MEMORANDUM NO. 3

POLICY RECOMMENDATIONSONSTRENGTHENING THE PILLARSOF EAST ASIAN COMMUNITY BUILDINGBY THENETWORK OF EAST ASIAN THINK TANKS (NEAT)
21 - 23 AUGUST 2006
LE MERIDIEN HOTELKUALA LUMPUR

NEAT MEMORANDUM OF POLICY RECOMMENDATIONS NO. 3

Part I
Introduction
1. The Network of East Asian Think-Tanks (NEAT) Fifth Country Coordinators
Meeting and its Fourth Annual Conference were held from 21-23 August 2006 at Le
Meridien Hotel, Kuala Lumpur, Malaysia. To highlight the approaching tenthanniversary of inter-governmental cooperation in East Asia and to set the stage forfurther development, the theme of the Conference was “East Asia Cooperation: The
Next Ten Years”. A total of 66 participants from the 13 NEAT countries attended.
2. The attention of participants focused on two areas. The first area of focus was
the submissions made by NEAT countries for the Second Joint Statement on East Asia
Cooperation to be adopted by the ASEAN Plus Three (APT) governments in 2007.
This follows from the decision taken at the Sixth APT Foreign Ministers Meeting held in
Vientiane, Laos, on 27 July 2005 to ‘take into consideration recommendations madeby APT mechanisms, such as the Network of East Asia Think-Tanks (NEAT), East Asia
Forum (EAF) and others’. Part II contains the summary of NEAT inputs to the Second
Joint Statement.
3. The second area of focus was the reports of NEAT Working Groups in theareas of:•
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Intra-regional exchange rate stability & prevention of financial crisis in East
Asia;
East Asian financial cooperation;
Trade-foreign direct investment-technology linkages in East Asia;
East Asian investment cooperation;
Energy security cooperation in East Asia; andOverall architecture of community building in East Asia (Regional architectures
for non-traditional security and environmental cooperation in East Asia).

Part III of this document summarises the Working Group policy recommendations. The
full background and rationale of the recommendations can be found in the various
reports.
4. This Memorandum of Policy Recommendations was formulated, discussed andapproved at the Fifth NEAT Country Coordinators Meeting (CCM) and presented to
the Fourth Annual Conference. The CCM wishes to place on record its deepest
appreciation to all the researchers and institutions that have led, participated orotherwise contributed to NEAT activities.
Part II
Inputs to the Second Joint Statement on East Asia Cooperation
5. APT governments should consider a Declaration or Agreement on East Asia
rather than simply a Statement. This would convey strong political will, mutual trustand firm commitment to work cohesively towards the long-term objective of community
building.

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6. Vision, goals & objectives. The Declaration or Agreement should focus oncommunity building for the next ten years.
7. The goal of community building in East Asia should be to promote the welfare
and well-being of the people, and realise the East Asian vision of ‘Peace, Prosperity
and Progress.’ An East Asian community should promote peace by building trust andconfidence as well as ensuring the mutual security. The community should promote
prosperity by increasing interdependence of trade, investment and technologies andmaking strong efforts to narrow the development gap in the region. An East Asian
community should also promote progress by improving governance, enhancing
protection of basic human rights and advancing the quality of life of people.
8. The long-term vision of East Asian cooperation could be an East Asian
community that is based on three pillars, viz. (1) an East Asian Economic Community,(2) an East Asian Security Community, and (3) an East Asian Socio-Cultural
Community.
9. Principles and values. Community building should be based on universal
values including good governance, the rule of law, democracy, human rights,
international law and norms. East Asian countries should promote these values as acommon goal.
10. The countries of East Asia should cooperate comprehensively on the basis ofsound and universally accepted principles including:•
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Equality;
Consensus;
Mutual benefit;
Transparency;
Openness;
Inclusiveness; andMutual trust.

