ECONOMIC RESEARCH CENTERDISCUSSION PAPER

No.150

The Paradigm Change of Regional Cooperationin Northeast Asia and Financial Cooperation
by
LI Gang-Zhe

October 2004

ECONOMIC RESEARCH CENTERSCHOOL OF ECONOMICSNAGOYA UNIVERSITYThe Paradigm Change of Regional Cooperationin Northeast Asia and Financial Cooperation1
By
LI Gang-Zhe
Researcher of National Institute for Research Advancement (NIRA)

Abstract
In the post-Cold War world, Northeast Asia has experienced dramatic changes in
the waves of globalization. Local governments and NGOs were the main constituents inthe early period of regional cooperation. But central governments have now become amechanism of regional cooperation. In that Japan, China and South Korea approachedeach other rapidly, we can say that the paradigm of Northeast Asian regional
cooperation has changed. The three countries will form a core of regional cooperation,and must take the leadership initiative jointly. The establishment of a regional
multilateral cooperative institution can be contrived when the region draws the grounddesign for mid- to long-term development and thinks of it from the perspective ofregional financial cooperation. When thinking about each country’s economic
development status and potential problems in the future, China would be the natural
headquarters for the development bank, South Korea for recommending investment,
and Japan for the currency foundation.

This model addresses the problem ofNortheast Asia financial cooperation on a step-by-step basis.

Visiting Research Fellow (From May 1st, 2003 to September 30th, 2003), The Economic
Research Center, School of Economics, Nagoya University; Senior Researcher, Instituteof Northeast Asian Studies, Tokyo, Japan.
I would like to say thanks Professor Hitoshi Hirakawa, the director of The Economic
Research Center who invited me and provided a wonderful research environment. I also
thank the center staff for their cooperation with my research.

11. Introduction
In the post-Cold War world, Northeast Asia has experienced dramatic changes in the
waves of globalization.

Since the 1990s, in this region, relations that had beenstrained by crises and the mutual distrust of war and detente are being replaced byregional cooperation.

In other words, although many observers choose to emphasize

regional crises, steady progress is being made in pursuit of mutual cooperation, peacefulcoexistence and mutual prosperity.
Though economic, human, and cultural exchange currents in Northeast Asia are
expanding rapidly, the move towards community hasn't developed naturally in theinternational relations of this region.

To promote the regional development, theexpansion of cooperation in economics and trade is very important, but I recognize thatthe most important problem is financial cooperation.
As for the necessity of financial cooperation in Northeast Asia, it has been
proposed by experts from South Korea and China in 1991, at the international
conference held by the Northeast Asia Economic Forum2.
cooperation was not yet recognized as a realistic goal.
the situation in Northeast Asia has changed.

At that time, financial

However, over the past 10 years,

The changing environment is largely the

result of two factors – the rapid economic growth in China and its accession to the WTO,
as well as the tripartite discussions between Japan, China and South Korea through the"ASEAN Plus Three" framework.
Informal talks between the leaders of Japan, China and South Korea began in
Manila in November, 1999, and have become normalized since then.

Communication

channels among the three governments have been promoted, and received the attentionof this summit.

What impact will increased communication have on the region?

Canthese three countries become a core and can they lead the efforts at Northeast Asian
regional cooperation? For now, the three countries framework is seen as different froma Northeast Asia regional cooperation framework, but that may change in the future.
In any case, the three countries are thinking seriously about the issue of Northeast
Asian cooperation.
On the other hand, regional economic integration of the market economies ismoving ahead rapidly with a background of the globalization within the three countries
of Japan, China and South Korea.

Regional trade and investment among the three2

NAM Dock-woo, a former Prime Minister of Republic of Korea (South Korea), proposed the necessityof creating a financial mechanism for the development of Northeast Asia in the first international
conference of "The Northeast Asian Economic Forum” which was hosted in Tianjin, China, September
2-7, 1991.

1

countries is expanding rapidly and economic interdependence is rapidly increasing.

It

is possible to regard this as being a de facto economic integration process.
The economic scale of the Northeast Asia region accounted for about 20 percent of
the global economy already (measuring the GDP scale and the trade scale) following the
growth in the 1990s.

It has quickly become one of the three poles in the global economy.

