Regional Economic Integration in Asia-Pacific:
Relevance, Potential, Areas and Institutions

Presentation at Japan-India SymposiumInternational House of Japan, Tokyo,
13 December 2012
byNagesh Kumar

Key messages•

The Asia-Pacific region’s rapid growth over the past six decades has been supported
by favourable external economic environment and opportunities thrown byglobalization.

•In a dramatically altered post-global crisis scenario, realization of the Asia-Pacificcentury and region’s dynamism, so crucial for elimination of poverty and hunger,
will critically depend on its ability to harness the potential of regional economicintegration.

•The region, a late starter in regionalism, has many underexploited opportunities formutually beneficial regional integration given its many complementarities arisingfrom its diversity.

•Regional economic integration can also assist in a balanced regional developmentwith the lagging economies receiving a boost by stronger connectivity andintegration with the region’s economic growth poles such as China and India.

•Besides fostering peace, such cooperation would also assist the region address
shared vulnerabilities and risks, and exercise its influence in global economic
governance commensurate with its rising economic weight.

•Japan and India as two major economies and democracies of the region have muchto contribute to and benefit from regional economic integration.

Changed new international context• A-P’s rapid growth supported by favourable external
economic environment in the past
• External economic environment changed
dramatically since the onset of 2008/09 crisis• Business-as-usual not an option• Regionalism as a dominant trend in the worldeconomy• Stalemate in WTO negotiations• Shared vulnerabilities and risks

Lessons from regionalism worldwide• Regionalism driven by strategic industrial policy considerations
geared to strengthen competitiveness and growth– Leads to efficiency-seeking industrial restructuring to exploit
economies of scale and specialization– Substantial welfare gains result from such restructuring– Creates productive capacities in poorer countries• More Equitable Development: relatively smaller and poorer
Economies grow faster because of production restructuring;
economic convergence: lessons from EU, NAFTA, Asia
• Smaller economies also get extra-regional investments as
domestic markets size constraint is obviated• Trade even with extra-regional countries increases as a resultof trade facilitation measuresAsia-Pacific a late starter but now a growing
recognition is attached to regionalism• Asia-Pacific countries begin to pay serious attention toregionalism since 1997-98 crisis– Japan’s review of trade policy in 1999; Japan-Singapore FTA in 2002
– ASEAN advances AFTA implementation and adopts a vision of ASEAN Economic
Community» ASEAN dialogue partnership process strengthened with Summit level
annual dialogue» Leads to ASEAN+1 FTAs
» Broader forums of ASEAN and dialogue partners: ASEAN+3 and the East
Asia Summit (ASEAN+6)– SAARC concluded SAFTA in 2004 and then SATIS (2010)– BIMSTEC is formed and adopts BIMSTEC FTA– ECO adopts ECOTA;– PICTA and PACER– Numerous bilateral FTAs are initiated across the length and breadth of theregion to create the Asian Noodle Bowl
– several functional groupings initiated: ACD, CICA, SCO,

• Several Asia-Pacific leaders articulate visions of integrated Asia Relevance of abroader framework with a long run goal of creating an Asian economic community is widely sharedEnhancing regional economic integration• Key elements of a plan to enhance regional
economic integration could include the following• An integrated Asia-Pacific Market• Seamless Connectivity for goods, energy andpeople• Financial cooperation to facilitate redeployment ofregion’s savings• Addressing shared vulnerabilities such as energy
and food security, natural disasters andenvironment sustainability• Adopting a long-term vision of Economic community ofAsia-Pacific [or Asia-Pacific economic community]Towards an Integrated regional market• Intraregional trade expanding
fast; can grow faster withsome facilitation• Potential in subregions but
often across the subregions• potential of intraregional
trade in services remains tobe exploited• Intraregional FDI flows havestarted to grow with theemergence of China, India,
Hong Kong, Singapore,Malaysia, Thailand as new
sources of FDI

To
Indicatorof opportunities
to export from

East &
NorthEast
Asia

SouthEast
Asia

South &Asia andRest ofSouth- North &NorththetheWest Central
Pacific Pacific Europe America World
Asia
Asia

