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Prospects for Financial and Economic Integration in East Asia

The 21st century is very often referred to as the Asian Century. The term is used to describe the belief that if certain demographic and economic trends persist, the 21st century will be dominated by Asian politics and culture, as the 20th century is often called the American Century and the 19th century, the British Century. China and India have the two largest populations in the world and are expected to grow rapidly economically. Japan in spite of a long spell of economic recession in recent years, is still the world’s second largest economic power. While much emphasis is focused on the growing power of China, India and Japan, the term Asian Century generally refers to all growth in East Asia, South Asia and South-East Asia. Russia with more than half of its land mass situated in Asia may also be considered as a rising economy in Asia, though it is not usually referred to as an Asian economic power. Goldman Sachs in its BRIC economic forecast highlighted the trend towards mainland China becoming the largest, and India becoming the second largest economies by the year 2050 in terms of GDP. But this is subject to so many ‘ifs and buts’ . The Republic of Korea (South Korea as it is commonly referred to) is the world’s second fastest growing economy from 1960 to 1990. The smallest territory among the G-20 major economies, the South Korean economy today is the fourth largest in Asia and its capital Seoul is one of the world’s top-10 financial and commercial cities. With its closeness to the Peoples’ Republic of China for a very long time and its historical antipathy to Japan, South Korea has the potential to play the spoilt sport in its relations with China and Japan.

Economic liberalization, privatization and globalization have opened up trade and investment flows the world over, but this has also resulted in the emergence of several regional economic blocs. One of the oldest economic grouping was the ASEAN – comprising the ten countries of South East Asia, which over time has been enlarged to ASEAN +3 – namely, the three Northeast Asian countries of Japan, South Korea and China. Today, this grouping includes also India, New Zealand and Australia, to make it ASEAN +6 . Going by the generic of East Asia, the region accounts for 50 per cent of world population, 33 per cent of world’s national income and 25 per cent of world’s exports and, more importantly it is the future growth area of world economy. And yet, the financial crisis of 1997-98 not only rattled several economies of Southeast Asia but also exposed the limitations of a growth model : ‘manufactured in Asia, consumed in the West’. There was a need to develop new drivers, new engines of growth, and regional economic cooperation appeared to be the new growth model. 60 years ago, addressing Asian Relations Conference in New Delhi, Pandit Jawaharlal Nehru said, (and I quote) “Strong winds are blowing all over Asia. Let us not be afraid of them, but welcome them. For, only with their help, can we build the new Asia of our dreams”(unquote). How prophetic Nehru’s words were !

Regional trade, especially among Asian countries, allows optimal balancing of benefits and costs of trade. But trade alone is not enough to bring about development nor to make development more inclusive. To enhance Asian regional integration we must aggressively pursue integration in both investments and migration of professionals ; and in this respect, Western countries always attracted the most talented professionals globally. Southeast Asian economies are rather reluctant – these countries consider themselves ‘unique’. FTAs (Free Trade Agreements) have become one of the more popular mechanisms for promoting trade and we know from experience how intra-regional exports can help tackle a crisis. Deep, concerted liberalization will help trigger a less shocking re-balancing even.

FTAs as vehicle to transform the economic structure of East Asia have grown at an accelerated rate and the slow progress of Doha Round of trade talks could be one of the causes for this. East Asian countries have entered into almost 81 Regional Trade Agreements so far, that are at different stages of negotiation / implementation. Of these, Regional Trade Agreements among East Asian countries number around 40. But, East Asian FTAs have developed in a multi-layered structure, making new barriers due to different arrangements and rules in each case. With a view to promote an integrated regional market, two Study Groups were set up by ASEAN+3 leaders and they came with 2 sets of reports – one, East Asian Free Trade Agreement (EAFTA) and the other, Comprehensive Economic Partnership (Agreement) of East Asia (CEPEA). EAFTA is expected to be a comprehensive integrated single package agreement and CEPEA would help promote economic integration and development by enhancing economic cooperation, facilitation and liberalization over a time frame. Though there were many things common in both the reports – one lead by the Japan Group and the other by China (Korea lead ) group – China prefers and hopes to adopt East Asia FTA in preference to Comprehensive Economic Partnership of East Asia. It must, however, be remembered that for both CEPEA and EAFTA to succeed, a key constraint is the ability of China, Japan and Korea to manage their participation in it.