Most remarkable of all, in the Northeast Asian countries, the domestic savings and theforeign reserves totals accounted for more than half of the worldwide total, because of
the rapid expansion of exports among the partners.

In other words, it becomes amature relationship based on mutual respect and cooperation, in one of the “richregions" of the world.
However, because there is a large population in the Northeast Asia region andthere are many developing countries nearby, a constant shortfall of financial support forregional development and cooperation is a prominent contradictory point.

In otherwords, the big mismatch has occurred on the supply side of the financial resources.

It

is a very important problem that must be solved in the future for Northeast Asian
regional cooperation to continue to grow.
This paper will focus to the subject of financial cooperation in the Northeast
Asia Region.

To explain the paradigm change in Northeast Asian regional cooperation,

it will examine the historic conversion evidenced by the formation of the cooperative
framework between Japan, China and the South Korea.

It concludes by clarifying

some problems on the subject of financial cooperation and Northeast Asia Regional
Cooperation in the future.

２． The Paradigm Change in Northeast Asia Regional Cooperation3
1) TRADP and Northeast Asia Regional Cooperation in the 1990s
The 1990s were characterized by rapid and upbeat changes for most for the
Northeast Asia region. The Cold War ended and the stalemate of East-West opposition
was broken.

Actors in Northeast Asia began actively seeking a new form and ideologyof regional cooperation.
Several dynamic changes in Northeast Asia occurred in the 1990s.

The first

I discussed the paradigm change in Northeastern Asia cooperation formerly in a paper,"The Forming of a Frame for The Northeastern Asia finance cooperation," International
Finance Journal" Vol.1091, September 2002. The Institute of Foreign Exchange andTrade Rsearch, Tokyo, Japan.

32

development was “The International Conference for Northeast Asian Economic andTechnological Cooperation”, which was held in Chang-Chun city, China in July, 1990.
Participants included scholars and experts from countries throughout the region, as
well as staff from the United Nations Development Programme (UNDP).

At theconference, an expert from Jilin province in China unveiled the Tumen River Golden
Delta development concept, which attracted wide attention.

Later, with the UNDP

taking the lead, China, North Korea and Russia, as well as Mongolia and South Korea,
participated in the "Tumen River Area Development Programme" (TRADP).

TheTRADP was promoted throughout Northeast Asia, and attracted attention as the firstmultilateral international development project.
Concerning this TRADP promotion, a framework for international cooperation
was formed by the UNDP and the concerned countries.

"Three agreements"4 weresigned by the countries involved, and two organizations ("the Coordination Committee"
and "the Consultative Commission") were established as cooperative institutions
between the governments in December, 1995. Japan participated as an observer
member from the beginning, but local governments of Japan Sea rim actively expanded
the current of exchange activities with other members, independent of the central
government.
However, during the past decade, cooperation under the TRADP did not matchthe high expectations of its architects, and as a result, the countries involved have notproceeded with full-scale multilateral cooperation on complex issues.

It is possible tosay that the paradigm of Northeast Asian regional cooperation is changing the status of
the region and resulting in dynamism in relations and economic development.
2) Formation of the Japan – China – South Korea Framework
The Asian financial crisis of 1997 spread to the Northeast Asian countries, taking
a heavy toll in South Korea and Russia.

The crisis effected regional cooperation as well,and the Tumen River Development Project gradually lost momentum.
However, within the “ASEAN Plus Three” framework, the crisis provided an

The Three Agreements consisted of the following: "The Agreement about theEstablishment of the Tumen River Area development Coordination Committee,"(Among China, Russia and North Korea) and "The Agreement about the Establishmentof the consultative committee for Tumen River Economic Development and theNortheast Asia Development," (Among the above three countries plus Mongolia andSouth Korea) and "The memorandum about the Tumen River Economic Development
and the Northeast Asia Environmental Standards," which depends on five countries.

4

3

opportunity to advance regional cooperation.

An “ASEAN Plus Three” summit,

consisting of ASEAN countries with Japan, China, and South Korea, was held on thethirtieth anniversary of the founding of ASEAN in December, 1997.

The summit has

been held annually since then, and in 1999 was normalized and expanded to include
meetings of the ministers of economy, finance, and foreign affairs, as well as othercabinet-level officials from the 13 member countries.
The "ASEAN+3" frame was institutionalized in Manila meeting in November,
1999.