East & North-East Asia

23.3

3.7

5.3

3.6

0.8

36.8

20.8

3.9

11.8

South-East Asia

19.4

2.3

4.1

1.7

0.6

28.1

16.2

5.4

6.9

South & South-West Asia

9.1

2.1

2.8

1.9

0.5

16.5

12.9

3.6

7.0

North & Central Asia

13.5

3.1

6.1

1.0

0.7

24.4

18.1

7.9

6.8

Pacific

5.2

1.4

2.5

0.7

0.3

10.1

7.3

1.8

3.5

Asia and the Pacific

13.0

2.4

3.9

1.6

0.6

21.4

14.1

4.3

6.7

Europe

13.8

3.8

5.6

4.5

1.0

28.6

29.7

6.1

13.7

North America

32.1

6.6

11.1

4.3

1.5

55.6

40.3

10.9

16.5

Rest of the World

9.5

2.2

3.9

1.3

0.6

17.5

12.1

4.9

5.6

••
•

Towards an Integrated regional market

High trade costs in intraregional trade: tariffs
and non-tariff barriers
Barriers to trade in services and investments
also remain
Approaches to liberalization limited tosubregional and bilateral arrangements-Asian
Noodle Bowl––••Do not provide an integrated broader market
Poor facilitation of trade between subregions

Coverage also varies with most agreements
liberalizing trade in goods and are graduallyextending their coverage to trade in services
and investment. Some provisions for
migration covered in a few agreements
Need to complement the subregionalgroupings by a broader arrangement to leadto a pan-Asia-Pacific regional trade
agreement– Broader, comprehensive (substantially all trade),
deeper– Liberalization, facilitation and cooperation– Can be evolved in a progressive manner– Equitable: S&DT
Three options to evolve a broader– Economic cooperation should cover assistance pan-Asia-Pacific RTA
for lagging regions and vulnerable sections

1. Creating an Asian Economic Area to join thesub-regional groupings••••

One option could be to create anumbrella agreement AEA, negotiatedunder the auspices of ESCAP toprovide a framework for subregionalgroupings to exchange tariff
preferences on a reciprocal basis andshare experiences
May be complicated by different
stages of evolution of the subregionalgroupings
Potential for substantial welfare gains
Leaves out some major economies e.g.
China, Japan, RoK

1.8

Scenario B
Full tradeliberalization
within andbetween thefour blocs•

Creating a Consultative Group of theSubregional Groupings on EconomicCooperation to facilitate sharing ofbest practices between them

Annual welfare gains for each bloc
as percentage of each grouping's GDP1.5

1.2

0.9
Scenario AFull tradeliberalization
within thebloc

0.6

0.3

0.0

AFTA

ECOTA

SAFTA

PACER-Plus2. Building on ASEAN+ approach
Using CEPEA of ASEAN+6 as a nucleus of
an incipient Asia-Pacific-wide FTA to which
other Asia-Pacific countries could accede
to in future• CEPEA Study process completed; fourASEAN+ study groups have been set up todevelop it further• ASEAN+1 FTAs concluded with all the six
dialogue partners that can be
multilateralized with common rules oforigin– Already based on Liberalization,
Facilitation and Economic Cooperation•• Opening it up for accession forother Asia-Pacific countries•••

Potential for substantial welfare gains
Bali Summit of ASEAN in 2011 adopted
framework for regional
comprehensive economic partnershipof East Asia (R-CEP)
Need to expedite the process

3. A new Asia-Pacific Trade and Economic
Cooperation Agreement•••••

A new agreement under the auspices ofESCAP open to all member states
Based on substantially all trade(negative list basis) conforming toArticle XXIV of GATT
Comprehensive coverage: goods,services and investments, facilitation
Special and differential treatment forpoor countries and economic
cooperation covering support to lagging
regions and vulnerable sections
Potential to raise welfare by more than
one percent of the whole region withpoorer countries benefiting more.
– The three options are not mutually exclusive.

Towards a seamless connectivity• Maritime and aviation links relatively better with advanced countries
and often poor with neighbouring countries• Land transport important for regional integration and balanced
regional development– Simulation results show that improving connectivity has potential to increase
economic growth especially for relatively poorer areas– Critical for the landlocked developing countries• Asian Highway and Trans-Asian Railway networks not fully completed• Asian Highway routes: even though no missing links but uneven quality a constraint
to connectivity• Significant missing links and non-standardized routes in Trans-Asian railway• Countries can make greater use of these networks by:– Improving transport facilitation measures– Investing in intermodal facilities such as dry ports• Dry ports can build synergies by linking different modes of transport, also promotebalanced spatial development because they help to relocate industries to inland
areas from coastal zones• Network externalities grow disproportionately with bigger and versatile networks