11. Modalities. The process of East Asian community building should continue tobe evolutionary and progressive. Cooperation should remain functional and gradually
be bolder and more ambitious. Plans of action, working roadmaps, concrete
timeframes and proper funding strategies should all be devised in order to implement
areas of cooperation.
12. Asean must be the driving force in promoting and managing regional
community building. It is therefore essential to maintain the APT Summits and all other
APT mechanisms.
13. The Declaration or Agreement on community building should recall and reaffirm
the decisions of the APT and EAS Declarations made in Kuala Lumpur in 2005.
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APT process will be the main vehicle for the realisation of the East Asian
community in the future;
EAS is an open and inclusive forum, with Asean as the driving force, for broad
strategic, political, economic issues of common interest and could play asignificant role in community building in this region;
APT and EAS processes should move on parallel tracks without overlappingand complement one another as well as other regional processes.
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14. There should be ongoing discussion of modalities that give a greater sense ofownership to China, Japan and Korea. The EAS should also evolve in a balanced andcomplementary way to the APT process. All countries should be comfortable with the
EAS process.
15. In order to build the East Asian community, it will be necessary to involve
political organisations, government officials, academics, the private sector, the media
and civil society.
16. The East Asian community should also cooperate with countries, regional andinternational organisations that share its vision and are prepared to make positive
contributions to the process of community building in the region.
17. Closer Northeast Asian cooperation among China, Japan and Korea is an
essential foundation of an East Asian Community. The three countries should tighten
Northeast Asian cooperation by further utilising the trilateral summit on the occasion of
the APT, and consider additional meetings to be regularised.
18. Productive institution building is essential for further promotion of community
building in East Asia. For this purpose, the APT Unit in the Asean Secretariat should
be strengthened.
19. Governments should seriously consider the early establishment of an East Asia
Community Development Fund which can be used to support mutually agreed
programmes, projects and activities, including the NEAT and the East Asia Forum.
20. Areas of cooperation. The APT should aim to consolidate and strengthen thefoundations for East Asia community in the next decade. Common interests of East
Asian nations should be identified, developed and maximised wherever and wheneverpossible.
21. In view of the disparities in economic development and the diversity of cultures,
political systems and security perceptions, regional cooperation should, for the present,be centred on promoting cooperation in the areas of economics, environment, health,energy and transnational issues.
22. Countries should explore the possibility of establishing an East Asia Economic
Community where there is free flow of goods, services, investment and capital. To alarge extent, this will depend on the faithful and speedy implementation of EASG and
NEAT Working Group initiatives.
23. East Asia should also explore the possibility of eventually establishing an East
Asia Security Community taking into account the evolution of the Asean Security
Community. This Community would explore new modalities for confidence-building,preventive diplomacy, and conflict resolution. There should also be efforts tostrengthen regional mechanisms for cooperation on non-traditional security issues andcooperation on human security.
24. In the next decade, the APT should focus on establishing the East Asia SocioCultural Community binding East Asia together as a community with a common
identity. East Asia must have a strong social agenda in the next 10 years to ensure
continuing stability and to counter criticisms that it is only interested in economics.
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Efforts should be made to pursue an active and ambitious agenda that is peopleoriented, which complements the economic and political dimensions, and contributes
towards more holistic human development.
25. Diversity, a characteristic feature of the region, should be respected and seen
as an asset. Cross-cultural dialogue should be encouraged and enhanced.
26. The nations of East Asia also share many common values, which will help
develop a community identity. While diversity is respected, common values should beenhanced. The norms developed over years by Asean, including cooperation,
consultation, consensus and comfort level, should be the basis upon which closer ties
may be strengthened for building a harmonious East Asian community.
27. In the process of forming the East Asia Socio-Cultural Community, the APT
should further strengthen networks of researchers and scholars by promoting Track II