At that time, the leaders of Japan, China and South Korea conducted an

informal breakfast meeting5.

Held at the suggestion of South Korean President Kim

Dae Jung, it was the first historical and informal summit of the three countries.

The

opening topics were about the three countries’ common points in culture, history andtradition, and mostly concerned with economy and trade.

The second summit meetingof the three countries was held in Singapore in November, 2000.

The three leadersthen agreed to the normalization of the meeting and its continuation in the future.
The pace of cooperation increased as the three countries implemented joint research on
economic cooperation and agreed to promotion of cultural and personal exchanges, IT
cooperation, and cooperation on environmental issues.

In November, 2001, the summit

meeting was held for the third time in Brunei and a joint report on economic
cooperation, conducted by research organizations from the three countries, wasreleased6.
finance.

The leaders agreed to hold meetings for the ministers of economy and
They also agreed to extend government support of cooperation to the businessworld.
3) Characteristics of the Paradigm Shift
In that Japan, China and South Korea approached each other rapidly, we can saythat the paradigm of Northeast Asian regional cooperation changed.

Thischaracteristic can be derived from some of the following viewpoints.
(ⅰ) The geopolitics of regional cooperation in Northeast Asia is changing.

In thebeginning of the 1990s, the Northeast Asia Regional Cooperation included the Japan
Ministry of Foreign Affairs home page (http://www.mofa.go.jp/).
In accordance with the common understanding reached by the leaders from China,
Japan and Korea during the Manila Summit in November 1999, the joint research on"Strengthening Economic Cooperation among China, Japan and Korea" was officiallylaunched by the representative institutes from the three countries, namely theDevelopment Research Center of the State Council of China (DRC), the National
Institute of Research Advancement of Japan (NIRA) and the Korea Institute forInternational Economic Policy (KIEP) in November 2000.

5
6

4

Sea rim and of Bo-Hai and Yellow Sea rim (a narrow concept).

But the concept ofNortheast Asia region must include the six countries of all of Northeast Asia at
present—Japan, China, South Korea, North Korea, Mongolia and Russia, as well as
Taiwan and Hong Kong of China7. This “wide view” of regional cooperation is essential
for its success.

It is meaningless to discuss East Asian economic relations without

including Hong Kong and Taiwan, because they are part of the region geographically.
Also, it is very important for Northeast Asian economic development to capture thedynamism of areas which might be excluded. With the exception of Singapore, all of
the Asian NIEs are included in this “wide view”.
(ⅱ) Northeast Asian regional cooperation in the past could be spontaneous,
mainly occurring in the “Natural Economic Territory" (NET)8, e.g. local economic blocs
based on shared waters, such as the Japan Sea rim economic bloc, the rim of Bo-Hai andYellow Sea economic bloc, the Huanan economic bloc, the Taiwan Straits economic bloc,
which all developed naturally.

This was the inevitable development of the historicturning point after the end of Cold War.

However, in every country in East Asia that

was affected by the Asian financial crisis, it is the one of the intervals of the states atpresent.

Regional cooperation through agreements (such as free trade agreements or"economic cooperation") and so on is developing rapidly.

It is moving in the direction ofsystematic integration and the activity of the local economic bloc shows movement thatis absorbed by systematic integration.

It is necessary to recognize that the momentum

toward economic integration is moving closer to the models presented by the European
Union and NAFTA.
(ⅲ) Local governments and NGOs were the main constituents in the early periodof Northeast economic cooperation.

But central governments have now become amechanism of regional cooperation, and are quickly becoming the main players.
Central governments, local governments, and NGOs are like the wheels on the car of
regional cooperation.

It should be recognized that the speed of cooperation is rising

rapidly and also that the paradigm is changing from a theory of regional cooperation
into a theory of regional integration.
(ⅳ) The Japan – China – South Korea summit meeting signifies that the

When thinking of the forming of an area cooperation body as the systematic frame,
one should put Japan, China and Korea in the core and Far East Russia, North Korea
and Mongolia in the category of the Northeast Asia, and it should include Hongkong
and Taiwan in my view.
8 Robert. A. Scalapino, winner of the Nobel Prize in economics and Professor at
Pennsylvania University (U.S.A.), described a potential Northeast Asia economic area
as a NET (Natural Economic Territory).
7

5

cooperation frame is extending to the level of top political leadership.