The Asian economies have developed profound synergies that have helped in expanding the intra-regional trade. A virtual economic community is emerging from a complex web of FTAs linking ASEAN and its 6 dialogue partners. However, these FTAs remain sub-optimal as they failed to provide a seamless regional market important for fuller exploitation of the synergies for mutual benefit. Comprehensive Economic Partnership Agreement of East Asia aims to liberalize tariff and non-tariff barriers to intra-regional trade in goods and services and investments in a phased manner by 2020, accompanied by improved connectivity and trade facilitation to cut trade costs, and economic cooperation to narrow down development gaps. Chinese insistence on recognition as a market economy and concerns about conflicts with internal objectives, Korean worries about China’s agricultural competitiveness and about Japan’s competitiveness in manufacture, and Japanese worries about Korean agriculture and fisheries, are difficulties in the way of regional integration of East Asia. The three Northeast Asian nations hold the key, but the possibilities of the three concluding bilateral FTAs or a trilateral FTA among them appear to be very slim.

Meanwhile, a new shadow has fallen on the 16-State East Asia Summit Forum. To add to the innumerable already existing Regional Fora, the Australian Prime Minister Mr. Kevin Rudd has proposed an Asia Pacific Community and the new Japanese Prime Minister Mr. Yukio Hatoyama, who wants to develop relations of mutual trust with China, has envisioned an East Asia Community, different from the East Asia Forum. The United States, a self-proclaimed resident power in East Asia will figure in both the groupings. Mr. Hatoyama in one breath desires to steer Tokyo towards a new equation of equality with Washington and in another breath says he has no intention to exclude the US from the East Asian Community. The equations among the US, China, Japan and India (the last, a new strategic dialogue partner for the US) will be critical to the formation and functioning of the new community in East Asia. China factor in Japan-US relations will be a key element in the US diplomacy and India-China-US equations could be a disturbing factor in the success of East Asian Community.

ASEAN sees ‘connectivity’ as central to connecting its role as the primary driver of regional integration.. ASEAN leaders described the group as located at the crossroads of a region bounded by India in the west, China, Japan and Korea in the northeast and Australia and New Zealand in the south. Despite marking India as the western boundary of the region, India still is not considered by many ASEAN leaders as central to community-building in East Asia. And, the Prime Minister of India, Dr. Manmohan Singh had to remind ASEAN and Japan at the recent East Asia Summit in Thailand (last October) that there could be no Asia without India and the centrality of India is vital to the emerging institutional arrangement in Asia.

Real economic integration of East Asia presupposes a multi-pronged approach. Developing Regional Transportation networks, Increasing trade through improvements in ICT infrastructure, Developing a Regional Financial Architecture, Promoting a Regional Energy Security Framework, and Strengthening the social foundations for inclusive and resilient societies. Of these 5 elements, financial cooperation provides a substantial opportunity to generate aggregate demand and faster inclusive development of the region. Balance of payment emergencies, management of forex reserves, financing regional connectivity and exchange rate cooperation could be some of the elements of development of financial architecture. But unfortunately, the lessons of the East Asian crisis of 1997 and the lessons of the worldwide financial crisis of last year, have not made world leaders any wiser. Economics is becoming the handmaid of politics. Mutual distrust among Japan, China and Korea, aggrandizement and ‘my country right or wrong’ attitude of leaders big and small, make regional economic integration a mirage. So far, 7 East Asia Summits are over till now, and three more are in the pipeline (the 10th East Asia Summit is to be hosted by India in 2012 in New Delhi). Given the doubts, fears and mental blocks amongst the neighbours, it is a moot question how many more summits should take place before our leaders attain enlightenment to make the 21st century really a Century of East Asia and of Asia.

( Presentation made by Professor N.Krishnaswamy, President, Indo-Japan Chamber of Commerce and Industry (IJCCI), Chennai, at a seminar on “21st Century Asia-Emerging symbiotic Relations among India,Japan, China and South Korea”, organised by the IJCCI,at Chennai on 7 November 2009)

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