Why economics will top East Asian agenda

Why economics will top East Asian agenda

Denis Hew and Rahul Sen, The Straits Times/Asia News Network, Singapore

At a recent seminar held here to discuss the East Asia Summit
(EAS), it was reported that economics is unlikely to be the main
issue at its inaugural meeting, to be held in Kuala Lumpur next
month.

The summit will bring together the ASEAN+3 countries (the 10
member countries plus China, Japan and South Korea), India,
Australia and New Zealand.

To the contrary, economics will very much drive the EAS agenda
for three main reasons.

First, the economies of East Asia have become increasingly
integrated and inter-connected over the past two decades. In
particular, one observes a relatively high degree of trade and
investment integration in this dynamic region.

Intra-regional trade as a share of East Asia's trade rose from
35 percent in 1980 to 54 percent in 2003. This means that, by
2003, about half of East Asia's trade was with itself, a trend
comparable with the 64 percent in the European Union, a far more
formalized economic grouping.

How was this form of market-driven integration achieved? East
Asia has long embraced trade liberalization, avoiding the
discriminatory trade practices practiced elsewhere. Decades of
foreign direct investment (FDI) flowing into the region have led
to a high level of cross-border integration of production value
chains, reinforcing the nexus between trade and investment.

In recent years, that has been further reinforced by China's
rapid industrialization: China is not only a major destination
for FDI but also an important market for exports of specialized
components and other intermediate inputs from the region.
Concomitantly, India, Australia and New Zealand are also
increasing their economic linkages with ASEAN+3 members,
particularly with South-east Asia.

Second, substantive work has been done to promote financial
cooperation at the ASEAN+3 level. In May 2000, ASEAN+3 finance
ministers agreed to set up a regional financing arrangement
called the Chiang Mai Initiative (CMI), which has two main
components: an expanded ASEAN Swap Arrangement and a network of
bilateral swap arrangements.

The former, originally established in 1977 between Indonesia,
Malaysia, the Philippines, Singapore and Thailand, is now worth
US$1 billion (S$1.7 billion). The latter, which currently totals
$36.5 billion, comprises arrangements in which one party requests
another to enter into a swap transaction that provides liquidity
support to overcome balance of payments difficulties.

Last May, the ASEAN+3 finance ministers agreed to strengthen
the CMI by integrating and enhancing economic surveillance,
adopting a collective decision-making mechanism for bilateral
swaps, and doubling the size of available swaps.

It seems to be a propitious time to enhance this framework,
which could pave the way for an Asian Monetary Fund in the near
future. (An earlier attempt failed during the Asian financial
crisis because of lack of support).

Moreover, cooperation of this kind strengthens the regional
financial architecture and may one day lead to the introduction
of a common currency in the region. The Asian Development Bank
(ADB) is currently undertaking research on the feasibility of
establishing an Asian Currency Unit, a precursor to a regional
common currency.

Third, every EAS participant has a free trade agreement (FTA)
with ASEAN, which is itself moving towards a fully functioning
FTA under the ASEAN Free Trade Area framework. What is urgently
needed is to multilateralise the existing FTA initiatives among
EAS members to facilitate economic integration.

This means that EAS members should develop a common
understanding about FTA negotiations so that business does not
perceive the costs of implementing FTAs to be unacceptably high.
The Pacific Economic Cooperation Council has already undertaken
studies in this direction. But above all, East Asian integration
must be market-driven. Domestic reforms by each individual nation
will be necessary for each to attain higher levels of
competitiveness. This is especially true for countries with a
sizable domestic market and so are not highly dependent on the
external sector for growth.

Deeper economic integration will also require a stronger
institutional structure. Prof. Masahiro Kawai of Tokyo
University, who is currently head of the ADB's Regional Economic
Integration Office, argues that regional economic integration can
be institutionalized by establishing regional frameworks for
trade and investment liberalization as well as macroeconomic and
financial management. If so, establishing a regional economic and
financial secretariat could be discussed at the summit.

True, there is some concern that enlarging the participation
beyond ASEAN+3 may give rise to conflicting interests. But market
forces have bound the economies of all participating nations
together, creating greater impetus to cooperate in trade,
investment and finance. Such linkages suggest that economics will
be the summit's top priority.

Both writers are fellows at the Institute of Southeast Asian
Studies. The views expressed here are their own.