In thisenvironment, agreement on regional cooperation can be promoted politically.

Cabinetministers, as well as the government and school levels can then promote cooperation
based on political agreement.

The impact is different compared with cooperation

initiatives spearheaded by local governments, as occurred in the "two committee"
structure of the Tumen River Development Project.
In short, when any dialog channel among the central governments results infurther regional cooperation in Northeast Asia, the idea of progress in inter-local
government exchange (such as the Tumen River development project, or Japan Sea rim
exchange) gains momentum.

But it may be said that progress in cooperation among

central governments that entails the institutionalization of multilateral regional
cooperation is the present objective.

3. A Cooperation Frame for Japan, China and South Korea and Their
Leadership
Because of the complicated historic problems in relations between Japan, China, andSouth Korea, the basis for regional cooperation was very fragile until the mid-1990s
among these three countries, which occupy the core position of a potential Northeast
Asian economic cooperation paradigm.

However, one important result of the

turbulence after the Asian financial crisis was the emergence of the Japan – China –South Korea Summit Meetings and the formation of the “ASEAN Plus Three”
framework.
The Japan – China – South Korea Summit Meetings are the beginning of a new
era in Northeast Asian regionalism, and it can be argued that this development wasalso an historic inevitability.

The three countries have share many common points andcommon interests in politics, economics, and culture, and in their relations withcountries outside of the region.

The three countries will be able to play a leadershiprole in Northeast Asian regional cooperation if the union strengthens.

But, it isdesirable for each country to have a balanced role in the triangular relationship, since
there have been many problems in past political and economic relations.
1)

Politics and economic reliability

First, the domestic politics of each country is stable.

I think that the basis forNortheast Asia cooperation is formed if three countries are united and take leadershipjointly, because stability is crucial for smooth relations among the three countries.

6

2)

The mighty economic scale

Next, the three countries GDP scales (in 2002) account for about 19.1% of theworld economy and constitute the core of the Northeast Asian economy.

The threecountries account for 15.7% (or 19.2% if Hong Kong is included) of global trade and thissecures core status in Northeast Asia region as a whole (22.6%).

With China’s

accession to the WTO in November, 2001, economic mutual interdependence is rising
rapidly with trade within the region, foreign direct investment, technology transfer,human movement and so on.

Accordingly, the intra-region trade ratio increased from

14.1% 1992 to 20.0% in 2002.

Also, in the balance of trade, it is respectively in Japanvs. China, China vs. South Korea, and South Korea vs. Japan.

In other words, thebalance of trade forms a triangle in which each nation has a surplus to one nation and a
deficit towards the other.

The balance of trade issue is difficult to solve.

The mutual

complementary relationship is strong on trade, and it is desirable to construct a free
trade area in this light.
3)

Strong cultural relations

Japan, China and South Korea share similar cultures (all three use kanji), anddeep historical relationships in human and cultural exchange.

In the last century, an

unfortunate period of war, invasion and colonization coincided with the imperialistic
policy in Japan.

The Cold War era emerged after the second World War, preventing theNortheast Asian countries from building cooperative relationships.

However, thecurrent era of exchange and interdependence began after the Cold War.

Without

precedent, in 2002, the World Cup for soccer was co-hosted by Japan and South Korea.
China also entered the event for the first time, and the mood of three countries ofprivate alternating current is rising at a breath.

Since 2002, the three countries havepromoted alternating currents and are quickly taking steps to build a relationship ofmutual trust.
4)

Stable relations with neighboring countries

Lastly, the three countries maintain strong political and economic relationships
within and outside of the region.
Peninsular relations.

Within the region, there is the problem of Korean

Faced with the problems of unification and national economic

7

integration, South Korea needs to promote a current of exchange with the North.
China has friendly relations and a strong economic relationship with North Korea, andwill provide a good model for North Korean economic development by the precedence ofreform and opening economy.

Japan will have to address the history problem

eventually and it is now in a position where normalization of relations with North
Korea is especially important.

