metadata: authors: 0: author: Sakakibara, Eisuke
1: author: Yamakawa, Sharon
count: East Asia and Pacific,Japan,China
docna: 0: docna: Regional integration in East Asia :
            challenges and opportunities - Part 1: history and institutions
docty: Policy Research Working Paper
subtopic: Mining & Extractive Industry (Non-Energy),Coastal and Marine Environment,Marine Environment,Ports & Waterways,Coastal and Marine Resources,International Trade and Trade Rules,Ecosystems and Natural Habitats,Energy and Natural Resources,Oceans
teratopic: International Economics and Trade
abstracts: cdata!: Over the past decade, regional
            integration has become the focus of intense global interest
            and debate, and the regionalization of East Asia has figured
            prominently in that dialogue. East Asia can be described as
            a heterogeneous region that is both global and
            intraregional. The authors examine the motivating factors
            and underlying dynamics of the progression toward closer
            cooperation in the region beginning from a historical
            perspective, which sets the stage for an evaluation of the
            form that regional cooperation might take so as not to
            sacrifice the benefits of the region's already achieved
            openness. This examination includes a review of the
            lingering effects of the 1997-98 Asian crisis, the expanding
            role of China in the region, the prolonged slump in
            Japan's economy, and the evolution of regional
            institutions such as the Asia-Pacific Economic cooperation
            and the Association of Southeast Asian Nations, among
            others. The authors focus on trade, direct investment, and
            the financial and monetary aspects of regional cooperation.
            In their analysis, they compare other regions, particularly
            the European Union and the North American Free Trade
            Agreement. Finally, the authors suggest cooperative steps
            the region might take over the next decade to promote the
            growth and stability of its member economies. In this
            regard, they look at the future role of regional
            institutions, the prospects for a regional role in promoting
            trade and foreign direct investment, and the possibilities
            for financial and monetary cooperation.
geo_reg_key: 517198,119225,517191
repnme: repnme: Regional integration in East Asia :
            challenges and opportunities - Part 1: history and institutions
display_title: Regional integration in East Asia :
            challenges and opportunities - Part 1: history and institutions
listing_relative_url: /research/2003/06/2420980/regional-integration-east-asia-challenges-opportunities-part-1-history-institutions
topicv3: Trade m1326924 698,Ports m1327399 167,Coastal and Marine Ecosystems m1327594 596,Population, Aging and Health m1327736 640,Silver m1503519 2937
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: PREM Sector Department (EASPR)
no_of_pages: 92
model_extractions: POLIcy RESEARCH WORKING PAPER 3078

# Abstract

Over the past decade, regional integration has become the focus of intense global interest and debate, and the regionalization of East Asia has figured prominently in that dialogue. East Asia can be described as a heterogeneous region that is both global and intraregional. Sakakibara and Yamakawa examine the motivating factors and underlying dynamics of the progression toward closer cooperation in the region beginning from a historical perspective, which sets the stage for an evaluation of the form that regional cooperation might take so as not to sacrifice the benefits of the region's already achieved openness. This examination includes a review of the lingering effects of the 1997-98 Asian crisis, the expanding role of China in the region, the prolonged slump in Japan's economy, and the evolution of regional institutions such as the AsiaPacific Economic cooperation and the Association of Southeast Asian Nations, among others. The authors focus on trade, direct investment, and the financial and monetary aspects of regional cooperation. In their analysis, they compare other regions, particularly the European Union and the North American Free Trade Agreement. Finally, the authors suggest cooperative steps the region might take over the next decade to promote the growth and stability of its member economies. In this regard, they look at the future role of regional institutions, the ptospects for a regional role in promoting trade and foreign direct investment, and the possibilities for financial and monetary cooperation.

This paper-a product of the Poverty Reduction and Economic Management<sup>SectorUnit,East Asia and PacificRegion-</sup> is part of a larger effort in the region to analyze integration through trade.<sup>PolicyResearch WorkingPaper 3079 on Trade,</sup> Finance, and Integration is part II of this paper. Copies of this paper are<sup>availablefree from the WorldBank,1818H Street</sup> NW, Washington, DC 20433. Please contact Shahid Yusuf, room MC2-509, telephone<sup>202-458-2339, fax 202-522-1150,</sup> email address syusuf@worldbank.org. Policy Research Working Papers<sup>are alsopostedontheWebathttp://</sup> econ.worldbank.org. Sharon Yamakawa may be contacted at yamakawa@gsec.keio.ac.jp.<sup>June 2003.(81pages)</sup>

> _The Policy Research Working Paper Series disseminates the findings of work in_<sup>_progress toencourage theexchange of ideas about_</sup> _development issues. An objective of the series is to get the findings out quickly, even if_<sup>_the presentations are less than fully polisbed. The_</sup> _papers carry the names of the authors and should he cited accordingly. The findings,_<sup>_interpretations, and conclusions expressed in this_</sup> _paper are entirely those of the authors. They do not necessarily represent the_<sup>_view_</sup> _of_<sup>_the World Bank,its Executive Directors, or the_</sup> _countries they represent._

Produced hy Partnerships, Capacity Building, and Outreach
# WORLD BANK EAST ASIA PROJECT

REGIONAL INTEGRATION **IN** EAST ASIA: CHALLENGES<sup>AND</sup> OPPORTUNITI-ES Eisuke Sakakibara and Sharon Yamakawa Global Security Research Center, Keio University Part One: History and Institutions Chapter I - Asia: A Historical Perspective Chapter II - East Asia Today Chapter III - Regional Institutions in East Asia _Note: part two of this report is presented as a separate working paper._
# **Acknowledgements**

We would like to acknowledge<sup>the support of others in the preparationof this paper.In</sup> particular, we would like to<sup>ftiankShuichi Shimakuraand Eri Moriaifor datasupport and</sup> Catherine Sasanuma and Shunichi<sup>Sueyoshifor their contributionsto theresearchon</sup> regional institutions.
# **Overview**

The purpose of this study is to evaluate<sup>the patternand gauge the progressof</sup> regional iiitegration in East Asia from<sup>a political-economicviewpoint.The focus is on</sup> the trade, investment, and financial/monetary<sup>aspects of regional cooperationin</sup> projecting a viable framework for integration<sup>in the coming decadeandassessing the</sup> prospects for its success in bringing prosperity<sup>to East Asia. Thestudy examines the</sup> causal factors of regionalism in East<sup>Asia and the underlyingdynamicsof the movement.</sup> In this process, differences between Asia's<sup>typeof regionalismandthat of otherregions</sup> of the world, in particular Europe and<sup>North America,will become apparent.</sup> The extent of the region's heterogeneity<sup>is revealedand itsimplicationsfor</sup> regionalism evaluated. The region's<sup>economic and financialdiversity hasparticular</sup> implications for the formation of regional<sup>institutions in East Asia.The evolutionof such</sup> institutions as the Association of Southeast<sup>AsianNations(ASEAN)and Asia-Pacific</sup> Economic Cooperation (APEC) are<sup>examinedfrom the perspectiveof their objectivesand</sup> achievements in an effort to assess<sup>theircontributionto thedevelopmentof regionalism</sup> in East Asia. That examination will determine<sup>whetherthe economiccooperation they</sup> promote has brought the desired benefits<sup>to theirindividual membersand to the region as</sup> a whole.

An analysis is made of the patterns of<sup>East Asia's trade and foreigndirect</sup> investment (FDI) from a global/intraregional<sup>perspective,takinginto consideration the</sup> importance of trade and FDI interlinkages.<sup>In thiscontext,we will determine what,if</sup> any, role regionalism can play in the<sup>promotionof these twotypesof transactions, which</sup> are so essential to the growth and development<sup>of theregion.</sup> We evaluate the ramifications of the<sup>East AsianCrisis in the contextof</sup> motivating factors for intraregional cooperation.<sup>Arising out of thiscrisis weresome</sup> initiatives, e.g., the Chiang Mai Initiative<sup>of bilateralswaparrangements,that have</sup> intensified financial integration in the<sup>region.The study examinesthisaspectof the crisis</sup> and assesses the potential effectiveness of<sup>such initiativesindeterring another financial</sup> crisis in the region.

Other areas of concern that have arisen<sup>from the crisisarecapital account</sup> liberalization and financial structure reform.<sup>Inthe case of the former,our discussion</sup> focuses on possible approaches to capital<sup>accountliberalizationthat mniniizeits inherent</sup> risk. The latter, financial structure<sup>reform,isaddressed fromthe perspectiveof a bank-</sup> based system versus a market-based<sup>systemand how the region might progress fromthe</sup> former to the latter in the attempt to<sup>developa sound andstablefinancialsector capable</sup> not only of forestalling another crisis,<sup>but also of promotingeconomicgrowth in the</sup> region. The alternatives of a national,<sup>regional and internationalapproachto attaining</sup> this goal are presented.

The issue of monetary integration and<sup>exchangerateregimes for EastAsia has</sup> been vigorously debated throughout<sup>the region,and even theworld, but with noreal</sup> consensus reached so far. This study<sup>presentsthe current argumentsfor and againstthe</sup> various regimes, including fixed, floating,<sup>and theintermediateregimesthat fall between</sup> those two corner solutions. While the<sup>region maynot yet be readyfor an EU-type</sup> currency union, some type of foreign<sup>exchange policy coordinationwould be a pragmatic</sup> and feasible starting point for eventual<sup>full monetaryintegration.</sup>
Overall, the study assesses the progress that has been made in East Asian cooperation and suggests some possibilities for the future that would use regionalism to advantage in plotting steps for growth over the next decade. In particular, it will consider the future of regional institutions, the prospects for a regional role in promoting trade and FDI, and the possibilities for monetary and financial cooperation.

The paper is divided into two parts. Part One, "History and Institutions," sets the stage for the above discussion and includes Chapters I through III. Chapter I is a historical review of the development of trade in Asia from the pre-modem era. This review encompasses a wider area than just East Asia since the origins of trade in the region extended from China and Japan west to India and south to Southeast Asia. It is revealed that Asia's trade was at the same time intraregional and global, emphasizing the openness and prominence of the region even at that time. The role of precious metals, used as "money" in this trade, further reinforces this image.

Chapter II examines the heterogeneity and degree of openness of East Asia today. This is accomplished through a review of current economic and social indicators, which provide an overview of the region in terms of economic size and development. These reveal the high level of diversity among the nations within East Asia, particularly in comparison with other regions of the world. Other indicators show the degree to which East Asia remains open today and how well it is integrated into the global economy.

Chapter III looks at regionalism in East Asia from the perspective of the region's institutions or fora. Regional institutions have been slow to develop in East Asia and in fact are still evolving. Institution building has not played the prominent role in East Asia that it has in Europe. As cooperation among nations of the region becomes more of a -priority, attention is increasingly focused on what type of institutions would best serve the interests of the region as a whole and of the individual countries therein. There are currently several institutions comprising different groupings of countries, which represent the region. The most prominent of these are ASEAN (and ASEAN-Plus-Three) and APEC. This chapter examines the rationale for their formation, objectives and achievements.

Part Two of the study, "Trade, Finance and Integration," includes Chapters IV through VII. A description of these chapters is included in the "Introduction to Part Two". Please note that Chapter VI includes the summary and conclusions for the entire study (Parts One and Two) and Chapter VII presents future prospects for East Asian regionalism.

iv
# - **Chapter I Asia: A Historical Perspective**

In assessing the appropriate integrative strategy for any region striving to promote economic development., it is essential to look not only at relationships as they currently exist, but also as they existed historically. John Maynard Keynes advised economists to "examine the present in. light of the past, for the purposes of the future." Angus Maddison goes a step ffirther to suggest that the _past_ to be examined should cover periods prior to the **l9 th** and **20th** centuries (which is the period usually covered by quantitative research in economic history) even though earlier periods "involve the use of weaker evidence, and a greater reliance on clues and conjecture [ . .] because differences in the pace and pattern of change in major parts of the world economy have deep roots in the past."' A review of economic history will show that Asia has been an open region fully involved in the world economic system as far back as pre-modern times. Even when China and Japan, during the 15th and 17th centuries, respectively, ostensibly closed their borders to outsiders and external trade, evidence shows that the closure was not complete. It is clear that, over time, Asia had an instrumental role in the global division of labor and its conduct in the world economy was open and outreaching.

Historians have in recent years come to regard the world economy from other than a Eurocentric point of view. The Asia of previous centuries is now being recognized as not just a part of the globe _discovered_ and _opened up_ by Europeans but rather as having had an economic system of its own prior to their arrival. In fact, this system may have contributed as much to Europe's economic growth as Europe did to Asia's growth.

