Asia’s EconomicRegionalism

Trends, Prospects, & Global Crisis Implications
Giovanni Capannelli
Office of Regional Economic Integration
Asian Development Bank
Lecture at the GIARI Summer Institute
Waseda University, Tokyo
7 August 2009
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 1

2008 ADB Study: Main Messages• Asian integration is rapid, broad, with global links• Cooperation is accelerating, but needs more focus• Distinctive Asian regionalism: open, multi-speed,multi-track, pragmatic, bottom-up• Need to develop deeper institutional capabilities¾ Asian Financial Stability Dialogue¾ Asian Secretariat for Economic Cooperation• Asian regionalism is good for Asia, good for the world
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Integrating Asian Economies
Integrating Asia (16 economies):-87% of total Asia’s population-96% of total Asia’s output

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Drivers of Asian Regionalism Today• Increasing economic interdependence (Asia’sdominance of global manufacturing depends on regional
production networks)• Reaction to progress of regionalism elsewhere in
the world (Europe, North America, Latin America)• Converging Asia’s global economic interests andreaction to external shocks (1997/98 Asian financialcrisis; ongoing global economic crisis)
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Asia’s Economic Interdependence:
How Asia Makes a Disk-drive•

Assembly
production of raw
materials, parts,components•

Production andtrade
fragmentation:
location is decided
by the cost andavailability ofinputs, economic
infrastructure, localenvironment•Technology policyand upgrading is
also important

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Integration Implies Cooperation• Manage regional interdependence– Reduce regional trade and non-trade barriers– Ensure financial stability and promote financial integration– Cooperate on macroeconomic and exchange rate policies– Develop energy and infrastructure corridors within subregions– Provide public goods in health, security, environment• Reinforce national policy– Strengthen domestic reforms– Support regional integration against special domestic interests• Represent global interests– Champion open, stable global markets– Ensure support for development– Assume burden of global institutions
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 6Issues on Regionalism• Regionalism and discrimination• Free riding and reciprocity• Membership fee and rules of entry• GATT/WTO Article XXIV
• Intermediary step towards global integration• Open Regionalism to reduce discrimination
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Logic of Regional Collective Action• Providing new regional public goods• Managing spillovers among economies• Exercising influence in global economic forums• Liberalizing trade and investment• Adding value to national policy making
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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The Benefits of Regionalismin Asia Outweigh its Costs
Responses of Perception Survey to 600 Asian Opinion Leaders% of respondents answering ‘high’ or ‘very high’

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 9Analytical Structure ofAsian Regionalism• Asian Financial Crisis of 1997/98 as the trigger for theemergence of regional cooperation initiatives• Four priority areas:i. Trade and investment
ii. Financial systems
iii. Macroeconomic links
iv. Social & environmental issues• Building regional architecture of cooperation
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Trends: All Indicators of Asian
Economic Integration are Rising

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Growing Trade Integration:
Intraregional Trade Shares

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Open Regionalism
No Fortress Asia

Trade / GDP

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 13

Trade Policy in a Fractious
Global Environment
Free Trade Agreements in Integrating Asia

as of June

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 14

Policy Priorities for
Integrating Production & Trade• Supporting global trading system• Maintaining open investment regimes• Pursuing regional cooperation as widely aspossible• Developing guidelines for best practices in FTAs
• Enhancing regional connectivity• Improving technological competitivenessAsia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 15

Financial integration is less advanced,
but under way: Price indicators
Std Dev of cross-market overnight interbank rates

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 16Financial Integration is Under Way:
Quantity Indicators
Integrating Asia’s portfolio investment in IA and the US% share on total assets invested abroad
45%

30%

34%

28%

15%

USIA

6%

10%

0%

2001

2006

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 17

Financial Cooperation Forums

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Policy Priorities for
Integrating Financial Markets• Improving financial market surveillance¾ Asian Financial Stability Dialogue• Promoting harmonization and mutual recognition• Strengthening financial markets & infrastructure¾ Develop local currency bond markets• Liberalizing capital accounts and cross-borderfinancial services prudently
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Deepening MacroeconomicInterdependence
Output Correlation of Integrating Asia with itself and EU+US
Correlation of de-trended quarterly growth rates of GDP

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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CMI Swap Arrangements

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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CMI Multilateralization

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Asian Agenda for
Macroeconomic Cooperation• Making macroeconomic dialogue andsurveillance more effective¾ Asian Secretariat for Economic Cooperation• Strengthening Asia’s short-term financing facility¾ Chiang Mai Initiative (and its multilateralization)• Enhancing regional demand and maintaining
robust growth• Cooperating in exchange rate management
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Fighting poverty and exclusion