Also, as areas with transitional economies, Mongolia

and far-Eastern Russia must keep good political and economic relationships with Japan,
China and the South Korea, and learn the development experience to gain status within
the region.
On the other hand, in the relations with countries the outside of the region, Japanand South Korea are in alliances with the US, and China is in a position which the US
cannot ignore because of its rapid growth in economic power and market scale.
Economically, all three countries have strong ties to the US, the EU and ASEAN.

In

other words, each country independently has strong enough relations withextra-regional countries to ease global acceptance of regional cooperation.
The expectations for the leadership roles of Japan, China and South Korea willrise in Northeast Asia regional cooperation and for East Asia as a whole.

4. The Proposal to Build A Northeast Asia Capital Circulation System
Cooperation between the three countries is a necessity, and moreover theadvancement of Northeast Asian economic cooperation to the next step requires thejoint leadership of the three countries.

Currently, East Asian regional cooperation

through the "ASEAN+3" framework is highly regarded.

However, from a mid- tolong-term strategic viewpoint, the inclusion of nearby countries such as Mongolia andNorth Korea is essential to maintaining peace, stability, and sustainable development
throughout the region.

Therefore, Northeast Asian regional cooperation must be

accompanied by a strong movement towards East Asian strategic cooperation.
The 1997 Asian financial crisis made the necessity of economic cooperation
apparent.

In the case of Northeast Asian regional economic cooperation, the relevant

countries began to recognize that financial cooperation is of the utmost importance,
especially addressing the problem with financing development.

Currency stabilizationand the development finance problem are of equal importance, and need to be dealt withsimultaneously.
First, the establishment of a Northeast Asian multilateral cooperative institution
can be contrived when the Northeast Asia region must draw the ground design for mid-8

to long-term development and thinks of it from the perspective of regional financial
cooperation.

Also, as shown in Table 1, the Northeast Asia region possesses

considerable foreign currency assets.

Now, the foreign reserves have reached 1.58

trillion U. S. dollars – over the half of the world total – and Northeast Asia has become
one of the “rich regions" in the world.
Table 1. The foreign reserves in the Northeast Asia countries (Unit: 100milion U.S$)Countries

1990

1995

2000

2001

2002

2003

Japan

694.87

1,724.43

3,616.38

4,038.80

4,697.28

6,735.29

China

285.94735.791,655.74

2,122.00

2,864.07

4,033.00(Hongkong)

245.70553.981,075.45

1,112.00

1,119.00

1,161.00(Taiwan)724.41903.101,096.00

1,212.00

1,616.60

1,766.86

South Korea

144.59319.28961.981,082.00

1,214.10

1,553.52

Russian.a.

148.72279.72366.22440.54.

609.00.

Total

2,095.51

4,385.30

8,685.27

9,933.02

11,951.59

15,858.67

Note: The data is for the end of each year.

North Korea and Mongolia are omitted because data is not available.

Source: statistics of International Monetary Fund and Ministry of Finance of every country.

5. The Initiative of a Triangular Finance Mechanism in Northeast Asia
When thinking of utilizing such rich foreign currency assets and domestic
savings and building an intra-regional circulation system, three financial mechanisms
can be contrived.

A general cooperative institution will be necessary to supervise thecreation and operation of the three mechanisms.

China, South Korea and Japan can

attempt a mutual balance by jointly promoting this concept and placing theheadquarters of one mechanism in each of the three countries.

When thinking about

each country’s economic development status and potential problems in the future,
China would be the natural headquarters for the development bank, South Korea forrecommending investment, and Japan for the currency foundation.

This model

addresses the problem of Northeast Asia financial cooperation on a step-by-step basis.
1) The Asian Monetary Found (AMF) Initiative should be restored
When promoting Northeast Asian financial cooperation, first, it will benecessary to establish an Asian Monetary Found (AMF) to stabilize currency and9exchange in the East Asia region.
Asian currency crisis in 1997.

Japan proposed this conception when facing theIt wasn't possible to promote this idea, which the U.S.A.

and International Monetary Fund (IMF) oppose, when the three countries lacked aconsensus on the concept.

However, in recent years, the voice of the AMF foundation

has become stronger, and there is less active resistance to such proposals from the USA
and IMF.