Abu-Lughod (1989) focuses on the period between 1250 and 1350 as the time when "an international trade economy was developing that stretched all the way from northwestern Europe to China; it involved merchants and producers in an extensive (worldwide) if narrow network of exchange."<sup>2</sup> Frank (1998) claims there has existed a "single global world economy with a worldwide division of labor and multilateral trade from 1500 onward."<sup>3</sup> He emphasizes the preponderant position of Asia in the world economy and system "not only in population and production, but also in productivity, competitiveness, trade, in a word, capital formation until 1750 or 1800." Braudel (1984) describes the Far East as the "greatest of all the worldeconomies".<sup>5</sup> Although he speaks of the Far East between the 1 5t and **1 8th** centuries as a single world-economy, he says it in fact comprised three "gigantic world-economies: Islam, overlooking the Indian Ocean from the Red Sea and the Persian Gulf, and controlling the deserts stretching across Asia from Arabia to China; India, whose influence extended throughout the Indian Ocean, both east and west of Cape Comorin; and China, at once a great territorial power - striking deep into the heart of Asia - and a maritime force, controlling the seas and countries bordering the Pacific."<sup>6</sup> Braudel describes the relationship among these areas as "intermittent" since it was the result of a "series of pendulum movements of greater or lesser strength, either side of the centrally positioned Indian subcontinent." These pendulum swings sometimes benefited the East (China) and other times the West (Islam) "redistributing functions, power and political or economic advance," or sometimes ceased altogether leaving Asia divided into "autonomous fragments".' This type of situation exists even today as evidenced by the variety of regional institutions, such as APEC, ASEAN, ASEAN Plus
Three, and others, that comprise different groupings of Asian and Pacific nations in an attempt to find one that works best economically and politically for the region.

Emergent from the historical economic literature is a picture of a gradually expanding world economy that included not only trade but also the institutions and systems that supported it. Of considerable significance in this world system and, from some perspectives the central focus of it, is Asia. While many of the territories, countries, nation-states and cities that make up Asia have changed over time, this region's importance in, and contribution to, the world economy cannot be denied. This chapter will show that throughout history Asia has functioned not only as an integrated region but also as an active and, sometimes leading, participant in the global economy.

# **Size of the Asian Economy**

One indication of the prominence of a country within a region, or a region within **the** world, is the size of its economy. The size of the global economy historically, and Asia's position therein, is reflected in the population and GDP statistics.<sup>8</sup> Population growth and share for periods between 1000 and 1800 are compared for Europe and Asia in the tables below using data from three sources; i.e., Bennett (1954), Clark (1977) and Maddison (2001). (See Tables H.2 through H.5 in Historical Appendix for details of population levels, growth rates, and shares as estimated by the three historians.)<sup>9</sup> Table 1.1

|||**Compara**<br>1000-1500|**tivePopulation**|**Growth**|1500-1600||
|---|---|---|---|---|---|---|
|Region|Bennett|Clark|Maddison|Bennett|Clark|Maddison|
|Euopef|64.3%|74.4%|121.9%|29.0%|22.1%|28.1%|
|**AllAsi7**|51.2%|30.5%|55.2%|15.0%|31.2%|33.4%|
|**China**|**78.6%**|66.7%|74.6%|12.0%|50.0%|55.3%|
|**India**|12.5%|12.9%|46.7%|25.9%|26.6%|**22.7%k**|
|**Japan**|300.0%|60.0%|105.3%|25.0%|12.5%|20.1%|
|Wodd|62.2%|52.5%|63.2%|9.0%|16.6%|27.0%|
|||**1600-1700**<br>|||**1700-1800**<br>||
|Region|Bennett|Clark|Maddison|Bennett|Clark|Maddison'|
|**Europe**|29.2%|27.7%|**10.7%**|63.5%|63.2%|68.6%|
|**AlAsia**|37.7%|38.6%|6.2%|52.2%|40.5%|76.8%|
|**China**|46.4%|0.0%|-13.8%|68.3%|110.0%|176.1%|
|**India**|47.1%|100.0%|22.2%|57.0%|-5.0%|26.7%|
|**Japan**|35.0%|44.4%|45.9%|3.7%|**0.**%|14.8%|
|**Wodd**|27.0%|28.7%|8.6%|48.9%|38.8%|72.5%|
|**'Growth rate**|**covers**1700-1820|**forMaddison.**|||||
|**2 Includesbot**|**hEasternandWes**|**ternEurope.**|||||

> 3 Includes East, West and South Asia Source: Compiled **from** Maddison (2001), **Frank** (1998), **Bennett** (1954), **and Clark** (1977)

2
In Table 1.1 above, there are obvious differences in growth rate estimates among the three sources; however, there is consistency in some time periods and certain trends are apparent. The estimates of all three sources show Europe's population growing considerably faster than that of Asia from 1000 to 1500. In the next two centuries (16th and 17th), the growth rate worldwide slows considerably - most likely due to epidemics of infectious disease (primarily bubonic plague), war and urbanization. During this time, the difference between the two regions' growth rates narrows but for Europe the slowdown is greater so that Asia's growth exceeds that of Europe (according to two of the three sources). In the 1 8 th century, Asia's growth rate jumps to between 40 percent and 77 percent, but only Maddison shows a faster rate for Asia than for Europe.

Table 1.2 <!-- Start of picture text --> Comparative Populatlon Share of World Total<br>1000 1500 1600<br>Radlon 6;ndtt| Clark:| Meddlson Bennett Clark | Maddlon Bennett Clark IMaddbon<br>Eurq;e? 15% 14% 12% 15% 16% 16% 18% 17% 1s<br>Al Asia 61% 63% 68% 57% 54% 65% 60% 61% 66f<br>Chhia 25S 21% 22% 28% 23% 24S 29% 30% 29<br>India 179% 25% 28% 12% 19S% 25% 14% 20% 24<br>Japan 1% 4% 3% 4% 4% 2% 4% 4% 3%<br>Wcdd 100% 100% 100% 100%9 100% 100%O 100% 100% 100%<br>1700 1800<br>Rion SeBennet Clark Maddlson Bennrtt Clark Maddbeon'<br>Eurape 19% 17% 17% 20% 19% 16%<br>Al Asia 65% 6f% 67% 67% 66%J 68%<br>China 33% 23% 23% 38% 35% 37%<br>India 16% 31% 27% 17% 21%7 20%<br>Japan 4% 4% 5%9 3 3% 3<br>WaId 100%S 100%9 1001% 100% 100% 100%<br>Gtovlh rate coim 1700-182D for Maddison<br>klk-d both Eastern and Western Eurpe<br>Indides Ed, West and Sotth Asia.<br>Sagia td frn Maddisan (2001) Frank (1998), Bennett (1954), and Clark (1977)<br><!-- End of picture text -->

Asia's share of world population far exceeded that of Europe in all time periods. (See Table 1.2.) The esitimates for population share from the three sources (Bennett, Clark and Maddison) are much more consistent than those for population growth.'<sup>0</sup> Asia's share of world population in the year 1000 was already four to five times greater than that of Europe so that although faster growth in later periods allowed Europe to increase its proportion, Asia retained the predominant share. In fact, Asia's population share has remained above 50 percent for 2,000 years and was, by most estimates, between 60 and 70 percent up to the end of the 1 9 th century.

The major proportion of Asia's population has been located in China and India, which historically have had a combined 70 to 85 percent of the total population of Asia, or 40 to 60 percent of the world's population. " 1 The speed of population growth in Asia is thus strongly affectedl by growth in these two countries, and secondarily by growth in Japan and Indonesia. For example, according to Maddison's estimates in Table H. I (Historical Appendix), in the 18 th century, East Asia's phenomenal 80 percent rise in population was led by China's increase of 176 percent. Similarly, in the following 3
> century (1820-70), the considerably smaller increase of 7 percent for East Asia reflects a

> decline of 6 percent in China's already large population partially offset by increases in

> the smaller populations of India, Indonesia, and Japan.

The significance of a region's population gains perspective when its relationship to economic development is considered. Maddison (2001) points to two possible causes of the accelerated population growth in the last millennium: increased fertility and reduced mortality, with the latter, in his opinion, being predominant. While acknowledging that increases in life expectation are not captured in GDP measures, he has found there to be "significant congruence, over time and between regions, in the patterns of improvement in per capita income and life expectation."<sup>12</sup> Improved economic development generally leads to longer life expectation, which in turn leads to increased population size.<sup>13</sup> Frank (1998) is of the opinion that despite the lack of production and income estimates for the period he covers (1400-1800), "it stands to reason that this much faster population growth in Asia can have been possible only if its production also grew faster to support its population growth."'1<sup>4</sup> He cites the literature of other economic historians, including Ho Ping-ti (1959), Gilbert Rozman (1981), Immanuel Wallerstein (1989), and others, as confirmation that "Asia and various of its regional economies were far more productive and competitive and had far and away more weight and influence in the global economy than any or all of the 'West' put together until at least 1800." 15 He goes on to say that this was made possible in part because of Asia's technology and economic institutions. Although hard data for this period is difficult to obtain, he supports his argument by referring to GNP estimates for at least the end of the period (1750-1800) as cited by Braudel (1992), who in turn cites Bairoch (198 1).16 These are indicated in Table 1.3 below.'<sup>7</sup> 4
Table 1.3 <!-- Start of picture text --> Levels of GNP<br>(in 1960 US dollars and prices)<br>Total (billio ns of dollars) Per cap ita (dollars)<br>Third Developed Third Developed<br>Year World' countries2 World' countries2<br>1750 112 35 188 182<br>1800 137 47 188 198<br>1830 150 67 183 237<br>1860 159 118 174 324<br>1900 184 297 175 540<br>1913 217 430 192 662<br>1928 252 568 194 782<br>1938 293 678 202 856<br>1950 338 889 214 1,180<br>Beiroch uses the term "Third World" and includes Asia and other countries currently<br>referred to as 'developing countries-.<br>2 Includes Europe, America, Japan and other industrialized countries of today.<br>Source: Compiled from Bairoch (1993: Table 8.2, p. 95)<br><!-- End of picture text --> According to the figures in the above table, from the mid- 1 8 th century through the mid- 19 th century total t5NP was considerably higher (roughly one and a half to three times higher) in "Thircl World" countries (including Asia) than in developed countries. A reversal of this pattern began to occur around 1900 and is attributed to the long-term effects of the Industrial Revolution, which after a century and a half resulted in a "multiplication by more than five of the average standard of living" in developed countries. 1<sup>8</sup> Bairoch's estimate of total GNP in 1750 was $147 billion (in 1960 U.S. dollars), of which 76 percent was in "Third World" countries while only 24 percent was in developed countries. By 1860, these proportions had dropped to 57 percent for "Third World" countries and 43 percent for developed countries out of a total $277 billion of GNP.

However, given the large population of Asia relative to that of Europe, per capita GNP follows a different pattern. While Bairoch estimates that per capita GNP in 1750 is also greater for "Third World" countries ($188) than for developed countries ($182), this does not continue and is reversed over the next 50 years so that by 1800 developed countries' GNP per capita exceeded (by $ 10) that of "Third World" countries, for which the level remained the same ($188). His estimate for China alone, however, is $210, which exceeds that of both developed and "Third World" countries. 19 By the end of the colonial period in 1950, the per capita income of "Third World" countries had reached only $214 while that of developed countries was **51/2** times greater. Braudel (1984) points to Bairoch's calculations as indicative that despite Europe's "dazzling triumphs all, over the globe," its level of wealth was far from superior to that of the rest of the world. He supports this statement by referring to Bairoch's total GNP figures in Table 1.3, which shows that it was not until the late 19th century that the developed countries overtook the rest of the world in total GNP.<sup>2 0</sup> _5_
While Maddison's (2001) GDP estimates are not directly comparable to those of Bairoch (because of differences in regional grouping and currency measurement), there are some consistencies between the two. (See Tables H.6 through H.9 in the Historical Appendix.) Table H.6 reveals that total GDP for Asia exceeded that for Western Europe in the periods up to the late 1gth century - being two to four times greater in the periods between 1500 and 1820. This divergence is even more apparent in Table H.8, which shows Asia's share of world GDP at a remarkable 70 percent in the year 1000 versus about 9 percent for Western Europe. As Asia's share declines gradually to 59 percent in 1820 with a further drop to 38 percent over the next 50 years (to 1870), Europe's share increases at a slow, steady pace to reach 33.6 percent by that year. By 1913, however, Europe overtakes Asia and maintains that lead until the late **20t1h** century.

Maddison's estimates of per capita GDP follow a different trajectory from those of Bairoch. His estimates in Table H.9 show that from 1500 onward, Europe's per capita GDP surpassed that of Asia. In the year 1000, per capita GDP was nearly the same for both regions (I$40021 for Europe and I$449 for Asia). By 1870, that for Europe had risen fivefold, whereas that for Asia had increased only 23 percent. The gap only becomes greater throughout the 20th century with Europe's GDP per capita reaching a level five times that of Asia by the end of the century (based on Maddison's 1990 international Geary-Khamis dollars).