activities to support official processes in East Asia, and connect the existing network in
the region through regional activities and research.
Part III
Intra-Regional Exchange Rate Stability & Prevention of Financial Crisis in East
Asia
28. With regard to the future direction of financial cooperation, NEAT has reached abroad consensus that one of the most important long-term objectives is to establish astable exchange rate mechanism in East Asia. This is essential because economic
interdependence through trade and investment has risen and is expected to increase
further with the creation of free trade areas among APT countries. A stable exchange
rate mechanism is indispensable to maintaining sound and sustainable economic
growth while avoiding financial instability that may lead to financial crisis in anenvironment of high capital mobility.
29. Regional currency basket. There should be a major study of the various
options for regional currency units with a view to establishing a common currency
basket and avoiding the problems that arise from a dollar peg. (See, also Para 37.) A
joint study between the public and private sectors would provide an opportunity to
explore suitable exchange rate mechanisms, while deepening public understanding of
this complex subject. The study should include lessons and experiences of theEuropean Union.
As each
30. Capital account liberalisation & currency convertibility.
component currency in the regional basket should meet certain criteria so as to ensure
confidence in the basket, East Asian governments should, in addition to maintaining
sound macroeconomic management, carefully study the pros and cons of graduallyliberalising their capital accounts and establishing currency convertibility.
31. It is important to carefully evaluate the impact that capital account liberalisationand currency convertibility can have on domestic monetary and financial markets. It isalso critical to consider the proper sequence of liberalisation. This will usually begin
with the current account and proceed to the capital account, from domestictransactions to cross-border ones, and from foreign direct investment to short-term
portfolio capital flows.
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32. Surveillance. NEAT believes that regional surveillance mechanisms should besignificantly enhanced. The Economic Review and Policy Dialogue (ERPD) of the
Chiang Mai Initiative (CMI) should be strengthened as it is imperative that regional
governments exchange information on capital flows in order to deepen coordination ofmacroeconomic and exchange rate policies.
33. Permanent secretariat. In order to expedite and streamline the regional
surveillance mechanism, it is essential to establish a permanent secretariat in APT
countries. This secretariat should draw up a roadmap that can be used to set targets,
review progress and initiate consultations among member countries.
34. Roadmap to a regional regime. A roadmap towards a regional exchange rate
regime should be drawn up so that members can review the progress achieved. The
proposed permanent secretariat should be tasked with drawing up the roadmap which
can be used for consultations among members from time to time.
35. Central bank governors. Since the central banks in the region play animportant role in maintaining stable exchange rate regimes, their participation in the
APT Finance Ministers Meeting as regular members is strongly recommended.
36. Global imbalances. East Asian countries should actively seek to play a role inmultilateral dialogue that will be called to find a way to solve global imbalances andmitigate the adverse impact that any possible adjustment may have on the regional
exchange rate regime as a whole.
East Asian Financial Cooperation
37. Monetary system. East Asian countries should study how to compute and use
an East Asian currency unit. The initial focus should be on the currencies to be
included and their shares in the regional basket. The relationships between
component currencies and the basket must also be examined. This could be followedby research into ways to use the currency basket to stabilise East Asian currencies,
and the possibility of having an Asian dollar market. Finally, there should be an indepth study of policy dialogue and surveillance mechanisms.
38. A careful study should be made on how to promote the multilateralisation of the
CMI mechanism and also the feasibility and roadmap for the CMI to be upgraded fully
into a regional monetary fund.
39. The interactions between regional economic processes and economic
globalisation, including major international financial institutions and other actors
outside the region, should be explored and the positive and negative impacts suchinteractions may have on regional financial cooperation studied.
40. Bond market. In order to develop the East Asian bond market, the use of credit
guarantees and investment mechanisms should be established and promoted. APT
finance ministers should look into effective use of existing institutions such as the ADB,
the various business models and organisational options. For example, a new East
Asian Bank concentrating on credit guarantees and investment may be the subject ofstudy and discussion.