The countries should discuss and promote the issue jointly once more to

realize AMF initiative.
The AMF initiative is not limited to Northeast Asia; it aims to include all of East
Asia and should be described as “an East Asian financial cooperative institution.”Itshould function to support the adjustment of exchange rates in the whole region, theadjustment of the foreign currency balance, and service of the financial system,
including Northeast and Southeast Asia.

It will be able to facilitate the adoption of acurrency swap agreement in East Asia based on the Chiang Mai Initiative (CMI), which
was agreed to in 1999, by developing it further and making it a multilateral agreement.
There is a problem how to win the support of countries outside the region (e.g. the U.S.A
or EU) and international organizations once consensus has been reached among
regional countries (ASEAN+3).

The country best suited to leading the AMF initiativeis Japan, because it has the strongest financial system in Asia and is the greatest
economic power in the region.
2) Establish a Northeast Asia Development bank (NEADB)The Northeast Asia region includes not only Japan and South Korea, but also
large developing countries like China, Russia, and Mongolia, which are in transition
from a planned to a market economy (as well as North Korea, which is likely to begin
transition soon).

To build sustainable development and prosperity in this

now-unbalanced region, development support to the countries in transition isindispensable.

Technically, the ADB should support these programs, but historiccomplications make it difficult for North Korea and Russia to join. Also, because there
are so many developing countries in the whole of Asia, and because the percentage of
population in poverty is more than half the global total, the ADB does not have enoughresources to meet the needs of Northeast Asia and the rest of Asia as well.
The NEADB initiative will compliment the role of the ADB in Asian development,
focusing on the needs of Northeast Asia.

It would be responsible for financing projects

such as cross-border infrastructure development, such as gas pipelines and expanded

10rail connections throughout the region.

It would also provide specialized knowledge

necessary for expanding “hard” and “soft” infrastructure in the region’s developing
countries.
As a country that is successfully switching over from a planned to a market
economy and experiencing continued economic expansion, China is the natural modelfor the regional developing countries.

These countries (North Korea, Mongolia, andthe far East of Russia) also share borders with China.

Japan and South Korea are in aposition to jointly provide funding and technological support for these countries, as they
have for China in the past.
3) The foundation of "Northeast Asia Trust Fund" (NEATF)
When thinking about international development and financial cooperation in
the Northeast Asia region, another important problem remains.
of North Korea and the issue of Korean unification.

It is the development

Even if Korean unification ispolitically difficult at present, this historic problem must be rectified in time, andsignificant steps forward have occurred through North-South summits in recent years.
However, it is necessary to recognize that the economic recovery of North Korea, and its
international revival after a long period of isolation, present a pressing issue for every
country in the region.

If Northeast Asia aims to build a regional community, it will not

be possible without economic reform and recovery in North Korea.
Therefore, the important problem which is thought of as an aspect of financial
cooperation is to found a "Northeast Asian Trust Fund" with the NEADB.

The NEATF

is necessary to assist with the economic revival of North Korea and the eventual
reunification of North and South Korea.

South Korea is best suited to host the TrustFund because of its advanced market economy and for obvious reasons.

South Korea

must take the initiative in building the Trust Fund to further its goal of reunification.
The active support of Japan and China is also essential.
Lastly, the three-part financial mechanism discussed above will be easy for Japan,
China and South Korea to accept because of their strengthening relationships and thespecialized role of each country.

Of the three mechanisms, the NEADB has the highest

priority at present, as development will be necessary before progress can be made inother areas of economic integration.

If the NEADB initiative is realized, the other two

initiatives will quickly gain support.

6. Conclusion

11

The Northeast Asia Regional Cooperation paradigm is changing, with relations
between Japan, China and South Korea improving rapidly after the Asian financial
crisis of 1997.

It may still be too early to say that cooperation between the three

countries amounts to Northeast Asian regional cooperation, but a framework forregional cooperation will certainly emerge in the near future.

Japan, China and theSouth Korea will form the core of regional cooperation, and must take the leadershipinitiative jointly.
It’s possible to say that, among the Northeast Asian countries, only Japan showeda negative reaction to the idea of cooperation, but in recent years, Japan has greater
incentive to support the creation of a multilateral financial institution for regional
development and to reconsider the importance of regional cooperation.

Japan must

recognize that the cost of establishing a Northeast Asian Development Bank is small
compared with the strategic benefits and the strengthening of peaceful relations in theregion.

12