Maddison estimates that China's per capita GDP exceeded that of Europe from the 5h to the 14th centuries<sup>22</sup> (see Table 1.4 below) after which China (along with most of the rest of Asia) remained more or less stagnant in per capita terms until the second half of the 20th century. He credits the higher levels of income in the earlier periods to China's "technical precocity and meritocratic bureaucracy"<sup>23</sup> and attributes the stagnation in Asia initially to "indigenous institutions and policy, reinforced by colonial exploitation which derived from Western hegemony and was most marked from the eighteenth century onwards."<sup>24</sup> Table 1.4 <!-- Start of picture text --> "Guesstimated" Level of Chinese and European GDP Per Capita, 50-1700 AD<br>(1990 $)<br>Year<br>50 960 1280 1700<br>China 450 4501 600 600<br>Europe' 450 400 500 870<br>a Excluding Turkey and USSR<br>Source: Maddison (1998: Table 1.3, 25)<br><!-- End of picture text --> Based on Maddison's data, Japan was an exception as it did not experience this stagnation. Japan's per capita GDP remained lower than that of Asia as a whole until the early 19th century. Maddison believes that income levels in Japan were probably depressed in 1500 because of civil war but estimates a substantial increase in performance in certain sectors of the economy from 1600 to 1820. His estimate is that Japanese GDP per capita rose by a third from _1500_ to 1820 and, thus, caught up with and surpassed that of China and most of the rest of Asia by the early **1 9th** century. He 6
attributes this to the Meiji takeover in 1868, which involved massive institutional change with the goal of catching up with the West.<sup>25</sup> Frank (1998) also finds that Japan's economic development was not stagnant from the second half of the 17'h century through the 18th century. Despite stabilization of population growth, agricultural and other production continued to grow causing per capita income to increase during the 18'h century.<sup>2 6</sup> Maddison's findings reveal an Asia that has maintained throughout history the largest share of the world's population, and of world GDP (absolute value) until the 20k" century, but that has been considerably less productive and worse off than Western Europe on a per capita basis since 1500. He claims his view is consistent with the mainstream view, which is reflected in Landes (1969, p. 13-14). Maddison labels Bairoch's (1981) view of China being well ahead of Western Europe (and the rest of Asia only 5 percent lower), as a "highly improbable scenario [that] was never documented in the case of Asia [... ], 27 While he goes on to acknowledge that Bairoch has been influential, he rejects Bairoch's assessment that colonial exploitation was largely responsible for the slow development of the "Third World". Maddison agrees with Landes (1969) who states, "Western Europe was already rich before the Industrial Revolution [...]. This wealth was the product of centuries of slow accumulation, based in turn on investment, the appropriation of extra-E,uropean resources and labour, and substantial technological progress, not only in the production of material goods, but in the organisation and financing of their exchange and distribution [...] it seems clear that over the nearmillennium from the year 1000 to the eighteenth century, income per head rose appreciably - perhaps tripled."<sup>28</sup> Maddison supports his view by referring to the "laborious efforts" he has made "to accumulate quantitative evidence on this topic." He claims that by rejecting the view of Bairoch he does not deny the role of colonial exploitation, but makes it better understood "by taking a more realistic view of Western strength and Asian weakness around 1800."29 In the final analysis, it is difficult to reach a high level of certainty as to who is correct in his assessment of economic development during this period, particularly in view of the lack of reliable data available (freely acknowledged by all) that makes estimates or, in the worst case "guesstimates", necessary for the earlier periods. There are also allegations of E,urocentrism, Asiacentrism and Sinophilia that are alleged by one or another to have prejudiced the findings presented in much of the previous literature.

Keeping this in mind, the best that can be concluded at this stage is that Asia did have the major share of world population, as well as world GDP in absolute amounts throughout most of the previous millennium. Furthermore, Asia most likely had higher per capita income than did Europe in the pre-modern era (or prior to about 1500) and possibly even up to 1800 (depending upon whose estimates are used). It is generally agreed that the Industrial Revolution in Europe and European colonization of Asia had decidedly negative consequences for Asian economic development in the 19 th and 20h centuries. While Europe's technological superiority rapidly accelerated during this period, there is plenty of evidence that Asia was not lacking in this respect, particularly prior to 1500.30 At the very least it can be said that historically Asia's share of the world economy was of such magnitude as to render it impossible to dismiss as irrelevant. In 7
fact Asia had large resources of primary materials and a significant technological base from which to produce goods that were highly desired in Europe.

# **Asia's Historical Place in the Trading World**

Trade between Asia and Europe began over 2,000 years ago (5,000 according to some) and increased after the 16'h century with the establishment of direct maritime contact.<sup>31</sup> More precisely, the opening of the direct sea route around the Cape of Good Hope led to the integration of global trade generally between 1500 and 1800 with the Portuguese pioneering direct European maritime trade with Asia.<sup>32</sup> In the 16th century the Portuguese were a dominant presence in Euro-Asian trade. Their position, however, was successfully challenged in the 1 7<sup>thand1</sup> **8**<sup>**th**centuriesby other Europeans,particularly</sup> the Dutch and the English who founded joint-stock companies specifically to trade with Asia (i.e., the Dutch Verenigde Oostindische Compagnie (VOC) and the English East India Company (EIC).) The shift in dominant European presence in Asia among these three countries from the 16'h through the 18'h centuries is demonstrated in Table 1.5.

## Table 1.5

|NumberofShipsSailingtoAsiafromSe|venEuropeanCount|ries,1500-1800|
|---|---|---|
|**1500-99'**|**1600-1700**|**1701-1800**|
|Portugal<br>705|371|196|
|<br>Netherlands<br>65|1,770|2,950|
|England|811|1,865|
|France|155|1,300|
|Otherb|54|350|
|Total<br>770|3,161|6,661|
|**'1**590sfortheNetherlands|||
|b'Other'referstoshipsofthe Danish, Swedishtrading com|panies,andthe OstendCom|pany (Austria).|
|Source: Maddison (2001:Table2-6,**63)**sourced originallyf<br>inBruinandGaastra(1993:7and17);otherwisefromBruij|rom:Portugal1500-1800from<br>nandGaastra(1993:178an|MagalhAesGodinho<br>d183).|

While the English expanded their presence between the 17th and 18th centuries, the Dutch retained the largest maritime presence among Europeans in both centuries. The presence of the Portuguese declined to almost nothing in the **18th** century.

From 1400 to 1800, Asia-related trade can be conceptually divided into two spheres: intra-Asian and global. The intra-Asian trading sphere can be further divided into two overlapping regions: the Indian Ocean region (encompassing the Middle East, Central Asia, India, and Southeast Asia) and the Asian region (encompassing Central Asia, India, and East Asia).<sup>33</sup> During the period under discussion, goods produced and traded by Asia included a wide variety of luxuries and commodities, with some of the most prominent being pepper, spices, sugar, silk and cotton textiles, rice, wheat, sugar, coffee, opium, precious stones, medicines, weapons, and horses. Another commodity that played a key role in Asia-related trade was precious metals (especially silver).

8
# **Intra-Asian or "Country" Trade**

Intra-Asian trade (also called "country" trade) was initially conducted by Asians with Asians. This trade developed long before Europeans arrived in Asia and, in the beginning, the ships and their owners, the merchants and the goods traded were all Asian. The nature of intra-Asiarn trade changed over the centuries. By 1500, there already existed "an old and wide network of maritime trade routes in Asia: routes between ports in East and Southeast Asia; routes between Malacca and ports on the coasts of India; and routes between India and ports in the Red Sea and the Persian Gulf [. . **."34** When the Europeans arrived in Asia, they became heavily involved in the country trade (particularly the Dutch) End influenced the way it was conducted. Nonetheless, intraAsian trade involving exclusively Asians remained a large portion of this type of trade.

Europeans engaged in intra-Asian trade to "procure cargoes for the European market" and "to accumulate profit [...] for their King, for their company - and for themselves as private individuals."<sup>5</sup> Among the European trading companies, the Dutch Voc<sup>3 6</sup> were the most active in intra-Asian trade. Towards the end of the 17 th century and beginning of the 18th century, the VOC was carrying more (in volume and value) between Asian ports than all other Europeans (trading companies and private traders) combined.<sup>37</sup> The VOC started to participate in intra-Asian trade around the same time it began its Euro-Asian trade and before long, the VOC's intra-Asian trade rivaled its trade between Europe and Asia. Although the VOC's intra-Asian trade began to decline in the 18th century, this trade remained an integral part of the VOC's overall trading strategy until it ended operation at the end of the **1 8th** century.<sup>38</sup> The VOC's intra-Asian trade involved a complex pattern of multilateral trade. Femme Gaastra (1999) describes the VOC's intra-Asian trade "as a 'fan' with Batavia [present-day Jakarta] as the 'grip' [. ..]."39 According to Prakash (1999), the most important links in this pattern in the early 1630s included investing European precious metals, Japanese silver (obtained against Chinese silk), and Taiwan gold (obtained against Japanese silver and Indonesian pepper) in Indian textiles, which were exchanged for Indonesian pepper and other spices. Some of the textiles, and the bulk of the pepper and spices, were exported to Europe. Textiles were also sent to various Asian factories and some pepper and spices were used for investment in India, Persia, Taiwan and Japan. In this way, new links were forged among the various Asian markets and between the markets of Asia and Europe.<sup>40</sup> Although trade was conducted under the direction of Europeans and goods were carried in European ships, in fact large numbers of Asians assisted with and were directly and indirectly involved. Braudel (1984) describes how thousands of local people manned the ships, served in the armies, and operated as merchants and bankers in the commercial centers. There were also ships owned and run by Asians that flew the Portuguese flag in order to benefit from lower customs duties accorded Portugal in certain ports.<sup>4</sup> ' Another connection between the Europeans and local people was through marriage. Before the arrival of the Europeans, there already existed many prominent Asian trading families whose activities were essentially run by the women of the family.<sup>42</sup> The Portuguese were the first to intermarry with these women, doing so to establish profitable colonies. Later, the Dutch married the daughters of these earlier unions instead of importing Dutch women who were reluctant to live in the Far East 9
because of living conditions there. These unions benefited not only the Dutch in their intra-trade operations but also the local families.<sup>43</sup> Steensgaard (1991), in discussing the pattern of Asian trade routes, refers to "increasing evidence of the viability of Asian merchant entrepreneurs and the practical partnership established by European powers and Asian merchants; partnerships explained by the fact that both sides still found more profit in co-operating than in fighting each other.""4 While there was indeed a strong _partnership_ aspect to intra-Asian trade, there were also many ways in which the Europeans and Asians remained separate and competitive. Gaastra (1999), in his study of intra-Asian trade in the 17'h century, determined that there was more competition than collaboration between the Dutch VOC and Indian merchants. Chaudhury and Morineau ,1999) acknowledge that most historians characterize the pre-colonial period (1 6' to 18th centuries) as the 'Age of Partnership'<sup>45</sup> but they believe there to have been more competition than collaboration between the European trading companies and Asian merchants during this period. Competition from Asian merchants was sufficiently strong to prevent the Europeans from driving the Asians out of trade in the area, except in the few cases where military and political power was applied (e.g., in the Moluccas, and Bantam). Van Leur (1955) emphasized that in the 16th century the maritime trade conducted by Asians had continued to be of vital importance. Most historians in recent years question the dominance of the Europeans in the Indian Ocean up to the mid- 1 8'h century emphasizing their limited role and marginal activities.<sup>46</sup> While the Asian-only portion of intra-Asian trade was quite large and Asian merchants were respectable competitors, European involvement did over time have a significant impact on this intraregional trade. Feldbek (1991) describes certain aspects of this impact as follows.<sup>47</sup>

- European settlements were established and thrived in South and Southeast Asia, e.g., Manila (Spain), Batavia (Netherlands), Pondicherry and Port Louis (France), and Bombay, Madras and Calcutta (Britain). By the end of the 18th century, these had developed into major commercial centers with extensive economic and financial interests.

- The Europeans promoted the development of their ports by attempting to "force" intra-Asian trade (by military, political and economic means) to become centered in these locations, particularly Portuguese Boa and Malacca, Dutch Batavia and English Madras.

- They opened up new routes and introduced new types of goods. For example, they exported large amounts of opium from English Calcutta to southern China.