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41. Governments should create a business environment where the private sector
can initiate the sale of financial products similar to the Asian Bond Fund (ABF) andAsian Bond Fund 2 (ABF2). Products that make sense in terms of improving theinfrastructure of financial markets should be explored. At the current stage, investors’
understanding of, and investment in, the ABFs should be further enhanced andfacilitated.
42. Countries, particularly less developed ones, should actively seek technicalassistance from various sources and build up their capabilities in bond market
infrastructure, transaction platforms, settlement systems, taxation and fiscal incentives,
credit rating institutions, bond market intermediaries, laws, regulations, andsupervisory mechanisms.
43. Countries should step up regional cooperation on settlement and transaction
systems and supervision standards. They should work out consistent market
standards and enhance their cooperation on taxation and foreign exchange
regulations in order to facilitate investment in one another’s bond markets.
44. Bonds denominated in an East Asian currency unit should be issued as soon as
possible.
45. East Asian Finance Association. To promote regional financial cooperationand integration, an East Asian Finance Association (EAFA) should be established andmade up of representatives from central banks, financial supervisors (such as
securities and exchange commissions), and private financial institutions.
46. The EAFA, together with subsidiary bodies in banking, securities, insurance,
etc., should promote cooperation among financial supervision institutions, banks andother financial institutions, and build a regional settlement system.
Trade-FDI-Technology Linkages in East Asia
47. Production networks in East Asia enable firms to separate out processes andreallocate them across the region based on relative endowments of capital, skill,labour and physical and institutional infrastructure. The resulting efficiency gains havebeen enormous and NEAT recommends that East Asian governments undertake two
types of policies, viz., those designed to lower service-link costs, facilitate technology
transfer and promote trade and investment, and those that seek to increase real
returns on assets.
48. Production networks, FDI flows & technology transfer. Governments
should seek to lower service-link costs to facilitate the functioning of the value chain
between geographically separated production blocks. Policymakers should focus on
strengthening infrastructure such as:••••Highways, ports, and airports;
ICT infrastructure;
Container yards; andMarket-supporting institutional infrastructure such as enforcement of laws,
information on vendors, enforcement of private contracts, corporate
governance, and legal remedies when firms violate intellectual property rights
agreements.
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49. Developing countries should move up the value chain and not remain engaged
in labour intensive activities. Technology transfer is an essential element of thisprocess and transfer of managerial technology from foreign companies to indigenous
workers is expedited when workers are highly educated. A strong local knowledge
base is also essential if firms are to become involved in engineering and design. To
build this knowledge base, high quality education in science and mathematics atsecondary school level and scientific training at university level is needed.
50. R&D policy should take into account each country’s level of technologicalinnovation. Domestic R&D supported by public research institutes can help indicate
what technologies are most appropriate to import while public-private cooperation canhelp countries advance from imitation to assimilation and, finally, innovation andleveraging new technological capabilities.
51. In order to facilitate the long tenure of foreign investments, it is necessary tosustain FDI-friendly environments including consistent and coherent enforcement oflaws and regulations at all governmental levels as well as stable macroeconomic
fundamentals.
52. Free trade agreements. East Asian governments should facilitate labour
mobility and the movement of firms from losing to gaining sectors by providing
retraining and upgrading for workers displaced through trade liberalisation and by
reducing entry barriers to new firms and facilitating exit through structural reform.
Sector-specific protectionist policies should be abandoned and competition policy
strengthened.
53. To enhance the benefits and quality of free trade agreements (FTA), it is crucial
to reduce the scope of sensitive items and to enlarge the area covered by FTAs.
54. Bilateral investment treaties. High quality bilateral investment treaties (BITs)
should be used to attract and retain foreign investors in host countries. They should
ideally provide for:••••Investment protection (compensation for expropriation and fair and equitable
treatment to avoid wrongful termination of government contracts);
Investment facilitation (transparency of relevant laws);
Investment liberalisation (freer market access and national treatment); andDispute settlement.