Towards a seamless connectivity• Some recent developments in terms of railway connectivity:• Under ECO a container trains runs between Istanbul-Tehran-Islamabad; also demo
runs between Istanbul and Almaty• Proposed Kunming-Singapore Railway link• Recent agreement on Bangladesh-India-Nepal rail link

– Connecting these links could revive a new silk route
Kazakhstan-Turkey-Iran-Pakistan-India-Bangladesh-Myanmar-China-Laos-ThailandMalaysia-Singapore but also Afghanistan, Nepal and Bhutan and Cambodia andVietnam• To facilitate development of connectivity• Work with Asian Development Bank and other financial institutions for financing
the construction of missing links in TAR and upgrading the AH links• Set up
• Asian-Pacific Ministerial Council on Transport• Asia Highway Authority as a regional association of national highway bodies forstandard setting for transit facilitation and coordination, and take up projects• TransAsian Railway Authority as a regional association of national railway bodies
for standard setting and coordination and facilitation , and take up projects

Energy highway for energy security•••

Energy resources unevenly distributed with some major net exporters and others net
importers
Rapid expansion of energy trade in the region
Energy connectivity unevenly developed, mostly bilateral or subregional––––

Many pipelines connecting Central Asian oil and gas reserves, South-West Asia
ASEAN moving towards Trans-ASEAN gas pipeline and ASEAN power grid
SAARC also is considering a SAARC Energy Ring to connect power grids across the subregion
Several pipelines projects under consideration•

Need for an Asian Energy Highway•

Lack of a regional energy market and agreements setting out consistent rules for energy
trade
Geopolitical and security considerations discourage investors from exploiting potentially
profitable opportunities••

A regional framework is needed for energy connectivity and trade– ESCAP’s Asia-Pacific Ministerial Energy Forum, Vladivostok, May 2013 could provide a basis
for institutional cooperation, hormonization of policies, exchange of knowledge and physicalconnectivity– Need to make Asia-Pacific Energy Ministers Conferences, a regular annual forum (as acouncil) to move the agenda forward.

Enhancing regional financial cooperation• Missed opportunities• Large reserves of over $6 trillion mostly invested outside theregion• Private savings by Asian wealthy $7.4 trillion in 2008 also
largely invested outside the region• AP countries’ needs for funds are also provided by westerncapital markets• Intermediation of Asia’s savings and investments is done by thewestern capital markets• Could benefit from pooling regional funds to provide
liquidity, boost trade financing and invest in infrastructure•Initiatives for regional financialcooperation

Over time a number of initiatives have been taken for different objectives– Asian Clearing Union– Asian Development Bank– Chiang-Mai Initiative – Multilateralization– Asian Bond Fund and Asian Bond Market Initiative– SAARC Development Fund (SDF)– ASEAN Infrastructure Fund (AIF)– Associations of central banks viz. SEANZA, SEACEN, EMEAP, SAARC Finance– Asian Exim Banks Forum– Association of Credit Rating Agencies in Asia
– Financial cooperation in the framework of East Asia Summit and ACD•

Most initiatives at early stages and generally with limited scope andcoverage•

Cooperation could build on existing arrangements to• strengthen resilience to external shocks,• Mechanism to mobilize regional savings to foster a programme ofinfrastructure development• Capital markets cooperation

Crisis prevention andmanagement• Chiang-Mai Initiative
Multilateralization (CMIM)– US$ 120 billion,– Limited to ASEAN+3 countries– lending linked to IMF
conditionalities– AMRO

Need for expanding the scopeand coverage to evolve intoa truly regional emergency
response mechanism

Mechanism for
infrastructure development– Existing mechanisms (AIF, SDF)
relatively small and with limited
scope for the region’s needs– Creating a regional fund with a large
capital base backed by region’s
governments with the ability to issue
secure and liquid securities– Ability to provide technicalassistance for development of viable
projects for attracting co-financing
by other financial institutions andprivate sectorRegional cooperation for capital markets development
••
•••
•
•

Well developed equity and bond markets in a number of countries
No facilitation of cross-border listings and IPOs
SWFs and private equity funds make cross-border short-term investments in emerging markets
Deepening equity and bond markets
Facilitation of cross-border listings and IPOs
Establishment of regional stock exchanges
Regional mutual funds