Akita (1999) looks at intra-Asian trade in the late 19 th and early 20 'h centuries and cites several Japanese economic historians<sup>48</sup> who claim "the economic growth of Asian countries was led by intra-Asian trade, which had long historical origins but which began to grow rapidly around the turn of the century."<sup>49</sup> Sugihara (1990) argues that the economic success of Japan in the 1980s, as well as that of the NIEs (South Korea, Taiwan, Hong Kong and Singapore) in the late 1 980s, originated in their pre-war intra-Asian trade where they developed skills in what she calls "culture neutralizing the Western commodity mix". By this she means neutralizing 10
Western cultural elements to suit Asian domestic markets; e.g., making things "smaller and cheaper" or "neater and cleaner".<sup>50</sup> Table 1.6 below shows Sugihara's estimates of the geographical distribution of Asian trade (including India, Southeast Asia, China and Japan) between 1883 and 1928.

Table 1.6 <!-- Start of picture text --> GeographIcal OlslHbuton of Aslds Trade (E nIi)i__n)<br>1is3 1896 1913 1928<br>_lbsWet "a Toti the iest sIa Total t West Asia Toti theVW Asia TOtaW<br>Inda 6~c 44.4 5 17.02 65.85 1o0 4271 63% 2a93 131s 6.15 100% 9674 63%1 41.70 127 156 136.41 64.38 6ss 2s 286 10DS<br>Irm3 4.569 5.1213 406971ID 33.51175 6.37 14 44.52 10 91.80 75 26,56 2 122.251IW 117.39 56 64.33 38200.381<br>SEAdla _ 14.98 670 25.62 1ODs 15.19 399 14.70 39.25 100% 54.17 42.93 41 104.70 10DS 139.69 53 9677 2c1.46 1<br>Im i3.54 6335 522.66 100 1595151% 14.17 4M31.05 100 46.56 5 32.44 39 2.98 1 44.15 55% 58604 34170.50 1<br>Cim E_ 17.78 76s 3.96 1 23.25 15 47 60% 885 34% 25.80 10% 29.99 30.42 496 61.687 10D 61.79 43S 70.71 s 14256 1<br>kn 6.55 47 9.29 514 161021ID 13.46561 1251 47 26.62 10% 46.59 5 36,5342 8614100 6&87.87 9616 171.57 1<br>JBPm EK 5.23 1.2D 6,53 10 615451 6104 48 16.9D100 34.21 47% 36.56 5 72.64 1 97.11 4 12D.38532674<br>Im 3.70 71 1.52 29 23 Io 10 14.69 2x.53 4g 28636 199' 35.00 445 42.0D 7682 1 104.59 425 138635 2S0.18 1<br>Tota _ 5244 2 s 2688 2 121.25 1/ 81.91 5' 552 35' 1s5010 102 214.11 551' 151.61 391 391.90 106' 00 35D44 41 8682 1o<br>In 60.48 6 2428 28 87.88 10oo 77.61 591 4658 361 130.55 1006/ 221.9516o 137.55 3713 370.19 1001' 385. 00 386" 448 80.3 1O<br>NcAs Mad d aCtasspors Ktig reeW to x hii ad mcst d her -n-a-s fan IKg Koig aiothy cam Sun dtwur<br>Souro Su9wa (199D Table 1 130); se aiW defacs fcr s dex.<br><!-- End of picture text --> According to these estimates, the listed countries' exports to and imports from the West between 1883 and 1928 increased by 4.3 percent and 5.4 percent, respectively. Intra-Asian trade between those years, however, experienced a greater rise of 11.2 percent (for exports) and 13.7 percent (for imports). This resulted in a jump in share of intra-Asian exports from 24 to 41 percent and imports from 28 to 44 percent, a significant rise over the 45-year period. Among the countries listed, the greatest increases in share of intra-Asian exports were for China (33 %) and Japan (35 %). For imports, the largest increases were for India (19 %) and Japan (24 pp). Southeast Asia's intra-Asian export share increased by 11 percentage points while its import share dropped by 1 percentage point.

Sugihara (1985) points to the development of the modern cotton industry as key to the growth of intra-Asian trade because it promoted the cotton trade on many levels eventually leading to the emergence of an "Asian inter-regional division of labour with Japan and India as exporters of manufactured goods and importers of primary products on the one hand, and China and Southeast Asia as exporters of primary products and importers of manufactured goods on the other."51 This pattern is shown in the breakdown of Japan's trade statistics in Table 1.7 below.

11
Table 1.752 <!-- Start of picture text --> Japanese Trade with other Asian Countries<br>1892 1902 1912 1925 1935<br>£000 Share £000 Share £000 Share £000 Share £000 Share<br>Exports _<br>Prmary Products 1,518 46% 3,701 33% 7,992 26% 20,186 18% 18,208 16%<br>Manufactured Goods: 1,550 47% 7,115 64% 21,638 71% 86,706 75% 91,288 81 %<br>Textiles 211 3,631 13,560 57.791 45,354<br>Other Light Industrial Goods 559 2,118 4,471 _ 13,8981 13,861<br>Heavy Industrial Goods 780 1.366 3,607 13.017 32.093<br>Total 3,270 100l 11,051 100I 30,527 100l . 115,240 100% 113,170 100O<br>Imports<br>Primary Products: 3,940 89% 11,660 94% 31.031 94% 138,636 95% 81.220 89%<br>Food 2,144 4,300 12,773 63,619 36,725<br>Raw Material for Textiles 1,600 6,265 14,376 52,591 19,558<br>Other Raw Material 196 1,095 X 3,882 22,426 24,937<br>Manufactured Goods 480 11% 669 5Y 1,579 5% 6,666 5% 9,764 11%<br>Total 4,435 100Y 12,418 100Y4 32,887 100Y 146,184 100%- 91,710 100G<br>Source: Sugihara (1990: Table 3,133); Yukizawa Kenzo and Maeda Shozo, Nihon Boekino Choki Tokei (Japanese Trade<br>Statistics Reaggregated by Commodity and by Basic and Major Region). Kyoto, Dohosha, 1978.<br>Notes: Total includes special category trade. Foreign Exchange Rate see Yamazawa Ippei and Yamamoto Yozo,<br>Boekito KokusaiShoji (Foreign Trade and Balance of Payments), LETS Vol. 14, Tokyo, ToyoKeizai Shimposha, 1979.<br><!-- End of picture text --> Table 1.6 shows that Japan's trade in the early 1880s was primarily with the West, which was the case for other Asian countries as well. In Japan's case, this trade consisted of exports to the West of primary products and semi-manufactured goods and imports of manufactured goods from the West (Sugihara 1990). However, by the end of the 1 9 th century this pattern had changed so that Japan's trade with Asia rose to make up about half its total trade. This proportion remained unchanged until the late 1930s when intraAsian trade in general began to decline. The breakdown of Japan's trade with Asia also changed over that period. Table 1.7 above shows that in 1892 Japan was exporting an equal proportion of primary products and manufactured goods to Asian countries but by 1935 only 16 percent of its exports were primary products while 81 percent were manufactured goods. The proportion of imports to Japan from Asia remained about the same over that period, i.e., around 89 to 95 percent were primary products.

Sugihara (1990) argues that the rise in Japan's proportion of intra-Asian trade is evidence of its function as an "engine of growth of intra-Asian trade." She accounts for this by pointing out the following: (1) Chinese and Indian merchants carried most of Japan's trade with Asia via their intra-Asian network during the early 1900s, (2) Japan knew, better than the West, how to produce goods of a certain quality and price that were suitable for the Asian market (her previously mentioned "culture neutralization"), and (3) Japan adopted Western technology faster than other Asian countries which gave it an advantage in the production of manufactured goods for export to Asia.<sup>53</sup> 12
Akita emphasizes the importance to Japan and other Asian countries (except for China) of close contact wvith the West in developing Asia's interregional trade. He cites as evidence the fact that these countries adopted the gold standard by the end of the 19th century in order to facilitate the import of capital and manufactured goods from the West. Sugihara explains, "most of the manufactured goods which served for the development of an infrastructure such as railways, ports (communication system) and cities were imported from the West, without which the intra-Asian trade would have been confined to a centuries-old junk trade."<sup>54</sup> After experiencing significant growth from the economic boom before World War I, the volume of intra-Asian trade began to decline in the late 1930s as the network became disrupted by the Japanese invasion and war. This was compounded in the late 1940s when China, India, North Korea and many Southeast Asian countries substantially withdrew from intraregional trade as they underwent serious political changes. The proportion of intra-Asian trade in world trade grew rapidly again in the 1970s and 1980s." The above discussion reveals that intra-Asian trade preceded the arrival of the Europeans in the 16th century and extends to the present day with periods throughout of more or less intensity. The importance of this type of trade in the economic development of Asia is widely acknowledged in the literature. It is also apparent, however, that this type of trade did not exist in a vacuum. In fact, its development was facilitated by contact with the West both in earlier periods as well as in the 2 0 th century. In fact, a look at historical trade networks gives a clear indication of just how intertwined this intraregional trade was with global trade at the time; e.g., (1) goods produced and traded in Asia eventually found their way to Europe and America and (2) the nature of intraAsian trade was characterized by both collaboration and competition between Europeans and Asians. While it is possible to assess the intensity of intraregional trade by tracking imports and exports between countries, the broader global view should be kept in mind since most goods circulated throughout the region and the world, as is explained further below.

# **Asia's Global Tradie**

Although Asia-related trade can be divided conceptually into the two categories of intra-Asian trade and global trade, in actuality the latter is really an extension of the former. In other words, the two overlapped and interacted in such a way as to have functioned as one system. Frank (1998) observes that the "world market was really a series of interconnected regional markets dispersed and overlapping around the globe" implying that the regional, national, and many local economies of that time were part of a single global economy.<sup>56</sup> In his view, the identification of "regional units" is arbitrary and "intra-regional ties, rio matter what their density, are no obstacle to having _inter-_ regional ones as well."<sup>57</sup> To give an example of this interaction: Although the Dutch traded in a selfcontained circuit within Asia (i.e., intra-Asian trade), many of the goods obtained there found their way back to E,urope through exportation (i.e., global trade). In fact, one of their objectives in participating in intraregional trade was to obtain goods for the European market. Although a large portion of the silver needed by the Europeans in their intra-Asian trade was obtained from Japan, some was obtained globally - from the 13
Americas via Europe. Furthermore, while maritime trade between Asia and the rest of the world was largely carried out by European ships, around 1800 there were also Asianbuilt ships, nornally involved in intra-Asian trade, that often picked up cargo from various Asian ports and carried it to Europe.<sup>58</sup> This interaction between intraregional and global trade is demonstrated by the trade patterns of the key Asian players during this period: China, India, Japan and Southeast Asia. The involvement of these nations/regions in Asian trade during the modern and pre-modern eras was complex and of considerable magnitude as described below.

_China_<sup>_59_</sup> From the 1 100s to 1433, China was the "most dynamic force in Asian trade"<sup>60</sup> After coming into power in 1279, the Yuan (Mongol) dynasty expanded shipbuilding (started under the Sung) for foreign trade, maritime commerce with Asia, and naval operations. The traditional trading area for China at that time was the "Eastem Oceans". In the early 1400s, the Ming emperor Yung Lo (Yong Le) undertook naval operations outside this area to places in the Western Oceans (Indian Ocean to the east coast of Africa including Calicut, Cochin, Malacca, Hormuz, Red Sea, Maldives, Bengal, Mogadishu, East Africa, Ceylon, Aden, among others.) These naval ventures were carried out for the purpose of displaying China's power and superiority. In furtherance of this goal, a system of tributary relationships<sup>6</sup> 1 was implemented. Korea and Japan were members of this tributary system - the former, a permanent member, and the latter, a member between 1404 and 1549.

Between 1405 and 1433 Admiral Cheng Ho (Zheng He) led seven expeditions to the Westem Oceans. The Chinese did not attempt to establish bases for trade there but had some interest in obtaining medicinal plants and exotic animals. Support for such voyages ended after the death of Cheng Ho (1435) as it became apparent that China's security was not enhanced by extending the tributary system to the countries of the "Western Oceans" and that the exorbitant cost of the voyages had contributed to a fiscal and monetary crisis. Although the tributary arrangements with countries in the "Eastem Oceans" were continued, private trade continued to be banned. The natural reaction to this regime was illicit private trade and piracy. By 1567, the ban on private trade was lifted but trade with Japan was prohibited. This provided a favorable window of opportunity to the Portuguese who had established a base in Macao in 1557.