55. Appropriate policy mix. The combination of fixed exchange rate regimes (orheavily managed floating regimes), coupled with current account surpluses in several
East Asian developing countries, has resulted in large accumulation of foreignexchange reserves. This suggests that more flexible exchange rates are desirable.
Greater exchange rate flexibility in the context of a multiple currency basket reference
rate with a band would be preferable.
56. In addition, although the management of foreign exchange reserves is thesovereign matter of each government, those countries should study further the ways
to invest more efficiently their reserves which include those prepared for a capital
account crisis while paying maximum attention to risks and liquidity.
57. East Asian countries should offset any recessionary impact of currency
appreciation by adopting demand stimulating policies. These include employing fiscal
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and structural policies to build both physical and human infrastructure (particularly inrural areas), using deregulation to promote competition and productivity growth in the
non-tradable sector, and strengthening social safety nets so that consumers would
have lesser need for precautionary savings.
East Asian Investment Cooperation
58. Institutional framework. Joint research by governments, business
communities and academic circles on investment cooperation in East Asia should be
carried out under the framework of East Asian Free Trade Area, with NEAT as thecoordinator.
59. A single and integrated East Asian investment promotion centre should also be
set up, together with an integrated service network for East Asian investment
cooperation within the APT framework. The function is to coordinate the work of many
existing similar institutions.
60. There is also need to establish a dispute management centre to deal withfrictions and disputes during the investment cooperation process.
61. Financing channels. Enhanced capacity-building of the Asian bond market,
including infrastructure, transaction platforms and clearing systems should beundertaken.
62. In addition, a uniform clearing system, regulatory framework, and market
standards are required to promote the integration of bond markets within East Asia,
while cooperation in taxation needs to be strengthened.
63. An East Asian investment cooperation fund should also be set up. Money could
come from governments of East Asian countries and the fund should be operated by asingle body to provide financing guarantees for small and medium enterprises andagricultural investment.
64. Finally, there could be an East Asian investment bank which functions as abank to provide preferential long-term credits for priority areas.
65. Priority areas. Efforts should be placed in four priority areas, viz. the promotionof investment cooperation:•