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Building Physical Connectivity
Corridors in Great Mekong Subregion
Building physicalinfrastructure
Key for regional
connectivity
Role of regional
development banks fordevelopment financing
Creating development
opportunities throughtrade and services
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Policy Agenda for
Inclusive, Sustainable Growth• Connecting the poor to the thriving regionaleconomy• Developing cost-effective social protection
systems• Facilitating and managing labour migration• Fighting epidemics and natural disasters• Limiting environmental degradation
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Building Regional Architecturewith Asian Characteristics• Outward-oriented, flexible, bottom-up, pragmatic,
multi-speed, multi-track (variable geometry)• Some streamlining and deepening is necessary• ASEAN, ASEAN+3, and EAS as the strategic regional
forums• Develop deeper institutional capabilities- Asian Financial Stability Dialogue- Asian Secretariat for Economic Cooperation• Regionalism as an engine for further global integration
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Emerging architectureof cooperation

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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ADB Study Conclusion:
Partnership for Shared Prosperity
Asian economies in the long-run are likely to have- a single market- deep, liquid and integrated financial markets- effective macroeconomic policy coordination- workers moving much more freely than today- collective efforts to address social issues- stronger voice in global policy forums- more regional institutions
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Asian Economic Cooperationand the Global Crisis• A global crisis requires a global solution:
regional cooperation initiatives can help

¾ Regional response is important to make global actioneffective and relevant: Asia should use national,regional, and global initiatives• A priority for Asia’s economic cooperationis the enhancement of Asia’s institutions
for regionalism
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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The World Economy Worst
Recession Since WWIIWorld GDP and World Trade Volume (y-o-y change, %)1512.3

11.0

1015

12.3

Trade12

Trade

95

4.0

6

4.0

30

1.5
-1.00-6

1981

1985

1989

5.1

6.2

5.2 6.2

GDP Growth-1.0

GDP Growth

1.5 -311.0

1993

1997-3.5

2001

2005 2009f3

-1.4

-1.0
-5

-10-12.4-15
1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009f

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Asia’s Economic Challenges:
First Round Effect¾ First round direct effect on the financial sector
was relatively small, but:
• Credit crunch: strong implications especially on those economies
still largely dependent on bank and trade financing• High market volatility: investors’ flight to safety and quality(withdrawals from Asia)• Steep decline in shares prices• Low business and consumer confidence• Depreciation of Asia’s exchange rates
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Asian Financial Systems
Remain Relatively Sound
Writedowns and Capital Raised by Major Banks since 2007Q3(USD billion, as of 7 July 2009)1512.3

12Trade

11.0

96
30

5.2 6.2

4.0
1.5

GDP Growth-1.0-1.0-3-6

1981

-3.5

1985

1989

1993

1997

2001

2005 2009f3

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Asia’s Economic Challenges:
Second Round Knock-on Effect• Disruption of export-based Asia’s growth: risk of
intraregional trade implosion• Declining overseas foreign workers’ remittances• Increasing unemployment rate
• Slimmer tax revenues• Asian economies may revert to protectionism
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Asia is Hit Hard by the Crisis…
Regional GDP Growth1—Emerging East Asia and PRC (y-o-y, %)1

Weighted by gross national income (atlas method, current USD).

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

..through Sharp Drop in Exports..
Export Growth1—Emerging East Asia and PRC ($, y-o-y, %)4035.0People's Rep. of China

29.1

ASEAN-530

19.0

2020.7
NIEs

109.2

10.1

0-10-22.2-20-23.7
-30

-25.8

13-month moving average of merchandise exports.
Data for ASEAN-5 is until Apr 2009.

-40
Jan06

Apr06

Jul06

Oct06

Jan07

Apr07

Jul07

Oct07

Jan08

Apr08

Jul08

Oct08

Jan09

Apr- May09
09

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

…and a Collapse in Investment
Gross Domestic Investment Growth—Emerging East Asia(y-o-y, %)2014.3105.1

4.50-1.1

ASEAN-4-2.0-10
NIEs-20-25.6-26.4-30
2006Q1

2006Q4

2007Q3

2008Q2Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

2009Q1

Advancing intraregional tradeintegration and openness
Evolution of ASEAN+3 exports by destination
Shares (%) on total exports of ASEAN+3
1987

