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.