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Investment in energy security and environment protection. It is
recommended that an investment cooperation mechanism be establishedunder the APT framework that includes a 24-hour disaster monitoring system,
an East Asia Fund for disaster prevention and relief, and control projects
against desertification in East Asia.
Investment in infrastructure development. Priority should be given tocooperation in building pan-Asia railway, road and waterway, with a view tobuilding a pan-Asia transportation network.
Investment in development of small and medium enterprises. It isadvisable to set up investment promotion agencies and an investment fund forthese enterprises.
Investment in agricultural development. It is thus necessary to increase
investment so as to accelerate agricultural development in East Asia.
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Energy Security Cooperation
66. Energy conservation. The countries of East Asia should set national targets ofenergy efficiency with a view of catching up with the world’s best standards in the longrun. Governments should also expand existing energy conservation efforts, including
energy audits and inspections, minimum energy consumption efficiency standards,
energy efficiency demonstrations, public education on energy efficiency, energyefficiency labelling programs and international technical exchange.
67. East Asian states should also pay attention to energy-saving activities byintroducing (mandatory or voluntary) energy efficiency standards for common
household products such as air conditioners, heaters, cooking appliances, water
heaters and other electrical appliances.
68. Governments should promote energy conservation efforts in the consumption ofoil (especially gasoline and diesel) in the transport sector and develop policies which
ensure that the increasing numbers of vehicles on the roads use fuel as efficiently as
possible. Manufacturing industries should also adopt more efficient methods ofproduction by using less energy per unit of output.
69. Countries in the region should hold regular energy conservation campaigns
which educate people about the relative quantities of energy they use and waste in thehome and at work each day, and instil in them the imperative of practicing energyconserving behaviour at all times.
70. Energy security. The more developed East Asian countries should consider
providing material or technical assistance to the less developed littoral states. Besides
patrol boats and training ships, these countries could help such states build asurveillance radar network to cover the Straits of Malacca.
71. East Asian countries should participate and cooperate actively in ReCAAP(Regional Cooperation Agreement on Combating Piracy and Armed Robbery against
Ships). There should also be multilateral exercises to handle environmental disasters
caused by oil spillage from tankers, tugs and barges in the Straits of Malacca andprovide humanitarian assistance by mounting search and rescue operations. These
initiatives can be regarded as confidence building measures as they aim to boost
mutual trust and confidence, reduce suspicion and develop a spirit of cooperation
among countries.
72. Countries in the region should build on the June 2006 proposal by Malaysia for
a Southeast Asian Disaster Relief Centre to provide humanitarian assistance andhandle environmental disasters. This proposal can be expanded to cover the Straits ofMalacca and potential maritime disasters with the participation of APT countries.
73. The more developed countries are encouraged to transfer energy conservation
technology and know-how to less developed members, which should introduce policy
and regulatory framework to absorb them. Thus, APT countries can share all theirenergy-efficiency experience for mutual benefit and enhance trust within the East
Asian Community.
Regional Architecture for Non-traditional Security & Environment Cooperationin East Asia
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74. Transnational crime. There is a need for regional cooperation in addressing
transnational crimes, above all human trafficking (including the trafficking in womenand children), drug trafficking, and money laundering. Two areas that need to beaddressed are (1) the varying perceptions and priorities of different countries and (2)the differences in state capabilities in implementing statements and declarations.
75. The APT framework should serve as the main process for regional cooperation,
along with others, especially in formulating general principles for regional law
enforcement based on respect for sovereignty and mutual trust. The Asean Secretariat
should serve as the program coordinator of the region’s attempts to narrow the abovegaps.
76. Civil society should play a more important role in combating transnational crimeand Track II should facilitate their efforts. It may be possible to propose extra sessions
in the Asean People’s Assembly on these issues.
77. Specific issues that need to be addressed as part of the APT process include
sharing of information and intelligence, extraterritoriality and the harmonisation of legal
systems.
78. General common principles that address not only crime but also issues such as
poverty alleviation, protection of labour, assistance to developing countries,
immigration, law enforcement, fostering mutual trust, establishment of databases andcentral strategic research and coordination of information exchange need to be
developed.
79. The creation of a Centre for Transnational Crime would be useful. Its missions,
including capacity building in general, trust-building, and information exchange, should
be clear.
80. East Asian cooperation builds on what the Asean has achieved. An Asean
Ministerial Meeting on Transnational Crime is the appropriate mechanism forpromoting cooperation on counterterrorism and the APT unit in the Asean Secretariat
should be strengthened and closely follow such cooperation.
81. Terrorism. It is also important to develop a common position among East Asian
countries so that they can work together to support the UN conventions on terrorism.
82. It is crucial to promote constructive values through a country’s education
system so as to curb extremist influences on the younger generation. It must be
ensured that school texts do not promote a culture of hate and chauvinism.
83. Terrorism should not be associated with any race, culture or religion. The war
on terrorism must not only address the symptoms but also their root causes.
84. Maritime security. Littoral states should be encouraged to take initiatives toreach a common agreement with user countries on the norms and rules of maritime
security in the Straits of Malacca and in creating a framework for burden-sharing
between littoral and user countries. Multilateral mechanisms for dealing with issues
such as oil spills and search and rescue operations should be put in place.
85. Pandemic threats. Containing the avian flu should be dealt with as part of the
APT and other processes to promote cooperation among members. Countries in the
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region which have practical experience should be encouraged to stock-take, sharegood practices and build a capacity to contain the threat.
86. Policy priority should be given to global and regional problems, especiallyglobal warming, deforestation, and marine and river contamination, since they cannot
be properly addressed without regional and global cooperation.
87.
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Environment. In promoting East Asian cooperation:Emphasis should be placed on technical and scientific approaches;
Existing bilateral or sub-regional frameworks for cooperation should bebroadened into a regional framework;
Common guidelines for environmental management, assessments andcommon codes of conduct should be produced by an Experts Group of APT
and institutional platform for cooperation;
Regional agreements to address trans-boundary environmental problems
among governments of APT, of which Northwest Pacific Action Plan (NOWPAP)
can serve as a model, should be concluded; andTechnical knowledge obtained from developed countries.

88. The goal of sustainable economic development should be promoted. Joint
academic research and the development of the new technology in the field ofenvironmental protection should be promoted.

© NEAT

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