My previous column underlined the imperative of rebalancing the Asia-Pacific economies in favour of greater domestic and regional demand (“The challenge for Asia-Pacific”, June 23). The context is provided by a structural break in the world economy that does not allow a return to business as usual in the post-crisis scenario. As we know, Asian dynamism was assisted by growing exports to the Western world over the past decade. Now, given the huge accumulation of debt, advanced countries are compelled to restrain their debt-fuelled consumption, so their import demand will not go back to the pre-crisis level. Thus, the region needs to develop new engines for generating aggregate demand to mitigate the loss in the West. One such engine can be poverty alleviation and closing infrastructure and other development gaps, as discussed in the previous column. We will now take up the other aspect of the rebalancing challenge: exploiting the potential of regional economic integration, which seems to be considerable.
An indicator of the potential of regional economic integration is growth of intra-regional trade. The Economic and Social Survey of Asia and the Pacific 2011 by the United Nations Economic and Social Commission for Asia and Pacific (ESCAP) shows intra-regional trade in Asia-Pacific countries has grown at a much faster pace than their global trade, bringing its share up to nearly 54 per cent from 47 per cent over the past decade. But ESCAP estimates point to an even greater potential given the rapid growth rate of the region’s economies.
Furthermore, the ESCAP’s analysis points to the presence of considerable complementarities — in terms of matching of imports of one country by exports of partner countries, within and between sub-regions. Generally, the complementarities between sub-regions are greater than within the sub-regions. There is, therefore, a case for broader regional co-operation.
Over the years, Asia-Pacific countries have evolved several sub-regional groupings such as the Association of South East Asian Nations (Asean), South Asian Association For Regional Co-operation (SAARC), Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation, Economic Cooperation Organisation, Asia-Pacific Trade Agreement, Pacific Islands Forum and numerous bilateral preferential trading arrangements. Being sub-regional or bilateral in nature with different rules, scope and coverage, they do not add up to provide a unified seamless region-wide market. We need to build on these initiatives a broader a framework while deepening them.
In that context, initiatives by Asean members in deepening their regionalism and bringing other major economies as dialogue partners viz. Japan, China, Republic of Korea, India, Australia and New Zealand in the frameworks of Asean+1, Asean+3 and the East Asia Summit are laudable. These initiatives are leading to broader free trade agreements (FTAs) linking Asean countries and their dialogue partners such as Asean+3 and Asean+6 nations. These FTAs can be the stepping stones for region-wide arrangements. In particular, the proposal of Comprehensive Economic Partnership of East Asia (CEPEA) mooted within the framework of the East Asia Summit, bringing together Asean and its six dialogue partners, has considerable potential. With the combined weight of economic powerhouses of China, Japan, India and Indonesia, and with 85 per cent of the region’s output and population, CEPEA could be a giant among economic groupings, with substantial welfare effects arising from economies of scale and specialisation.
Similarly, exploiting the potential of regional economic integration requires developing physical connectivity. Historically, the Asia-Pacific region has been better connected with markets in Europe and North America than with itself. The land transport links have been unevenly developed, making it expensive to move goods across countries. Two inter-governmental agreements sponsored by ESCAP, on the Asian Highway and the Trans-Asian Railway, have contributed significantly to infrastructure investment. Currently, ESCAP is working on the third inter-governmental agreement on dry ports that will connect the two networks to create a multi-modal logistical network in the region. Strengthened physical connectivity needs to be complemented by smoothing paper work at the borders, including customs and conformity assessment procedures, besides arranging for cross-border transit of vehicles and cargoes.
Regional economic integration should not be limited to trade promotion alone. There are many promising opportunities waiting to be tapped in different areas. For instance, over the past decade, a number of important initiatives on monetary and financial co-operation have been taken in the region, such as the Chiang-Mai Initiative which has now been multilateralised with a pool of $120 billion for providing emergency liquidity needs, and the Asian Bond Fund and the Asian Bond Market Initiative for development of the bond markets. We need to build on these initiatives to create a regional mechanism for infrastructure financing. ESCAP’s infrastructure index shows wide gaps exist within the region in terms of levels of infrastructure development between countries like Singapore or Japan on the one hand and Papua New Guinea and Nepal, among other least developed countries on the other. Closing these gaps will need an estimated investment of $800 billion per annum. India alone is projecting an investment of $1 trillion over the next Five-Year Plan. Raising the necessary finance for such staggering amounts will be a challenge. However, the region now has foreign exchange reserves of the order of over $5 trillion, which are largely invested outside the region because of lack of a well-developed regional financial architecture. ESCAP is elaborating the elements of such an architecture that may facilitate mobilisation of infrastructure financing within the region.
To sum up, regional economic integration acquires a new criticality in the post-crisis scenario with the emergence of Asia-Pacific as the world’s growth pole. As an emergent nation with a stake in sustained dynamism of the region, India needs to push various schemes of regional economic integration to evolve a broader unified regional market of Asia-Pacific!
The author is chief economist of the United Nations Economic and Social Commission for Asia and Pacific, Bangkok.
The views expressed are those of the author and do not necessarily reflect the views of the United Nations.