China was preeminent in the world also in terms of its production capability, particularly for silk, which was its largest export product traded primarily to other Asians, and for porcelain ceramics. Its great success in exporting these goods is evidenced by its having become a "sink" for the world's silver, which was used to balance its trade surplus with the rest of the world.<sup>62</sup> The question remains as to why China, which had huge "treasure ships" (much larger than European ships) that ventured as far as the Cape of Good Hope, ceased navigation beyond present-day Singapore and _appeared_ to turn inward after 1433. While govermment-sponsored navigation was ended in order to concentrate on domestic affairs, the curtailing of private sector shipping was related to "market forces". The price of timber (lots of which was required in the construction of the large "treasure ships" that were used in long trips to India and the Middle East) became prohibitively high due to its scarcity on the central China coast. Thus, the private traders resorted to building smaller 14
ships in Southeast Asia where timber was cheaper and where Chinese diasporas existed. The Chinese then focused on short-distance shipping using the entrepots that existed in areas favored by the monsoon winds. So in fact, instead of China being completely closed to trade at that time, Chinese traders established a tighter network of trade closer to home in order to maximize their profits.<sup>63</sup>

## _India64_

As might be expected, the center of the Indian Ocean trading sphere in 1400 to 1800 was the Indian subcontinent where many port cities developed along the east and west coastlines. Important among these were Diu, Cambay, Surat, Goa, Calicut, Colombo, Madras, and Masulipatam, many of which served as entrep6ts. India had an active inland trade as well - by water and overland. Almost all the port cities were connected to the caravan routes into and out of their respective interior areas.

Genevieve Bouchon notes that India played an essential role in intra-Asian (specifically Indian Ocean) trade after the departure of the Chinese in 1433. The large void left by the Chinese was filled by the Bengalis, Tamils and Gujaratis who brought products from India, Europe and the Arab world to the markets of Malacca.<sup>6 5</sup> She attributes the creation of new trade networks in the region to the Gujarati merchants.<sup>66</sup> India tended to export more than it imported and ran a large trade surplus with Europe (and some with West Asia) that was settled in precious metals. This imbalance was primarily related to its more efficient production of cotton textiles and to the production of pepper. These were exported to Africa, West Asia, Europe, and from there to the Caribbean and the Americas. Additionally, India exported rice, pulses (peas, beans, lentils, etc.), and vegetable oil westward to the Persian Gulf and Red Sea and eastward to Malacca and Southeast Asia. In exchange, India received silver and some gold from the West - the former it re-exported or used for coins and the latter it used for coins, jewelry and hoarding (although this is disputed by some, as discussed below.) India also exported cotton textiles to Southeast Asia and imported spices. It reexported silver there, and to China, indicating a possible trade deficit with that region. The Coromandel coast (facing the Bay of Bengal) served as an important entrep8t both in internal and worldwide trade. It was also used by the Dutch and other Europeans in their own Indian and worldwide operations.

# _Japan_

There is evidence that Japan's foreign trade began within Asia as early as the 13t century.<sup>67</sup> John Whitney Hall notes that in the 14th and **1 5 th** centuries Japan emerged "as a major maritime power in East Asia activated by a vigorous internal economic expansion."<sup>68</sup> Trade with China and Korea was important in the 1 3 th century, and during the 1 **5 th** and 1 6th centuries trade extended as far as the Straits of Malacca. Sanderson (1995) observes that Japan's involvement in vigorous Far Eastern trade seemingly occurred at the same time that China was withdrawing from world trade. He is of the opinion that these events were connected and that Japan took over where China left off. Japan participated in China's tributary trade from 1404 to 1549.69 Hall (1970) notes that during this time Japan's exports to China were mass commodities and artifacts (copper, sulfur, folding fans, screens, and primarily swords) and imports from China were strings of cash, raw silk, porcelain, paintings, medicines, and books. He states _15_
unequivocally that Japan was "no longer an underdeveloped member of the Chinese world order."<sup>70</sup> Frank (1998) describes Japan's trade after 1560 as follows: "Japan became a major producer and exporter of silver and then copper to China and Southeast Asia, but also of some gold and considerable sulfur, as well as such goods as camphor, iron, swords, lacquer, furniture, sake, tea, and high quality rice to as far away as India and West Asia. In return, Japan received Chinese silks and Indian cotton textiles, as well as a whole gamut of other producer and consumer goods like lead, tin, woods, dyes, sugar, skins, and quicksilver (used for smelting its own silver) from Korea, China, and Southeast Asia."<sup>7</sup> The silver that Japan produced in abundance from the mid- 1500s, and that China strongly desired, created a dilemma as to how this trade could be arranged.<sup>72</sup> China had prohibited trade with Japan around that time so, according to Tarling (1992), the exchange of Japanese silver for Chinese silk and other goods took place through Southeast Asian ports, particularly Manila and Hoi An (Vietnam), until 1635 when it was suddenly stopped.<sup>73</sup> Maddison (2001) claims that Chinese pirates and the Portuguese became the primary carriers of Japanese silver to China.

Japan's isolationist period began with the Tokugawa Shogunate.'<sup>4</sup> Key events leading up to _total_ isolation included the prohibition of Christianity in 1606, the departure/expulsion of the English and Spanish in 1623-1624, restrictions on foreign trade and travel in 1630, and banning of the Portuguese and restriction of the Dutch to a small area in 1639.75 The traditional view is that Japan remained totally isolated and economically stagnant after this date until its reopening in the mid- 19h century. However, more recent literature describes a process involving "large-scale urbanization, commercialization of agriculture, [...] growth in the wealth and economic importance of the merchant class, increased monetization of the economy, and beginnings of the factory system" as evidence of the economic vitality of this period.<sup>76</sup> Ikeda (1996) has found recent evidence from Japanese scholars showing that foreign trade did not in fact decline during the isolationist period. He reports that Chinese imports of silk actually increased after 1660 and continued until 1770. Also, trade continued with Southeast Asia including Burma, and even Japanese silver exports continued until the mid-18' century.<sup>77</sup>

# **_Southeast Asia_**<sup>**_78_**</sup>

Southeast Asia played a significant role in intra-Asian trade, as well as in world trade, particularly in the period from 1580 to 1630 when it benefited from the economic expansions in Japan, China, India, and Europe. Its "geographical location [...] made it a natural crossroads and meeting point for world trade."<sup>79</sup> Southeast Asia's trade patterns are representative of the integration of intraregional and global trade that existed in Asia at that time as aptly described by Frank: "The division of labor and pattern of trade in Indonesia and adjacent regions combined three interrelated axes of interisland and peninsular short-haul trade, regional trade with India and China/Japan/Ryukyu Islands, and world trade with West Asia, Europe, and the Americas."<sup>80</sup> Southeast Asia imported "cloth from India, silver from the Americas and Japan and copper-cash, silk, ceramics and other manufactures from China, in exchange for its exports of pepper, spices, aromatic woods, resins, lacquer, tortoise shell, pearls, deerskin, and the sugar exported by 16
Vietnam and Cambodia."<sup>8</sup> 1 China was Southeast Asia's "major customer, some eight times more than Europe."<sup>82</sup> Southeast Asia's role was also vital in that a number of its ports served as important entrep6ts in trade among China, Japan, other parts of Eurasia, and the Americas. Major among these was Malacca, founded in 1403, which served as a turnaround point for Chinese shipping (halted temporarily in 1433) and used by Gujaratis, Turks, Armenians, Arabs, Persians, and Africans as a trading center with Southeast and East Asia.<sup>83</sup> In support of this trading system Southeast Asia's financial system included a "sophisticated and reliable money market" where money could be borrowed at an interest rate of about 2 percent a month, similar to that in Europe.<sup>84</sup> As is evident in the above descriptions of the trade patterns and products of these four economies, there was a robust intra-Asian trade at the core of a broader global trade. Furthermore, although one or another of these players pulled back at certain points from the global arena, the gap was soon filled by other Asian traders so that the flow of goods continued unabated. The regional/global nature of trade at that time is further demonstrated by the flow of precious metals and their role in trade promotion.

# **The Monetary Side of Trade: Precious Metals**

Precious metals (as well as copper, coins, and shells<sup>85</sup> ) were used as money to "'settle the accounts' of the trade deficit at each link of the chain by those who wanted to import from the next link but did not have enough to export in return."<sup>86</sup> Most notable among those needing "money" to pay for their imports were the Europeans who, it has been claimed by some, had nothing to sell that was of interest to Asians, who in their turn produced a considerable quantity of goods desired by the Europeans. Consequently, Europe imported more from Asia than Asia did from Europe. This resulted in a significant balance of payments problem for the Europeans. In order to finance their purchases of the large amounts of goods they wanted from Asia, Europeans used precious metals.<sup>87</sup> Attman (1991) found evidence of this in the actual export and import figures from port records of the 17th and 18th centuries. There were three markets that had high demand for bullion at that time: Asia, the Baltic, and the Levant (Eastern Mediterranean). Invoices from that period reflect the amounts various European countries owed to Asia and the Baltic for imports. He estimates payment in silver and gold from Europe was two-thirds the invoiced amount for Asia and between one-half and one-third for the Baltic. Table 1.8 shows Attman's estimates for the export of precious metals from Europe to Asia and the Baltic.<sup>88</sup> Estimates for the Levant, for which there are no precise invoice values, are included based on the actual amounts of precious metals transported from European ports to the Levant.

17
Table 1.8

|EstimatedAnnual ExportsofPreciousM<br>(inmillionsofrix-|etalsfromEuro<br>dollars)|petotheEast||
|---|---|---|---|
|Year<br>1600|1650|1700|1750|
|TheLevant(EasternMediterranean)<br>1.0|2.0|2.0|2.0|
|TheBalticregion<br>1.7-2.0|2.3-3.0|2.3-3.0|2.3-3.0|
|TherouteroundtheCape(Asia)<br>1.0|**'1.7**|3.3|5.7|
|Total<br>3.7-4.0|6.0-6.7|7.6-8.3|10.0-10.7|
|*****Includes**silver**fromJapan usedbyVOCtomeet demand<br>Source: Attman(1991:Table4,17)|from1635to166|8.||

> The need for precious metals increased markedly from the mid- 16th century when Portuguese trade around the Cape increased, and even more so in the 1 7 th century when

> the Dutch (VOC) and English (EIC) began their Euro-Asian trade. Attman's estimates reflect this. While exports to the Levant and Baltic regions remained unchanged from

> 1650 to 1750, those to Asia increased by 5 percent between 1600 and 1750 at which time they reached 5.7 million rix-dollars.

Table 1.9

||ExportsofSilv<br>|erandGoldfromW<br>(tonnesof"silvere|esternEurope,1<br>quivalent")|601-1780||
|---|---|---|---|---|---|
||Tothe<br>Baltic|ToEastem<br>Mediterranean|Dutch(VOC)to<br>Asia|British(EIC)to<br>Asia|Total|
|16014-1650|2,475|2,500|425|250|5,650|
|1651-1700|2.800|2,500|775|1,050|7,125|
|1701-1750|2,800|2,500|2,200|2,450|9,950|
|1751-1780|1,980|1,500|1,445|1,450|6,375|
|Total1601-1780|10,055|9,000|4,845|5,200|29,100|

Source: Maddison (2001: Table 2-10, 65); Barrett, in Tracy (1990: 251) (he does not show his equivalence conversion ratio for gold.)

> As further evidence of the significant growth in precious metal exports from Europe to the East over the 17th and 18'h centuries, Angus Maddison (2001) estimates export levels in tonnes of "silver equivalent". (See Table 1.9.) Although Tables 1.8 and 1.9 are not directly comparable,<sup>89</sup> a similar pattern can be observed in both tables. Table 1.9 shows the amount exported to Asia (by the VOC and EIC) increased 6 percent between 1601 and 1750 when it reached a total of 4,650 tonnes before declining by nearly 40 percent over the next thirty years. The estimates for the total shipped to Asia are over 10,000 tonnes for the two centuries, but the amount was almost certainly more than this since only the Dutch and British exports are shown here while other European

> countries (including Portugal, France, Denmark and Sweden) were also engaged in this

> activity, albeit to a lesser degree.

18
In addition to being the<sup>major importer of precious metals, Asia wasalso a</sup> producer of gold and silver.<sup>In fact,while theEuropeansweremajor exportersof</sup> precious metals, they produced<sup>very little of it themselvesand, thus,had to obtain it</sup> elsewhere. The major and<sup>minorproducersworldwide of thesemetals are listedin Table</sup> 1.10.