Addressing shared risks and vulnerabilities
Food insecurity•••

AP home to 65 per cent of the world’s hungry
Some reasons: poverty, natural disasters, conflict and war, lack of employment
opportunities, underinvestment in agriculture
Areas for regional cooperation:• regional food reserves: ASEAN and SAARC reserves• sharing information,• Joint agricultural research,• Cooperation in post-harvest technology and meeting food safety regulations• managing trans-boundary resources,• Regional common agricultural policy• Regional cooperation and capacity building in spread of advanced technology
such as satellite monitoring of weather and food production patterns• Asia-Pacific Ministerial Council for Food Security and Agriculture to oversee theprogrammes of cooperationDealing with disasters•

AP is highly prone to disasters• Floods and earthquakes costing 430 billion/year on average over 1990-2010• Regional dimensions of disasters amplified by growing economic interconnectedness••

Hyogo Framework for Action provides a framework
Some cooperation at sub-regional level taking place
•
•
•
•
•

•
•

AP could benefit from more comprehensive regional agreements andcooperation
Some areas for cooperation:
••
•
•

•

ASEAN Agreement on Disiater Management and Emergency Response, 2009
SAARC Disaster Knowledge Network; SAARC Disaster Management Centre, New DelhiESCAP/WMO Typhoon Committee; ESCAP/WMO Panel on Tropical Cyclones
Pacific Disaster Net
Regional Early Warning Systems: RIMES supported by ESCAPStrengthening regional centres for capacity building and research
Producing regional baseline assessments and periodic reviews
increase options for prevention, preparedness and recovery
Cooperation in satellite technology for DRR

Biennial Asian Ministerial Conferences on DRR are important regional forums
to take action at regional level to be regularized as Ministerial Councils

Cross-cutting issues

Technological cooperation for addressing shared vulnerabilities• Joint technology development emerges as a key theme foraddressing all the shared vulnerabilities• Institutional architecture for promoting joint R&D• Asia-Pacific Technology Development Council (APTECH)• An regional apex body of national innovation institutions• Will foster cooperation and coordination in innovation to addresscommon issues and shared problems with sectoral bureaus• Cooperation in precompetitive R&D• Will administer a regional fund for funding joint innovation proposals• Intellectual property will be owned by APTECH and shared free withmember national innovation bureaus for onward sharing with nationaland regional enterprises for further competitive research• Innovative mechanism for raising resources: a 2% tax on royalties paid andremitted abroad by region

To conclude•

A compelling case for deepening and broadening economic integration in AsiaPacific region and move towards formation of an economic community of AsiaPacific as a long term goal
• Critical for achieving Asia-Pacific Century by 2050 and avoiding middle income trap of alow growth scenario

•••••
•

Great potential of enhancing intraregional trade and investment by exploiting
the synergies beyond those within the subregions through broader regionalism
Fruitful cooperation possibilities exist also in connectivity, finance, and inaddressing the shared risks and vulnerabilities as in food and energy security,
disaster risk reduction, and for enhancing environmental sustainability, among
other areas
Deeper cooperation would also assist the region to play its due role in global
economic governance and emerge as the centre of gravity of the world
economyTime for the region to get its act together and exploit more fully the potential ofregionalism for mutual benefit
The region will need an elaborate institutional architecture to take this agenda
forward
Regional economic integration is an important agenda for India-Japan
cooperation in view of their high stakes.

Supportive institutional architecture• Council for Asia-Pacific Economic Integration (CAPEI)» Highest (Summit) level political umbrella body for broad vision and agenda
setting, adopt a long-term vision of an Economic Community of the AsiaPacific and its contours, reflects on global challenges and global affairs andregion’s response, cooperation with other agencies and internationalorganizations; meets annually• Ministerial Councils on trade and investment, finance, transport, energy, foodand agriculture, environment, disaster risk reduction, technology: develop
specific agenda of work in the specific sector» E.g. Ministerial Council on Trade and Investment to review the three proposals
made for evolving a broader regional trading arrangement» Council on Transport will also oversee the work of its operational arms like
Asian Highway Authority and Trans Asian Railway Authority• It is proposed that ESCAP ministerial conferences are reorganized into
the sectoral ministerial councils• Consultative Group of Subregional Associations for Regional Cooperation:brings together all subregional bodies such as ASEAN, SAARC, ECO, PIF; meetsannually on the sidelines of CAPEI• Asia-Pacific Business Advisory Council• Asia-Pacific Network of Think-Tanks•ESCAP to convene the Asia-Pacific Ministerial Conference on Regional Economic
Cooperation and Integration in 2013

Thank you23