Why economics will top agenda<\/p>\n
Denis Hew and Rahul Sen
\nThe Straits Times
\nAsia News Network\/Singapore<\/p>\n
At a recent seminar held here to discuss the East Asia Summit
\n(EAS), it was reported that economics is unlikely to be the main
\nissue at its inaugural meeting, to be held in Kuala Lumpur next
\nmonth.<\/p>\n
The summit will bring together the ASEAN+3 countries (the 10
\nmember countries plus China, Japan and South Korea), India,
\nAustralia and New Zealand.<\/p>\n
To the contrary, economics will very much drive the EAS agenda
\nfor three main reasons.<\/p>\n
First, the economies of East Asia have become increasingly
\nintegrated and inter-connected over the past two decades. In
\nparticular, one observes a relatively high degree of trade and
\ninvestment integration in this dynamic region.<\/p>\n
Intra-regional trade as a share of East Asia's trade rose from
\n35 percent in 1980 to 54 percent in 2003. This means that, by
\n2003, about half of East Asia's trade was with itself, a trend
\ncomparable with the 64 percent in the European Union, a far more
\nformalized economic grouping.<\/p>\n
How was this form of market-driven integration achieved? East
\nAsia has long embraced trade liberalization, avoiding the
\ndiscriminatory trade practices practiced elsewhere. Decades of
\nforeign direct investment (FDI) flowing into the region have led
\nto a high level of cross-border integration of production value
\nchains, reinforcing the nexus between trade and investment.<\/p>\n
In recent years, that has been further reinforced by China's
\nrapid industrialization: China is not only a major destination
\nfor FDI but also an important market for exports of specialized
\ncomponents and other intermediate inputs from the region.
\nConcomitantly, India, Australia and New Zealand are also
\nincreasing their economic linkages with ASEAN+3 members,
\nparticularly with South-east Asia.<\/p>\n
Second, substantive work has been done to promote financial
\ncooperation at the ASEAN+3 level. In May 2000, ASEAN+3 finance
\nministers agreed to set up a regional financing arrangement
\ncalled the Chiang Mai Initiative (CMI), which has two main
\ncomponents: an expanded ASEAN Swap Arrangement and a network of
\nbilateral swap arrangements.<\/p>\n
The former, originally established in 1977 between Indonesia,
\nMalaysia, the Philippines, Singapore and Thailand, is now worth
\nUS$1 billion (S$1.7 billion). The latter, which currently totals
\n$36.5 billion, comprises arrangements in which one party requests
\nanother to enter into a swap transaction that provides liquidity
\nsupport to overcome balance of payments difficulties.<\/p>\n
Last May, the ASEAN+3 finance ministers agreed to strengthen
\nthe CMI by integrating and enhancing economic surveillance,
\nadopting a collective decision-making mechanism for bilateral
\nswaps, and doubling the size of available swaps.<\/p>\n
It seems to be a propitious time to enhance this framework,
\nwhich could pave the way for an Asian Monetary Fund in the near
\nfuture. (An earlier attempt failed during the Asian financial
\ncrisis because of lack of support).<\/p>\n
Moreover, cooperation of this kind strengthens the regional
\nfinancial architecture and may one day lead to the introduction
\nof a common currency in the region. The Asian Development Bank
\n(ADB) is currently undertaking research on the feasibility of
\nestablishing an Asian Currency Unit, a precursor to a regional
\ncommon currency.<\/p>\n
Third, every EAS participant has a free trade agreement (FTA)
\nwith ASEAN, which is itself moving towards a fully functioning
\nFTA under the ASEAN Free Trade Area framework. What is urgently
\nneeded is to multilateralise the existing FTA initiatives among
\nEAS members to facilitate economic integration.<\/p>\n
This means that EAS members should develop a common
\nunderstanding about FTA negotiations so that business does not
\nperceive the costs of implementing FTAs to be unacceptably high.
\nThe Pacific Economic Cooperation Council has already undertaken
\nstudies in this direction. But above all, East Asian integration
\nmust be market-driven. Domestic reforms by each individual nation
\nwill be necessary for each to attain higher levels of
\ncompetitiveness. This is especially true for countries with a
\nsizable domestic market and so are not highly dependent on the
\nexternal sector for growth.<\/p>\n
Deeper economic integration will also require a stronger
\ninstitutional structure. Prof. Masahiro Kawai of Tokyo
\nUniversity, who is currently head of the ADB's Regional Economic
\nIntegration Office, argues that regional economic integration can
\nbe institutionalized by establishing regional frameworks for
\ntrade and investment liberalization as well as macroeconomic and
\nfinancial management. If so, establishing a regional economic and
\nfinancial secretariat could be discussed at the summit.<\/p>\n
True, there is some concern that enlarging the participation
\nbeyond ASEAN+3 may give rise to conflicting interests. But market
\nforces have bound the economies of all participating nations
\ntogether, creating greater impetus to cooperate in trade,
\ninvestment and finance. Such linkages suggest that economics will
\nbe the summit's top priority.<\/p>\n
Both writers are fellows at the Institute of Southeast Asian
\nStudies. The views expressed here are their own.<\/p>",
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