Table 1.10

||I<br>**_Major_**_Producers_<br>c|_Linor_<br>_Producers_<br>|
|---|---|---|
|Siiver|klexico|NorthestEurope|
||Per&L<br>Japall|Persia<br>CenctalAsia<br>Burma/SiamiViemam|
|Gold|WestandSoutheastAfrica|Japan|
||SpanishAmerica(in1<sup>6'hc.)</sup>|Persia|
||Brazil(in18thc.,from<sup>1690)</sup>|China|
||SoutheastAsia||
|C7op-p-f|la-p:ln||
||Sweden||
|Tin'|Malaya||

'In addition, Prakash (1986-<sup>84) mentionsBolivia and Columbia as large SouthAmericansilver producers.</sup>

> 2Copper and tin were sometimes alloyed; both were used for low-value coinage. Source: Frank (1998:<sup>Table3.1,140)</sup>

Earlier on, copper was predominantly<sup>usedin Asiaascurrency but silver</sup> eventually displaced copper<sup>(and alsogold) as suppliesincreased.During this period,</sup> there was "at least a trimetallic<sup>world market,which however was predominantlyon a de</sup> facto silver standard."<sup>90For this reason(and becauseof limitationsof time andspace in</sup> this study), our focus will<sup>be primarilyonsilver.</sup>

# **Silver**

Rich deposits of silver<sup>discoveredandminedin the Americasconstituted the</sup> "most imnportant component<sup>of the increased total availability"of precious metalsin the</sup> 16th century.<sup>9t</sup> This silver<sup>traveled toAsia via twomain routes:(1) from South America</sup> via Spain to Europe and<sup>then on to Asiaand(2) from Mexico acrossthe Pacific to</sup> Manila.

Asia's producers included<sup>Japanas the major supplier in the regionstartingin the</sup> 16th century. Silver had<sup>becomea veryimportantcommodityinJapan in the16th and17'h</sup> centuries with only Spanish<sup>America beinga laiger producer and thusa majorcompetitor</sup> in the global market at<sup>that time.92Estimatesof Japan's productionare 50 tonsper year</sup> between 1560 and 1600,<sup>and 150to190tons per year between1600and 1640.9</sup> 19
Frank (1998) averages the estimates of Barrett (1990)94 and Attman (1986) to arrive at the amounts of silver production, trade routes and ultimate destinations that<sup>are</sup> shown in Table 1.11.

Table 1.1 1 <!-- Start of picture text --> World Silver Production, Exports, and Reeeipts<br>(values in thousands of tons)<br>Time Period Location and Amount Produced Shipped to Shipped to Asia<br>Europe directly or on-<br>shipped from<br>Europe to Asia<br>16a' century Americas - 17 17<br>Japan - 2 2<br>17th century Americas - 37 27 13<br>Japan - 7 7<br>18th century Americas - 75 54 26<br>1600-1800 Americas - 3 to 10 up to 25 All to Manila<br><!-- End of picture text --> Source: Frank (1998: Map 3.1, 148) One notable feature of the silver trade is that China received a very large share of this metal from all sources and via all routes. According to Frank's estimates, China received nearly all the silver shipped to Asia via Europe and the Pacific in the 1 7th and 18th centuries. Additionally, Japan's 9,000 tons produced in the 16th and 17t centuries went to China. Thus, for over two and a half centuries up to 1800, a total of 48,000 tons of silver from Europe and Japan and another 10,000 tons via Manila, as well as other silver produced in continental Southeast and Central Asia and in China itself is estimated to have ended up in China. He estimates that this total of about 60,000 tons was approximately half the world's production during that time.<sup>95</sup> More recent calculations by Von Glahn (1 996a) result in lower estimates for the amount of silver that went to China. These are shown in Table 1.12.

Table 1.12

|**ChineseImp**|**ortsofSil**<br>**Japan**|**verbyCountry**<br>**(metric tons)**<br>**Philippines**|**ofOrigin,155**<br>**Portuguese**<br>**shipments**<br>**toMacao**|**0-1700**<br>**Total**|
|---|---|---|---|---|
|**1550-1600**|1,280|**584**|**380**|**2,244**|
|**1601-40**|1,968|719|148|**2,835**|
|1641-85|1,586|108|0|1,694|
|1685-1700|**41**|137|0|178|
|**Total1550-1700**|**4,875**|**1,548**|**528**|**6,951**|

Source: Maddison (2001: Table 2-9, 64); **Von** Glahn (1996a: 140 and 232).
Frank (1998), however, finds von Glahn's estimation procedure to be "questionable" but calculates that even with these lower estimates, the total received by China from the mid- I6ti' to mid- I 7 th centuries was between one-fourth and one-third of total world silver production.<sup>96</sup> Various historians claim that most of the silver that ended up in China never came out again causing China to be referred to as the "sink" for silver during this period. Much the same is said of precious metals (silver and gold) that went into India. The traditional theory is that China and. India hoarded these metals and used them for decorative purposes rather than as money in commerce and investment. This resulted in these countries being labeled as financially unsophisticated and not interested in the expansion of investment and capitalism causing Asia to be viewed as "external to the European world-economy [ ...] .97 One historian (among several) who disagrees with this theory is Om Prakash who contends that the inflow of increasing quantities of money into India in the 1 7th century facilitated an increase in the degree of monetization in the economy, to which the rise of banking firms was in part related.<sup>98</sup> Chaudhuri (1986) also refutes the "hoarding" theory by saying, "the absorption of gold and silver by the Asian economies in the early modern period had little to do with a 'hoarding' social mentality but was grounded on an international pattern of economic specialization, on payments mechanism, and sociallydetermined demand which had existed for at least a millennium."<sup>99</sup> As stated by Frank (1998) "[ ... ] the world-wide flow of money to Asia and Russia is evidence precisely that they _were_ parts of the same world economy as Europe and the Americas."1<sup>00</sup>

# **Asia's Soft and Hard Infrastructure: Merchants and Ports**

A major contributor to Asia's historically significant role in the world economy, and one that has been subject to some misconception, is that of the Asian merchant or trader. Traditionally, Asian traders were labeled as "peddlers" who hawked small amounts of high value rnerchandise such as spices, pepper, pearls, perfumes, drugs and diamonds. This view, however, has in recent times been replaced with a more accurate image of the Asian trader - one that is closer to that of a western trader; i.e., a true capitalist, wholesaler, or merchant selling both luxury goods and ordinary commodities on a large scale. While there were indeed many small traders with little capital in Asia, there were also many "wealthy magnates" who had large amounts of capital. Also, in addition to luxury goods, cheap and medium-quality textiles and staple food items (rice, wheat, and oil) were traded within Asia.'I' It is now being acknowledged that the Asian merchant was not inferior to the European merchant " in. terms of their commercial operations and business acumen."'1<sup>02</sup> In fact, Asian merchants could compete successfully against the Europeans in an open market because they required lower profit margins (10 to 15 percent) than the European Companies, which wanted 40 to 70 percent to cover their high overhead costs.1<sup>03</sup> The only times the Europeans were able to succeed against the Asians was when they resorted to military might as did the VOC in Banda in 1621 in order to gain control of the spice trade.'1<sup>04</sup> 21
Morineau (1999) identifies a number of Asian merchants as "big-timers", including the Muslim merchants from the Gulf of Cambay and Gujarat who "ascended<sup>to</sup> the level of kingmakers" in the 12th, 13th and 14'h centuries. He states, "Vasco da Gama'<sup>05</sup> did not come to an ocean that was void of shipping or to territories without markets or merchants."'<sup>06</sup> In the 17'h and 18'h centuries, there were the merchant<sup>princes</sup> of India who have been favorably compared with the Medicis, Fiiggers and Tripps of Europe. 10<sup>7</sup> China also had its share of merchants and entrepreneurs including private sea traders of the late Yuan period (many of whom continued trading illegally in the early Ming period), Ming'08 government traders on government ships (until the 1430s), and private Chinese traders based in overseas settlements (diasporas). These Chinese diasporas existed primarily in Southeast Asia and the emigres tended to live together in self-contained Chinese communities. Most of them also had strong connections to the mainland because of a strong sense of family duty fostered by Confucianism and emotional attachment to their native villages. There were also reported to be a number of Chinese Muslims among the early overseas traders who have been credited with the spread of the Islamic religion in Indonesia.'<sup>09</sup> Trade diasporas existed in many locales in Asia and served to facilitate trade in the region. Besides the Chinese, there were also the Maharatshi merchants from Cambay and Surat in Malacca, and in other port cities in Southeast, South, and West Asia. "<sup>0</sup> Concerning ports in the region, the above discussion of trade routes gives a clear indication of the large number of ports established by both Asians and Europeans that were scattered throughout Asia to service the intra-Asian and Euro-Asian trade. Frank (1998) aptly describes these as "a sort of necklace of port-city emporia strung around Asia."" **'** Some of these functioned as entrepots (i.e., ports or port cities that served as commercial centers where goods are brought for import and export.) Several existed on the west coast of India, including Diu, Cambay and Surat in Gujarat and the Portuguese entrepot at Goa, where they functioned as ports of call for monsoon-driven ships from the Red Sea and Persian Gulf as well as turnaround points for the overland caravan trade with Persia, Russia, Central Asia, and others." 1<sup>2</sup> Some also existed in Southeast Asia (e.g., Manila and Malacca) and in West Asia (e.g., Aden and Hormuz) where their trade 3 relations were greater with the rest of the world than with their own surrounding area.<sup>1"</sup> The modern day Asian entrepot is epitomized by Singapore, which has functioned as such since the early 19'h century.

Petri (1993) distinguishes the "treaty port system" developed in the mid- 9I' century as a key contributor to Asian interdependence. Britain initiated this system when it abolished its monopoly through the EIC and moved to gain open access to ports through the Treaty of Nanking (ending the Opium War of 1840-42) and other treaties. Other nations followed Britain's lead resulting in a rise in trade through the large ports that had been developed by the Europeans (i.e., Hong Kong, Manila, Shanghai, and Singapore). These entrepots facilitated not only trade between the home country and its colonies, but also a large proportion of intraregional trade throughout Asia.

Most of these ports still exist, although perhaps with a different name and with more or less importance than in previous centuries. They constitute a "hard" infrastructure that serves the network of Asia's modern day trade. Their continued importance is clearly demonstrated in the discussion of present-day trade patterns and 22
relationships in Chapter IV. And, while the merchants themselves, of course, no longer exist, the _merchant legacy_ provides a "soft" infrastructure of knowledge and experience that continues to affect present-day trade in the region.

# **The Impact of Colonialism**

It could be said that in the early 2 0 th century, nearly all the countries of the East, and over half the world's population, were under some form of colonial rule. First the Europeans and later the Americans administered direct rule over the various countries and territories of Asia. The primary colonizers were: _Britain -_ India, Malaysia, and Singapore [Burma (MyEnmar) annexed in 1886]; _the Netherlands -_ Indonesia; the _United States -_ the Philippines (having earlier been under Spanish rule); and _France -_ Indochina. Although China, Persia, Thailand and Turkey were not colonies, they signed treaties that "reduced their sovereignty in commercial matters, and granted extraterritorial rights to foreigners."<sup>114</sup> Although it was expected by some that these nations would descend into "barbarism" upon departure of the colonialists, this did not happen since many Asian nations had long traditions of high-level civilization that gave them a sense of identity and nationhood. That is not to say, however, that the region was unaffected by the experience and, in more ways than one, the effect was negative. Paul Bairoch, upon finding that the positive impact of colonization on the West's economic development was limited, commented, "If the West did not gain much from colonialism, it does not mean that the Third World did not lose much." In his opinion, "[ ... ] a large number of negative structural features of the process of economic underdevelopment have historical roots going back to European colonization."'<sup>15</sup> Two major negative consequences of colonialism are discussed below.

## **De-industrialization**

There is no doubt that de-industrialization (the disappearance of industries) occurred as a result of colonization even though the precise extent of that may be difficult to ascertain. India's textile industry, for example, suffered under the British in two respects. Firstly, the British bureaucracy in India, as well as the Indians who worked under them, preferred European clothing, which led to the destruction of about three quarters of the domestic demand for luxury handicrafts (fine muslins, jewellery, luxury clothing and footwear, etc.)"1<sup>6</sup> Secondly, after 1813 English textiles began to flood India going from about 1 million square yards of cotton cloth in 1814 to 1,050 million in 1890. 17 Bairoch (1993) attributes this to the EIC's loss of its trade monopoly (a monopoly that prevented imports of textile goods into India) and to the technological progress made by the English spinning industry which resulted in an English worker's productivity by 1830 becoming ten to fourteen times higher (for an average yarn) than that of an Indian worker."1<sup>8</sup> The result was cheap British textiles flowing freely into India.

