I am very pleased to be here today to talk about the progress Asian countries have made towards regional cooperation and economic integration – as well as some of the challenges that lie ahead.

Given its huge population, I think it’s fair to say that what is good for Asia is good for the world. I strongly believe that regional cooperation and integration provides a key to unlocking Asia’s vast economic potential and help raise the living standards of its people. This, in turn, will bring greater stability to the region, improve the business climate and provide growing opportunities for the business sector, both in Asia and abroad.

In recent years, we have seen the emergence of a number of initiatives to enhance the region’s integration. The question is: how can we capitalize on the momentum of those initiatives to ensure continued growth and prosperity – prosperity that is shared by all countries and all people in Asia and the Pacific?

To provide context for moving forward, let me first briefly summarize some of these recent developments.

Recent Developments in Regional Cooperation and Integration

Compared with Europe and Latin America, Asia is a relative newcomer to regional cooperation. Before the 1997 Asian crisis, economic integration was primarily market-led and private-sector-driven. Few major government-led regional cooperation initiatives existed, and those that did were limited to the areas of cross-border infrastructure, trade, and investment. These included, for example, the Greater Mekong Subregional cooperation program and the ASEAN Free Trade Area, both of which were initiated in 1992.

After the 1997 crisis, however, the market-led process was supplemented by a series of government initiatives. In addition, the scope of government initiatives was extended to include regional cooperation in policy dialogue, money, and finance, especially in East Asia. Today, the geographic scope of cooperation initiatives is expanding across sub-regions of Asia. One example of this is the framework agreement for comprehensive economic cooperation between India and the countries of ASEAN – Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Viet Nam.

The growing interest in economic cooperation and integration can be attributed to various factors: growing economic interdependence among countries, especially in East Asia: the popularity of regionalism elsewhere: slow progress in multilateralism, and weaknesses in the international financial architecture¹ as demonstrated by the 1997 crisis.

Perhaps the clearest evidence of Asian countries’ desire to forge closer economic relationships is the proliferation of Free Trade Agreements. As of last year, there were more than 30 FTAs under negotiation in East Asia alone. Increasingly, these agreements are also deeper, extending to areas beyond just tariff reduction. An example is the recently signed India-Singapore comprehensive economic cooperation agreement, which covers not only trade in goods, but also services, investments and cooperation in technology, education, air services, and human resources.

I mentioned the growing economic interdependence among countries. Looking at East Asia, for example, we see that intra-regional trade has grown from less than 35% of total trade in 1980 to 54% in 2003. This is a lower proportion than in the European Union, but higher than NAFTA’s, which is around 46%.

Much of this increase in trade within East Asia reflects intra-industry trade in parts, components, semi-finished products and finished goods as multinational companies diversify their operations and create production networks across the region. As a result, foreign direct investment within the region is substantial. From 1990 to 2002, companies in the Republic of Korea, Singapore, Hong Kong and Taipei,China – the so-called newly industrialized economies – accounted for 48% of total foreign direct investment received by the middle-income countries of ASEAN and the Peoples’ Republic of China². This nexus between foreign direct investment and trade has been a key contributor to integration and closer dependence among the economies of East Asia.

Against this backdrop, and in response to the 1997 crisis, East Asian countries have determined that greater cooperation in money and finance is both necessary and beneficial. The ASEAN+3 group, which includes members of the ASEAN, along with China, Japan, and Korea, has played a leading role in this effort. They have instituted a regional economic review and policy dialogue process and established the Chiang Mai Initiative to provide liquidity support through a network of bilateral swap agreements. At their meeting in Istanbul last May, the ASEAN+3 Finance Ministers agreed to double the size of the existing bilateral swaps and adopted a collective decision-making system for the bilateral swaps, representing the first step towards multilateralization.

One of the fundamental causes of the 1997 financial crisis was over-reliance on the banking sector as the source for financing, coupled with the maturity and currency mismatches – the double mismatch problem. In order to address this issue and to mobilize the region’s vast pool of savings for investment in the region, the ASEAN+3 has also implemented the Asian Bond Markets Initiative. As part of the initiative, ADB established the AsianBondsOnline web site and has supported other efforts, for example, in creating a regional settlement mechanism.

