The rise of regionalism in the Asia-Pacific region

The rise of regionalism in the Asia-Pacific region

What are the factors spurring the phenomenon of regionalism? Vijayakumari Kanapathy provides an analysis.

Economic regionalism has become an important item in most countries' national, regional and international agenda. And Malaysia is no exception. The rise of large and powerful regional trading arrangements and the lethargic process of the Uruguay Round in the 1980s, that threatened the multilateral process, had thrust Malaysia into the forefront of economic regionalism. Malaysia has been the most active participant in the G-15, a forum for the developing economies of the South, and the proponent of the EAEC, a loose consultative forum to promote economic cooperation among ASEAN and the East Asian economies.

The Uruguay Round has finally come to a successful conclusion, after seven-and-a-half years of difficult negotiations. This has engendered an improved international economic environment and has allayed fears of the breakdown of multilateralism. Yet, the trend towards regionalism continues. In fact, there has been a renewed interest in regional economic cooperation in the Asia-Pacific. The forces that continue to drive economic regionalism, and the role of individual nations in this process has, of late, become an interesting topic of discussion.

What then, are the factors underlying the rise of regionalism in the Asia-Pacific region? A cursory survey of recent figures on trade and investments indicate that while governments are in the process of negotiating regional cooperative arrangements, a new economic relationship is evolving in East Asia, essentially driven by market forces. Fundamental shifts in domestic policies towards greater reliance on markets and the private sector in ASEAN and the East Asian economies to cope with domestic and international challenges, seem to have unleashed strong market forces that have induced a higher level of interaction and interdependence.

The ASEAN states were forced to unilaterally liberalize their economies to cope with the internal and external constraints to economic growth in the mid-1980s. It is important to highlight here that the sound macroeconomic management of their economies during the crisis years enabled the ASEAN states to undertake bold liberalization measures. They brought down barriers to trade and investment by removing quotas and reducing tariffs, and by relaxing the rules on foreign equity participation.

They also undertook tax reforms, foreign exchange adjustments, privatization of public enterprises and loosened bureaucratic red tape. These market reforms and the greater outward-orientation of ASEAN economies led to strong and sustained economic growth, thereby laying the foundation for enhanced regional cooperation.

The rapid growth of some of the more dynamic ASEAN economies coupled with significant differences in their relative sizes has somewhat altered their industrial structures. Thus, there has emerged a degree of complementarity within ASEAN that has made economic cooperation both desirable and feasible. This complementarity is most visible in the area of labor. Cross- border flows of labor among the ASEAN states has never been more intensive.

In fact, those ASEAN states close to each other that have exhibited greater complementarity in factor endowments have got together to jointly exploit their comparative advantages. These sub-regional forms of cooperation, commonly termed growth triangles, are driven by market forces and have been led by the private sector.

While economics might have granted the necessary conditions for enhanced economic cooperation, political stability has provided the conditions for these states to assume a pro-active role in regional cooperation. These factors have combined to inject greater confidence and willingness among the ASEAN states to engage in regional cooperation and have provided them with a clearer vision for their regional agenda.

Meanwhile, currency realignments and the limits exhibited by industrial structures have forced the East Asian NIEs to seek offshore production bases. This is yet another factor behind regional integration in the Asia-Pacific. The sharp appreciation of the Yen following the Plaza Accord, the rapid rise in production costs in Japan and the NIEs, and the huge capital surpluses accumulated by the East Asian economies have led to an influx of foreign direct investments from these nations to the ASEAN states. As a consequence, inter-regional trade and investment in East Asia has accelerated since the late 1980s.

Apart from market forces, technological and organizational changes have also played a key role in the regionalization process. These dynamic changes have brought about the globalization of the production process which has led to regional distribution of production and vertical integration. MNCs are generating intra-industry trade flows among ASEAN members through their network of offshore operations in the region. In this way they are gradually integrating the ASEAN states with one another and ASEAN as a whole with the rest of the world.

A survey of the factors driving economic regionalism raises the fundamental question as to whether it tends to weaken or make redundant the several regional economic cooperative arrangements in place or underway? It would appear that, while market forces might drive regional integration, governments might want to determine the pace and direction of the regional integration process. In this respect, a sound understanding of the trends and forces at work would aid nations chart their national, regional and international agenda in a manner that would not jeopardize their national interests, and at the same time ensure sustained growth and development of the region in a mutually beneficial way.

Regional groupings have emerged at different levels and with different objectives, but trade promotion represents their common concern. ASEAN, AFTA, APEC, the ARF and the EAEC are the main regional cooperation schemes that directly affect the economics and geopolitics of ASEAN, while the G-15 and the Cairns Group represent groupings of like-minded countries with a more specific agenda. For a small nation of only 18 million people and whose external sector forms more than two-thirds of its GNP, Malaysia naturally desires an open multilateral trading system.

AFTA aims to create a borderless ASEAN, while APEC is also beginning to place greater emphasis on trade and investment liberalization. Compared with many other countries in the Asia- Pacific, Malaysia's liberalization process has already reached an advanced stage, and therefore an increasingly borderless region might not be that threatening. In fact, the APEC process might even grant greater clout to small countries, like Malaysia, to prize open some of the more closed markets in the region, which they would not otherwise be able to achieve on their own.

The rise of regionalism in the Asia-Pacific does not necessarily mean a decline in South-South cooperation that is being actively promoted by Malaysia. Many of the original concerns of selective market access and diversion of trade and investment flows continue to plague developing economies, while new pressures to accept social policies, standards and institutional practices that threaten the autonomy in domestic policy-making are increasingly evident. East Asia's growth and prosperity might very well enhance its power in global decision- making, but cooperation with the other developing countries in the South with common concerns would certainly enhance the region's clout to influence the post-Uruguay Round agenda.

It is interesting to note that while EAEC is becoming increasingly remote, the dynamism of East Asia and the higher level of interaction and interdependence in the region have provided a stronger rationale and impetus to the concept of cooperation. Unfortunately, when Malaysia originally proposed the EAEC, it failed to effectively articulate the more logical reasons behind such a forum.

With increasing interdependence in East Asia, domestic economic policy decisions will become more inter-connected, and therein lies the scope for increased friction. It is also possible that rapid growth and development might transform the industrial structures of some of the ASEAN economies and make them more competitive with those of the NIEs. With the prospect of increased competition and even conflict between the NIEs and the near-NIEs, the need for a regional framework for policy coordination and cooperation will become even more important in order to foster healthy competition and avoid conflict.

It is even foreseeable that as this group of nations in geographical proximity to each other achieve a higher level of economic integration and interdependence, there will be a natural desire to enter into some kind of regional agreement, as has been the experience with NAFTA and the European Union.

The various intra- and extra-regional cooperation schemes are not mutually exclusive, but complement and reinforce each other. While intra-regional cooperation provides synergy in growth and development, extra-regional cooperation serves to strengthen the multilateral process.

Vijayakumari Kanapathy is Senior Analyst with the Institute of Strategic and International Studies in Malaysia.