Production costs in India were raised as a result of a large number of British workers being employed in the textile industry there. It is estimated that British employees made up 42 percent of the managerial and supervisory staff of the Bombay textile industry in 1895 (but dropped to 28 percent in 1925). Furthermore, the British did 23
not undertake to provide technical education or training and managerial experience to Indians, thus hampering Indian industrial efficiency.19l Under these circumstances it was obviously difficult for India to establish a modem textile industry. Bairoch suggests that by 1870-80 local industry and artisans provided 25-45 percent of local textile consumption (or a level of de-industrialization equal to 55-75 percent.)<sup>120</sup> De-industrialization was not restricted to the textile industry of India. Other industries (e.g., iron), as well as other colonized countries, suffered the same fate. Bairoch claims that de-industrialization may have been even worse in other Asian countries. He cites China as an exception because its local industry was better able to survive due to a later start to the inflow of manufactured goods from the West, more local autonomy, and the large size of the country itself. In 1890, its local textiles might have supplied around 50-70 percent of local consumption.<sup>12</sup> 1 Table 1.13 below shows Bairoch's estimates of industrialization levels from 1750 to 1990 for the "Third World" (including Africa and Latin America in addition to Asia) and developed countries. The differences are immediately obvious. Until 1860, the "Third World's" level of industrialization exceeds that of developed countries. This, however, is reversed in 1860. Subsequently, the level for the "Third World" begins to decline (until 1928) while that in developed countries accelerates. On a per capita basis, the level was always lower in the Third World (from 1750, at least) than it was in developed countries but the difference widens considerably after 1860.

Table 1.13

||**LevelsofI **<br>**(United**<br>|**ndustrialization,**<br>**Kingdom**In**19**<br>|**1750- 1990**<br>**00**=100)<br>||
|---|---|---|---|---|
||**Tota**|**l**<br>|PerCa|pita<br>|
|||**Developed**||**Developed**|
||**Third World**|<br>**Countries**|**Third World**|**countries**|
|**1750**|93|34|**7**|**8**|
|1800|99|**47**|**6**|8|
|**1830**|112|**73**|**6**|**1i**|
|1860|83|**143**|4|**16**|
|1900|60|481|2|**35**|
|1913|**70**|863|2|**55**|
|1928|98|1,260|3|**71**|
|1938|122|1,560|4|**81**|
|1953|200|2,870|**5**|**135**|
|1973|927|8,430|14|**315**|
|1980|1,320|9,910|19|**347**|
|1990|2,480|12,090|29|**412**|
|Source:Bai|roch(1993:Table8.1,9|1)|||

24
# **Decline in Standard of Living**

By 1950 (the end of the colonization period), the "Third World" economies had a much lower standard of living than did developed countries. Bairoch (1993) attributes this difference to a century and a half of Industrial Revolution experienced by the developed countries that boosted their standard of living fivefold. In his estimation, the average "Third World" country in the 1950s had nearly the same standard of living as it did in 1800, or at least no better than 10-20 percent higher. In terms of real income per capita122 it was five to six times lower than that of developed countries. Labor productivity in the agricultural sector of "Third World"' countries in 1950 was seven times lower than that in Western countries and 30-40 percent below that of developed countries in 1800.123 The patterns found by Bairoch are supported by data compiled by Maddison (2001) as shown in Table 1.14 below.

## Table 1.14

|LevelsofGDPPe<br>|rCapitainEu<br>_____________<br>(|ropeanColo<br>1990Interna|nialPowers<br>tionaldolar|andFormer<br>s)|Colonies,1|500-1998|
|---|---|---|---|---|---|---|
||**1500**|**1700**|**1820**|**1913**|**1950**|**1998**|
|Britaina|762|1,405|2,121|5,150|6,907|18,714|
|France|727|986|1,230|3,485|5,270|19,558|
|Italy|1,100|1,100|1,117|2,564|3,502|17,759|
|Netherlands|754|2,110|1,821|4,049|5,996|20,224|
|China<br>|600|600|600|552|439|3,117|
|India|550|550|533|673|619|1,746|
|Indonesia|565|580|612|904|840|3,070|
|**'**ReferstoEngland,Scotl<br>Source:Maddison(2001:|andandiWalesfor1<br>Table2-22a,90)|500-1913.Nohr|hemIrelandis inc|ludedfor1950 a|nd 1998.||

This table shows that GDP per capita for India and Indonesia increased in the early colonial period but declined toward its end - between 1913 and 1950. China's per capita GDP, on the other hand, dropped between 1820 and 1913.

Maddison also developed the following tables (1.15 and 1.16) for Indonesia and India, respectively, as "a crude measure of the burden of colonial rule and the colonialist gain."124 25
Table 1.15

||**TheDutch"Drain" on**Indon|esia,1698-1930|
|---|---|---|
||Indonesianexportsurplus<br>aspercentofIndonesian<br>netdomesticproduct|Indonesian exportsurplus<br>aspercentofDutchnet<br>domesticproduct|
|1698-1700|0.7|1.1|
|1778-80|0.9|1.7|
|1868-72|7.4|5.5|
|1911-15|7.6|8.7|
|1926-30|10.3|8.9|
|Source:Maddiso|n(2001:Table2-21a,87)||

According to the estimates in Table 1.15, the amount of Dutch income in Indonesia that was remitted out of the country jumped from 0.9 percent in the precolonial period (1778-80) to 7.4 percent in the early part of the colonial period (which started in 1815). This reached as high as 10.3 percent by 1926-30. This is despite the fact that the Dutch reduced the percentage of their Indonesian income remitted out of the country between 1870 and 1921 as the economy was opened up to private enterprise. Their income as a percentage of Indonesian domestic product had risen from about 1.4 percent in 1700 to about 17 percent in 1921-38.125 It can also be seen in the right column of Table 1.15 that Indonesian income added significantly to the Netherlands' domestic product by the late 1920s (8.9 percent). According to Maddison (1989), from 1840 onwards, this income made up the preponderance of Dutch foreign income.

Table 1.16

||**TheBritish"Drain"onInd**|**ia,1868-1930**|
|---|---|---|
||**Indian exportsurplusas**<br>**percentofIndiannet**<br>**domesticproduct**|**Indian exportsurplusas**<br>**percentofBritishnet**<br>**domesticproduct**|
|1868-72|1.0|1.3|
|1911-15|1.3|1.2|
|1926-30|0.9|0.9|
|Source: Maddis|on(2001: Table2-21b,87)||

Table 1.16 reveals that the "drain" on India was considerably less than that on Indonesia. British income in India was only about 5 percent in 1921-38 (versus 17 percent for the Dutch in Indonesia) and of this, only 1.7 percent was remitted.<sup>126</sup> Also, the addition of Indian income to Britain's domestic product was only 0.9 percent in 192630 compared to 8.9 percent for the Dutch (from Indonesia) in the same period.

26
# **Other Effects of Colonialism**

At first glance, Britain's rapid construction of railroads in India and the first mechanized textile mills in Asia might be perceived as positive outcomes of colonialism. Pomeranz and Topik (1999), however, point out that neither of these contributed to economic growth. Like the textile industry, the railways built in India used British equipment, engineers and coal, and thus did not result in the transfer of technology and skills. India's textile mills lacked sufficient resources and were unable to develop as well as did their counterparts in China and Japan, which had come under government protection prior to World War I.

Another legacy of colonialism in Asia is the diversity of traditions and influences that arose from having the region colonized by more than one foreign nation. While diversity can often bring richness and depth to a society, it can also make it difficult to reach consensus on important issues. This phenomenon has affected to some degree Asia's progress towards regional cooperation. For example, the political and legal systems in the Philippines (colonized by America), Indonesia (colonized by the Netherlands), and Malaysia and Singapore (colonized by Britain), as well as Thailand (not colonized), vary wicdely.'<sup>27</sup> Furthermore, as a result of having achieved much desired independence after colonization, some counTries have gravitated more toward nationalism than toward regionalism. Also, the problems confronted in the post-colonialist period (e.g., the struggle for economic development) may foster a tendency to focus on national, as opposed to regional, issues.

The issue of free trade is often mentioned as a positive occurrence of the colonial period. However, this is not as clear as purported. While Britain ostensibly promoted open trading with its colonies, it protected its own textile industry (with around 100 percent tariffs) from inexpensive imports from India during the 17th, and 18 th centuries. In the late **1 9th** century, during Britain's "free trade" period, it closed Indian industrial goods markets to the non-British.<sup>28</sup> The Dutch, on the other hand, did not espouse open trading in its colony of Indonesia as it did not perceive free trade there to be potentially profitable. The Dutch realized they would have been unable to compete successfully against the British and American traders who were more powerful at the time.'<sup>29</sup> Another legacy of colonialism is in the area of FDI. Until the early 1980s, FDI in Asia came primarily from Europe and America with the concentrations following traditional colonialist lines; i.e., U.S. investors dominating in the Philippines and European investors in other Southeast Asian countries.1<sup>30</sup> It is questionable whether or not this inflow of capital from former colonialists was a good thing or not. According to Fan Gang (2000), "Most of the former colonial territories, which enjoyed a high (maybe the highest) degree of freedom of commodity trade, capital inflows and technology transfer, did not prosper and still remain in the category of the most backward countries."'<sup>3</sup> ' He emphasizes that while open markets, or globalization can bring capital and technology to developing countries, other requirements, such as institutions and market management capability are just as necessary for a country to compete globally. These factors, however, are not "mobile" and thus do not come along with globalization because they are "national-specific and historically constrained."1<sup>3 2</sup> Examples have been provided herein of the colonizers' failure to train the local population in managemenit skills, preferring to fill such positions themselves. Having 27
been "run" by the colonizers for a long period of time, the local populace was hindered in the development of its own institutions and management capability. Therefore, the capital and technology provided by the colonizing nations was only part of what these developing countries needed to compete globally. They were thus left handicapped upon the departure of their colonizers.

# **Concluding Remarks**

The review of Asian economic history in this chapter leads to a number of generalized observations concerning the trade patterns and economic development of the region over a period encompassing hundreds of years. Asia was the source of a wide variety of goods, both primary and manufactured, that were highly desired throughout the region itself and in other parts of the world. The production of these goods derived not only from the rich primary resources in the region but also from a large and highly civilized population whose skills were technologically sophisticated for the time. As a result, Asia maintained the major share of world GDP (in absolute amounts) throughout most of the previous millennium and even had higher per capita income than did Europe in the pre-modern era (prior to about 1500) and, depending upon which estimates are used, possibly even up to 1800.

Prior to the arrival of the Europeans, there was an active intra-Asian trade that covered a triangular area from India in the West, to China and Japan in the Northeast, to Southeast Asia. This intraregional trade was eventually joined by the Europeans for whom it became a valuable source of profits. Asia's global trade was conducted in a complex pattern involving many routes: Asia to Africa, Asia to Europe, Asia to the Americas via Europe, and Asia directly to the Americas from Manila. While this trade was carried out primarily through the use of European ships, Asians were prominently involved, directly and indirectly, in its conduct. Asia's intraregional trade and global trade were interactive and mutually promoting. Developing from this complex trading network were a port system (hard infrastructure) and a merchant class (soft infrastructure) that continue to serve the region well today.

On the monetary side, Asian trade was facilitated by the use of precious metals as a form of currency. The fact that Asia produced more goods desired by Europe than vice versa created a balance of payments problem for the Europeans, which they resolved by using precious metals (particularly silver) to pay for their Asian purchases. While much of this silver came from the Americas, Japan was a large producer within Asia.

In contrast to its strength and prominence in earlier periods, Asia's economy weakened in the latter part of the millennium due in part to the effect of the Industrial Revolution in Europe and the colonization of a number of Asian nations. Colonialism had a largely negative impact on the region resulting in de-industrialization and a decline in the standard of living, among other things. Although the colonialists did bring capital and technology to their colonies, their failure to provide training and management experience to the local population meant that the colonies were poorly equipped to compete on a global level once independence was attained.

Economic history tells us that Asia has been an open region fully involved in the world economic system for much of the previous millennium and that it played a prominent role in worldwide trade and the global division of labor during that time. At the same time, the concept of intraregional trade is not a new one for the region although 28
the intensity of this trade has fluctuated from time to time throughout history. If it continues to exist today, this global/intraregional network has profound implications for regional integration in East Asia. We will follow this theme throughout the following chapters, where we will examine in the current period East Asia's trade and investment, as well as its financial and monetary systems as these relate to regional integration and cooperation.

29
# **Chapter 11 -East Asia Today**

The review of Asian economic history in Chapter I revealed two aspects of trade in the region (i.e., intraregional and global) that overlapped and interacted in such a way as to have effectively functioned as one system. This, in addition to the evidence of Asia's prominent role in the global economy at that time, supports the argument that Asian trade has been open and global for centuries.