Asia, 33.8 2007

Asia, 50.4

PRC+HKG, 10.6

PRC+HKG, 22.0
JPN, 8.3
ROW, 19.6

ROW, 19.2
AS EAN, 7.8

JPN, 6.4
EU, 14.3

EU, 14.9
Other Asia, 7.0
US , 31.7US , 16.2
AS EAN, 13.1

Other Asia, 8.9

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Final Demand of Asian Exports:
Still Dependent from the World
Final demand composition of Asia's exports in 2006

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Asia’s economic priorities¾ Promote regional aggregate demand(re-balancing growth)¾ Take effective action to ensure that the global trading
systems remains open
¾ Become more active members of the international
economic and financial community by increasing decision
making power in global institutions (i.e. IMF, FSB)
¾ Promote actively the reform of International FinancialInstitutions¾ Address the deficit of regional institutions for cooperationand strengthen their capabilities
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Asia’s Growth Outlook Remains Dim
Annual GDP Growth Rates (y-o-y, %)Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Global Crisis Requiresa Global Solution• The ongoing economic global crisis requires a global
solution and global action• The G20 is indeed the right forum to conduct global
discussions but some issues need to be addressed(legitimacy, agenda, coordination)• Opportunity for developing countries, including Asiancountries, to be part of the “steering committee of theglobal economy”
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Role of Institutions for Regionalism
Regional cooperation institutions are important to:• Alleviate the immediate impact of crises• Conduct effective policy dialogue and coordination for maintaining
economic and financial stability• Promote long-term economic growth (infrastructure, inequality)• Provide capacity-building programs• Bridge private and public sector initiatives• Maintain open systems and avoid protectionism
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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_______
Regional _______
Economic ___________
Institutions
SurveyResponses

All respondents
East Asia
Southeast Asia
South Asia

Facilitate economic policy
dialogue and macroeconomic
surveillance (75%)

TOP 2 BOX %Create an Asian common
currency (37%)

100%

75%

50%

25%Establish a regional commonmarket (74%)

0%Provide liquidity and financial
support to Asian countries(68%)

Develop common health,environmental, and security
policies (72%)

Base: All Respondents (n=600)
East Asia (n=244), Southeast Asia (n=198), South Asia (n=158)
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

Slide 44Enhancing Asia’s
institutions for cooperation
Streamline existing mechanisms• Harmonize and/or consolidate existing bilateral/plurilateral FTAs
under a region-wide agreement (ASEAN+α)• Eliminate overlapping or redundant initiativesStrengthen existing institutions• ASEAN Secretariat and other similar institutions• ASEAN+3 (Policy dialogue, CMIM, ABMI) and EAS• ADB infrastructure and other regional cooperation programs• Sub-regional programs (transport, energy, trade facilitation)• Others
Create new initiatives (as need arises)
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Asian Financial Stability DialogueAim• Enhance financial sector regulation, supervision, and surveillance• Engage in dialogue with private sector to address vulnerabilities andensure financial stability

Memberships• Finance ministries, central banks, and supervisory and regulatory
agencies

Functions• Assist in the harmonization of financial regulations and adoption ofminimum standards for early mutual recognition• Increase market efficiency through prudent liberalization of capital
accounts and cross-border financial service flows where these arestill controlled¾ Already started by ‘Plus-Three’ countries (Nov ‘08)
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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Asian Secretariat for
Economic Cooperation

Aim• Strengthen mechanisms for monitoring and potentially coordinating
macroeconomic and exchange rate policies• Create a proper Secretariat with qualified and permanent staff

Functions• Support harmonization of region-wide trade agreements• Macroeconomic monitoring and policy dialogue with agreements on
tools, indicators, and standards• Manage CMIM, oversee pooled foreign exchange resources and, in acrisis, negotiate economic policies with governments seeking support• Manage the creation of new mechanisms for dialogue andcoordination in the areas of exchange rates and fiscal policies• Establish a fund to compensate economic subjects who lose fromregional cooperation and integration initiatives

Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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New Regional Institutions
for Trade and Infrastructure
East Asia-wide FTA• Expand the scope of bilateral FTAs and consolidate
existing FTAs into a region-wide agreement• Need to develop guidelines for ‘best practices’
Asian Infrastructure Forum• Create an Asian Infrastructure Forum to help
coordinate and integrate existing subregional initiatives• Establish an Asian Infrastructure Fund to financeprojects identified and prioritized by the Forum
Asia’s Economic Regionalism: Trends, Prospects and Global Crisis Implications

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