The Emergence of Economic
Regionalism in Asia
Trends and Prospects
Giovanni Capannelli
Asian Development Bank
28 August 2008
Lecture at the GIARI Summer Institute
Waseda University, Tokyo
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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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
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Priorities and approaches• 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
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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All Indicators of Integration are Rising

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Drivers of Asian regionalism today• Asia’s global economic interests are converging (asdemonstrated by the 1997/98 financial crisis)• Reaction to the progress of regionalism in otherparts of the world (Europe, North America, Latin
America)• Exceptional growth makes Asian markets
increasingly important to each other– Asia’s dominance of global manufacturing depends onregional production networks
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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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 policy
and upgrading isalso important

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Integration implies cooperation• Manage interdependence– Reduce regional trade barriers– Ensure financial stability and promote financial integration– Cooperate on macroeconomic and exchange rate policies– Provide public goods in health, security, environment• Reinforce national policy– Support integration against special interests• Represent shared global interests– Champion open, stable global markets– Ensure support for development– Assume burden of global institutions
The Emergence of Economic Regionalism in Asia: Trends and Prospects

Slide 8Issues on Regionalism• Regionalism and discrimination• Intermediary step towards global integration• Free riding and reciprocity• Membership fee and rules of entry• GATT/WTO Article XXIV
• Open Regionalism
The Emergence of Economic Regionalism in Asia: Trends and Prospects

Slide 9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
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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The Benefits of Regionalism
Outweigh its Costs
Responses of Perception Survey to 600 Asian Opinion Leaders% of respondents answering ‘high’ or ‘very high’The Emergence of Economic Regionalism in Asia: Trends and Prospects

Slide 11Assessment of economic relations% sharePercent of respondents answering“strong (weak)” or "very strong (weak)"

0%

10%

20%

30%

40%

50%

60%

Trade and Investment (including the(creation of regional production networks

Money and Finance (bond markets, equities(.markets, banking, etc

strongweak,Cross-border Infrastructure (transport(.energy, communication, etc

Health, Environment, Security, and provisionof similar regional public goods

Base: All Respondents (n=600)
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Growing Trade Integration

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Open Regionalism
No Fortress Asia

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Trade Policy in a Fractious
Global Environment

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Priorities for
Integrating Production & Trade• Supporting global trading system• Maintaining open investment regimes• Pursuing regional cooperation as widely as
possible• Developing guidelines for best practices in FTAs
• Enhancing regional connectivity• Improving technological competitiveness
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Integrating Financial Markets

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Financial integration is less advanced,
but under way: Price indicators

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Stock Price Correlation

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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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%20012006

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Asia’s National, Regional, andGlobal Financial Centers
Asia’s Financial Centers
3 Global
5 Regional
18 National
Growing regional and global
integration
Increasing competition
Developing infrastructure
Domestic financial reforms
Harmonizing regulations
Regional cooperation
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Financial Cooperation Forums

The Emergence of Economic Regionalism in Asia: Trends and Prospects

Slide 22Effects of Financial Cooperation

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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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
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Transmission of Shocks

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Trend of Asian Exchange Rates

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Trend of Asian Exchange Rates ./.

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Needing Adjustment Ahead

The Emergence of Economic Regionalism in Asia: Trends and Prospects

CMI Swap Arrangements

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Managing Foreign Reserves:
New Challenges Ahead

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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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• Enhancing regional demand and maintaining
robust growth• Cooperating in exchange rate management
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Many are still left behind
Several major groups
have been left
behindLabor market andinvestment policies
can help alleviate
poverty andexclusion
Increased migration canproduce large social
benefits
Managing threats tohealth and safety isa priority
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Fighting poverty and exclusion

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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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
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Agenda forInclusive, Sustainable Growth• Connecting the poor to the thriving regional
economy• Developing cost-effective social protection
systems• Facilitating and managing labour migration• Fighting epidemics and natural disasters• Limiting environmental degradation

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Building regional architecturewith Asian characteristics• Outward-oriented, flexible, multi-speed, multi-track,
pragmatic, bottom-up• Some streamlining and deepening necessary• ASEAN, ASEAN+3, and EAS as the strategic regionalforums• Develop deeper institutional capabilities- Asian Financial Stability Dialogue- Asian Secretariat for Economic Cooperation• Regionalism as an engine for further global integration
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Strategic Regional Forums
ASEAN
Economiccooperation; Trade& investment
Regional Security
Socio-cultural
exchange
ASEAN+3
Finance
Macroeconomics
EAS
EconomicCommunity;
Energy &Environment;
Trade & Finance
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Emerging architectureof cooperation

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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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 common
market (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)
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Needed Institutional Development• Asian Financial Stability Dialogue
Forum for all major players in financial market policy(central banks, regulators, supervisors) on issues offinancial stability and integration of Asian financialmarkets.
• Asian Secretariat for Economic Cooperation
Permanent staff to help governments formulate andimplement cooperation policies, including:¾ Economic Review and Policy Dialogue¾ Asian Financial Stability Dialogue¾ Chiang Mai Initiative• Further analysis of institutional options
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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Asian Opinion Leaders Support anAsian Economic Community

Perception Survey’s Results
The Emergence of Economic Regionalism in Asia: Trends and Prospects

Slide 42Creation of Asian Common Currency
Should Asia create acommon currency?
6%

Which is the best positioned
group of countries?
38%

ASEAN+338%

Subset ofASEAN

25%
17%

ASEAN
East Asia
Summit57%

Asia
OverallYes, some time in the future

10%6%

No, Asia's economic gap still too wide

None of theabove

I don't know
Base: All Respondents (n=600)

Base: Respondents who believed a common
currency for Asian will be created (n=226)

4%

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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______________
Regional _______
Economic Identity
Q: Thinking about your economic interests andregional identity, rate your sense of belonging to:
All respondents
East Asia
Southeast Asia
South AsiaYour own country (87%)
100%

TOP 2 BOX %

75%

50%

The entire World (37%)

25%

The province/location
where you were born andraised (59%)

0%

The whole of Asia (46%)

Your sub-region: East,Southeast, or South Asia
(49%)

Base: All Respondents (n=600)
East Asia (n=244), Southeast Asia (n=198), South Asia (n=158)

The Emergence of Economic Regionalism in Asia: Trends and Prospects

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A Partnership forshared 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
The Emergence of Economic Regionalism in Asia: Trends and Prospects

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