All of these initiatives are critical to strengthening the financial systems in these countries, building the region’s resilience and mitigating the risks of future financial crises.

So that’s a snapshot of the situation today. What about the future?

Prospects and Challenges of Regional Economic Cooperation and Integration in Asia

As you know, Asia is a region of great diversity – in income levels, living standards, cultures, and governments – making the task of regional economic integration very challenging. However, recent developments, such as I have outlined, offer some cause for optimism.

Since 1992, the Greater Mekong Subregion Economic Cooperation Program has shown us the benefits that cooperation can bring in spite of obstacles. The six countries that share the Mekong River—Cambodia, People’s Republic of China, Lao People’s Democratic Republic, Myanmar, Thailand, and Viet Nam—are together reaping the benefits of increased connectivity, competitiveness, and a greater sense of community that would not have been possible two decades ago.

T his program , supported by ADB, focuse s on high priority subregional projects in transport, energy, telecommunications , environment, human resource development, tourism, trade, private sector investment, and agriculture. T he GMS countries have substantially increased their connectivity and competitiveness by building a more integrated regional market and regional institutions. And the subregion today is one of the fastest growing in the world.

Similar initiatives are underway in South Asia and in Central Asia, with exciting prospects for future development. The two sub-regions have joined together in an effort to connect landlocked Central Asia and seaports in South Asia via Afghanistan. Based on this partnership, we can envisage Afghanistan as a regional hub, and a critical link between the South and Central Asian markets.

Considering the spate of cooperative initiatives, I am optimistic about the prospects for broader and deeper economic integration in Asia. There is, however, a long way yet to go to create a pan-Asian community and an Asia-wide future of hope and prosperity. Needless to say, such an effort will take time and it will have to overcome many challenges.

It is worth noting that the proliferation of free trade agreements poses challenges, as well as opportunities. While bilateral and regional agreements are largely beneficial, they should be building blocks – not stumbling blocks – on the road to global trade integration. Now is the time, as so many deals are being struck, to ensure consistency within the web of free trade agreements that is emerging in Asia. To promote this approach, ADB has recently initiated a study of free trade agreements in Asia, which will provide recommendations for harmonizing these agreements. Doing so will ensure that Asian regionalism remains an open regionalism – open to trade and investment within the region, and with the global economy.

Another challenge is to take monetary and financial cooperation in East Asia to the next level. The Chiang Mai Initiative of the ASEAN+3 countries is a commendable step. Yet, despite its recent expansion, the total size of liquidity support available to countries in crisis is relatively small. There is, therefore, a strong case to be made for further expansion.

The regional surveillance process also needs to be strengthened. Stronger regional surveillance can complement and contribute to the economic surveillance done both at the national and the global levels. This will increase the likelihood of detecting vulnerabilities in a timely manner.

Finally, with continued trade and production integration in the region, there is an increased need for regional exchange rate coordination. So far, there has been no clear regional initiative in this area, but there are some encouraging signs. For example, on 21 July of this year, the Peoples’ Republic of China and Malaysia joined Singapore in adopting a managed floating regime based on a basket. Other countries may also eventually consider adopting the basket-pegging regime in order to promote greater intraregional exchange rate stability as this would be beneficial to intraregional trade.

Conclusion

Ladies and gentlemen, I am convinced that regional cooperation and integration are crucial ingredients for the region’s continued prosperity. As the region’s development bank, ADB is committed to taking a proactive role in this process. Just last week, we launched a new book on this topic, which represents the thinking of highly respected experts about the issues I’ve described.

While the obstacles to deeper and broader integration in Asia are real, they are not insurmountable. I believe that leaders across Asia and the Pacific share a vision of a thriving regional economy, well integrated within itself and with the world. By working together to build on common strengths and reduce shared vulnerabilities, this vision can become a reality, bringing profound economic and social benefits to all.

Thank you.

See Kawai, M., 2005. “East Asian Economic Regionalism: Progress and Challenges.” Journal of Asian Economics 16: 29-55.