The role of APEC in sustaining growth in the region

By Djisman S. Simandjuntak

JAKARTA (JP): The East Asian miracle and the rise of the North American West Coast in the past didn't just lead to high growth at the two ends of the Pacific. It also brought about a diverse set of linkages leading to market integration between the two ends of the Pacific as well as the rest of the world. According to Pacific Economic Cooperation Council data, intra Asia Pacific trade was as high as 70 percent in 1992, out of which an increasing fraction is in the form of intra-industry trade such as components which are shipped back and forth between different production locations before they reach the final users.

Major commercial centers in the Asia Pacific are now linked to one another in a complex web of foreign direct investment (FDI), portfolio investment and non-equity relations. The Asia Pacific region accounted for 46 percent of inward stock and 47 percent of outward stock of worldwide FDI at the end of 1992. In the past, the main investor countries which undertook direct foreign investment was confined mainly to Japan and the United States.

However, as of the mid-1980s, the Asian Newly Industrialized Economies (NIE), and even ASEAN, have become important originators of FDI. This strengthens further integration in the region. Obviously, a growing movement of people goes hand in hand with expanding trade and investment. Growth in air travel in the Asia Pacific is in fact twice as high as that of worldwide air travel.

The rapid speed of Asia Pacific integration has mainly been attributed to a dynamic and pragmatic private sector. However, there are other factors behind it. If two or more neighboring economies grow at a high rate and, thereby, undergo rapid structural change for an extended period, the likelihood is that linkages between them will develop. Good domestic policy is also relevant. Reducing trade barriers and relaxing investment restrictions unilaterally are among the important conditions for outsourcing and relocation to prosper.

More importantly, the East Asian model with its strong reliance on export expansion might have not worked at all, had there been no progress in multilateral liberalization.

Japan has benefited a great deal from earlier rounds of multilateral trade negotiation. The Generalized System of Tariff Preferences (GSP) which can also be seen as a joint product of the UNCTAD process and Part IV of GATT provided opportunities when the present NIEs and, more recently, ASEAN-4 and China entered the global trade in manufacturing. Even for a region as vast as the Asia Pacific, freer world trade is necessary for rapid growth. In a world where the costs incurred in overcoming border barriers are declining, any region is doomed to be sub- optimal.

Views on the future prospects of Asia Pacific's progressive growth are almost unanimously optimistic. On the basis of APEC's recent performance, developed member economies appear to have a better chance to grow in the future relative to Europe's developed economies. The same applies to APEC's NIEs if they are bench marked with other economies at a similar stage of development. Other regions do not have economies which are comparable to China and the ASEAN-4 in terms of size and prospects for high, sustainable growth. APEC, however, is meant to serve the interests of its members in the 21st century -- not now.

It is not equal with the Asia Pacific and world economies. Yet, we know very little and can only speculate about what is likely to happen in the first decades of the next century.

History is fickle. Surprises can occur between now and 2020, although some contours of Asia Pacific in the 21st century can still be guessed. Economic power shifts are likely to continue in favor of Asia, particularly China, in the course of which intra- Asia Pacific frictions may heighten. Setting such frictions on a regional basis does not seem to be highly promising. ASEAN for instance, is good in diffusing differences rather than tackling them head on. The existing diversity in the region is bound to increase when Indochina, Russia and Pacific Latin America as well as the Pacific Islands become more compatible with the present APEC economies.

Considering the likely reconfiguration in the Asia Pacific, APEC must define the role it will play can play in furthering the chances of member economies to sustain high growth and integrate more closely. The choices are limited. To borrow from ASEAN's vocabulary, there are three regional cooperation measures: resource pooling, technical cooperation and market sharing. As far as the first two types are concerned, governments are usually quick to agree, but slow to implement. APEC's leaders, ministers and senior officials have in fact agreed on a trade facilitation and technical cooperation with extensive coverage. However, governments are usually much less forthcoming with respect to market sharing. It took ASEAN 25 years to reach an agreement on the ASEAN Free Trade Area. It will take another decade for this agreement to fully materialize. The merits of unilateral liberalization were instead discovered earlier by governments in this group than those of regional liberalization.

APEC may also have to go through a similar evolution. Many of its members seem to prefer a two-tier approach to market sharing or to achieving the vision of Asia Pacific free trade, namely a combination of unilateral initiatives and active participation in the GATT process. Recent experiences show that this track is still a promising one. Hence, APEC's primary role with respect to market sharing within Asia Pacific should be tailored to long term commitments by member economies to undertake unilateral and multilateral liberalization in the context of GATT and the WTO. Giving APEC a structure that is recommended by the Eminent Persons Group (EPG) in its Second Report is surprising.

First, given the progress made in liberalization at the unilateral and multilateral levels, trade liberalization on a preferential basis is bound to diminish in importance as a vehicle for trade expansion. Thus converting Asia Pacific into a preferential trade area does not seem to be as urgent as argued by the EPG. Second, more experience in cooperation is needed in order to enable APEC to settle on issues of common interest, bearing in mind the region's extreme diversity, especially with respect to regional market sharing.