In this chapter, we will take a look at the region in the current period and focus on two characteristics that have figured significantly in the development of East Asian regional cooperation; i.e., diversity and openness. Certain economic and social indicators will provide an overview of the region in terms of economic size and development, educational level, life expectancy, and ethnic and religious breakdown. These will reveal the heterogeneity of East Asia, particularly in comparison with other regions of the world; e.g., North America (herein represented by NAFTA) and Europe (represented by the EU).3 Other indicators will reveal the degree of East Asia's openness and integration with the global economy. Relative to these indicators, the significance of the member composition of various regional institutions (e.g., ASEAN and APEC) will be explored. **134**

# **A Diverse Region**

If any single word can be used to describe East Asia, that word is "diverse". Nearly every aspect of the region can be characterized as diverse whether it be country size, ethnicity, religion, language, politics, or economic development. Compared to Europe, for example, "[ ... ] East Asia is characterized by greater diversity in terms of size, the level of economic development, industrial structures, the depth of financial markets, and broad institutional frameworks [... .].,135 East Asia's ethnic, religious and political diversity is clearly demonstrated in Table S.1 in the Statistical Appendix,'<sup>36</sup> which provides a breakdown in these areas for each country. With few exceptions, the countries of East Asia are home to varied populations that in the aggregate espouse nearly every religion in the world. Some ethnic groups (e.g., Chinese and Malay) are present in several countries - as a majority in some and a minority in others. The small country of Myanmar claims 135 ethnic groups within eight major races, whereas Japan and Korea each are home to only one ethnic group with just a small minority of one other. Systems of government include variations on constitutional monarchies, republics (independent and parliamentary), communist states, and military governments, among others.

Illiteracy and life expectancy data for these countries reveal further heterogeneity. For example, Table S.2 shows the illiteracy level in 1999 to be extremely low for Korea (1 percent and 4 percent for males and females, respectively), but very high for Cambodia (41 percent and 79 percent, respectively). The difference in life expectancy among countries is also wide - for Japan and Hong Kong it is above 80 years, while for Cambodia and Lao PDR it is only 54 years.

The heterogeneity reflected in these social indicators is in part related to the region's economic diversity. Table 2.1 below shows basic measures of economic size, including land area, population level and density, and gross national income (GNI).

30
Output or gross domestic product (GDP) is covered in a subsequent table."<sup>37</sup> Financial market size and degree of financial development will be dealt with in Chapter V.

31
Table 2.1

||SurfaceArea<br>1000Km<sup>2</sup>|Population<br>(millions)|Sizeof**the**Asia<br>Population<br>Density<br>(perKi <sup>2</sup>)|nEconomy**-1999**<br>GNI<br>(USSbillions)|<br>GMPerCapita<br>(USS)|PPP GNI<br>(USSbillions)|PPPGMPer<br>Capita<br>**(USS)**|
|---|---|---|---|---|---|---|---|
|BruneiDarussalam|6|0.3|61|7.8|24,630|||
|Camtodia|181|12.0|67|3.0|260|16|1,350|
|indonesia|1,905|207.0|114|125.0|600|550|2,660|
|LaoPDR|237|5.0|22|1.5|290|7|1,430|
|Mataysia|330|23.0|69|76.9|3,390|173|7,640|
|Myanma|677|45.0|68|_||||
|PhiNppines|300|74.0|249|78.0|1,050|296|3,990|
|Singapore|1|4.0|6,384|95.4|24,150|88|22,310|
|Thailand|513|60.0|118|121.1|2,010|358|5.950|
|Vietnam|332|78.0|238|28.7|370|144|1,860|
|China|9.598|1,254.0|134|979.9|_<br>780|4,452|3,550|
|HongKongSA|_|7.0||165.1|24.570|152|22,570|
|Taiwan|36|22.0|611|290.5|13,235|||
|Japan|378|127.0|336|4,054.5|32.030|3,186|25,170|
|Korea|99|47.0|475|397.9|8,490|728|15.530|
|Australia|7,741|19.0|2|397.3|20,950|452|23,850|
|NewZealand|271|4.0|14|53.3|13,990|67|17.630|
|Canada|9,971|30.0|3|614.0|20,140|776|25,440|
|Chile|757|15.0|20|69.6|4,630|126|8,410|
|Mexdco|1,958|97.0|51|428.9|4,440|780|8,070|
|PapuaNew Guinea|463|5.0|10|3.8|810|11|2,260|
|Peru|1,285|25.0|20|53.7|2.130|113|4,480|
|Russia|17,075|146.0|9|329.0|2,250|<br>1,022|6,990|
|United States|9,364|278.0|30|8,879.5|31,910|8,878|31,910|
|ASEAN|4,476|508.0|113|529.6|1,043|1.632|3,213|
|ASEAN+3|14,551|1,936.0|133|5,961.9|3,079|<br>9,998|5.164|
|APEC|62,377|2,522.01|40|17,242.1|6,837|22,352|8,863|
|NAFTA|21,293|405.0|19|9,922.4|24,500|10,434|25,763|
|EU|3,247|376.4|116|8,434.4|22,408|8,296|22,040|

GNI = gross nationai income; GNI per capita is calculated using the World Bank Atlas method; PPP is purchasing power parity. Brunei Darussalam - GNI data is 1998.

Taiwan data not precisely comparable to others. Taken from Taiwan Government Natb. Stats. GNI data is 'GNP at Current Prices'. Source: Wold Bank's World Developmfent Indicators 2001 The first 10 countries listed in the above table are the member economies of the Association of Southeast Asian Nations (ASEAN).1<sup>38</sup> This group comprises countries that range in size from only 1,000 sq. km. (Singapore, a city-state) to nearly 2 million sq. km. (Indonesia, a group of more than 17,000 islands). Population size ranges from the smallest of around 300 thousand (Brunei Darussalam) to 207 million (Indonesia).

The GNI per capita reveals wide differences in income levels for ASEAN members with Brunei Darussalam and Singapore reporting the highest and Cambodia, the lowest. The World Bank ranks Singapore 22"" worldwide for this measure'<sup>3 9</sup> and Cambodia, 187th. The newest members of ASEAN (Cambodia, Lao PDR and Vietnam) have GNIs well below those of the original members. (Data for Myanmar are not available.) The original ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand) was a fairly homogeneous group. Its enlargement with the addition of new 32
members (Brunei Darussalam, Cambodia, Lao PDR, Myanmar and Vietnam) brought more diversity. Heterogeneity would increase even further with the addition of the "PlusThree" (ASEAN-Plus-Three or APT) countries of China, Japan and South Korea. China's enormous population of 1.3 billion people dwarfs that of every other APT country. Japan's GNI per capita does the same for income, although on a PPP basis it is not far above that of Singapore (1999).

The effect of adding the Plus-Three countries to ASEAN is immediately visible in the comparison of regional groups at the bottom of Table 2.1. GNI in absolute terms is $530 billion for ASEAN but jumps to $5,962 billion for ASEAN+3, over ten times greater. Of course, this difference is primarily due to Japan's enormous GNI level of $4,055 billion. On a PPP basis, however, the GNI level of ASEAN+3 is six times that of ASEAN due more to China's $4,452 billion than to Japan's lower $3,186 billion. However, when China's enormous population is taken into account (in the GNI per capita figures), its level drops far below that of Japan - even on a PPP basis.

Taking the analysis one step further to include all the countries in APEC, the level of diversity increases even more, particularly with the addition of the United States. In addition to the increasedL heterogeneity in the ethnic, religious and political mix of APEC, the overall economic developmental level of the group shifts considerably. With the exclusion of Cambodia, Lao PDR and Myanmar (not members of APEC) and the inclusion of Australia, New Zealand, Canada, Taiwan and Hong Kong, the pendulum swings towards the more economically developed side. Thus the shift from ASEAN+3 to APEC leaves behind the smaller economies of East Asia and includes some much larger economies outside the region.

Some perspective can be gained through comparisons with the EU nations. Indicators of the EU's economic size for 1999 appear in Table 2.2 below.

Table 2.2

||||**Sizeoft **<br>**_opulation**|**heEUEconomy**<br>1999|||**prir**<br>**P**<br>Irer|
|---|---|---|---|---|---|---|---|
||Area<br>1000Km'|Population<br>(millions)|Density<br>(perKm')|GNI<br>(USSbillions)|GNIper capita<br>(US$)|PPPGNI<br>(USSbillions)|capita<br>**(USS)**|
|Austria|**84**|8.0|**98**|205.7|25,430|199|24,600|
|Belgium|**33**|10.0|**312**|252.1|24,650|**263**|25,710|
|**Denmark**|**43**|5.0|**126**|170.7|**32.050**|**13i**|25,600|
|**Finland**|**338**|5.0|17|127.8|24,730|117|22,600|
|France|552|59.0|107|1,453.2|24,170|1,349|23,020|
|**Germany**|**357**|**82.0**|**235**|**2,103.8**|**25.620**|**1,930**|**23,510**|
|**Greece**|**132**|11.0|**82**|**127.6**|**12,110**|166|15,800|
|**Ireland**|**70**|4.0|54|80.6|21,470|84|22.460|
|**Italy**|**301**|58.0|**196**|1,162.9|20,170|1,268|22,000|
|Luxembourg|**3**|0.4|166|18.6|42,930|18|41,230|
|Netherlands|41|16.0|466|397.4|25,140|386|24,410|
|Pcrtugal|**92**|10.0|**109**|**110.2**|**11,030**|**158**|**15,860**|
|**Spain**|**506**|**39.0**|**79**|**583.1**|**14,800**|**704**|**17,85**|
|**Sweden**|**450**|**9.0**|**22**|**236.9**|**26,750**|**196**|**22,150**|
|UnitedKingdom|**245**|60.0|**246**|1,403.8|23,590|1.322|22,220|
|TotalEU|**3,247**|376.4|1161|<br>8,434.4|**22,408**|**8,296**|**22,04i**|
|**GNI**=grossnation<br>Source:TheWorld|<br>alIncome;**GNI**<br> Bank.**Worid**D|**per**capitaIscalc<br>evelopmentIndic|ulated using**the** <br>ators**2001**|<br>WoridBank Atlas|<br>method;PPPispurc|<br>hasing**pawer parity**|**.**|

33
For the EU, differences in population size among nations are<sup>not as wide as for</sup> Asia. Although Luxembourg's population is extremely small<sup>(400,000),the largest</sup> country in the EU (Germany) has only 82 million people,<sup>which is minusculecompared</sup> to China's 1.3 billion.

Two observations can be made from the GNI figures. Firstly, there is the difference in the aggregate level of economic development<sup>between the tworegions -</sup> East Asia comprises ten developing economies, four NIEs<sup>and onedevelopedeconomy.</sup> On the other hand, the EU comprises 15 exclusively developed<sup>economies.</sup> Secondly, the uniform level of development among the EU countries<sup>is readily</sup> observable in the GNI per capita figures, which are mostly between<sup>$20,000 and $30,000</sup> with a few exceptions at both the low and high ends. The lowest<sup>WorldBank ranking for</sup> the EU economies is 4 9 th place for Portugal, although most<sup>countriesareamong the top</sup> 30 nations in the world in this category. Comparatively,<sup>mostof theEast Asian</sup> economies ranked between 80th place and 200t place. (There are<sup>slightly over 200</sup> countries in the ranking). Japan (7h), Korea (5 4th), Hong Kong<sup>(1</sup> 9 )), and Singapore (22nd) are exceptions. (Taiwan is not ranked.) 34
Table 2.3

||**Gr**|**ossDomesti**|**cProduct- 1**|**999**|||
|---|---|---|---|---|---|---|
||GDP|GDPPer<br>Capita|Percentof<br>WorldGDP|Percentof<br>APEC GDP|Percentof<br>ASEANGDP|Percentot<br>ASEAN+3<br>GDP|
||(US$nmillions)|USS|_<br>_|_|_<br>_%||
|BruneiDarussalam|||||||
|Cambodia|3,117|260|0.01||0.58|0.05|
|Indonesia|142,511|688|0.46|0.79|26.36|2.27|
|LaoPDR|1,432|286|0.00||0.26|0.02|
|Malaysia|79,039|3,436|0.26|0.44|14.62|1.26|
|Myanmar|||__||||
|Philippines|76,559|1,035|0.25|0.43|14.16|1.22|
|Singapore|84,945|21,236|0.28|0.47|15.71|1.35|
|Thailand|124,369|2,073|0.40|0.69|23.00|1.98|
|Vietnam|28,682|368|0.09|0.16|5.31|0.46|
|China|989,465|789|3.20|5.50||15.75|
|Hong KongSAR|158,943|22,706|0.51|0.88|||
|Taiwan(1993&1999)'|287,881|13,086|0.93|1.60|||
|Japan|4,346,922|34,228|14.08|24.18||69.17|
|Korea|406,940|8,658|1.32|2.26||6.48|
|Australia|404,033|21,265|1.31|2.25|||
|New Zealand|54,651|13,663|0.18|0.30|||
|Canada|634,898|21,163|2.06|3.53|||
|Chile|67,469|4,498|0.22|0.38|||
|Mexico|483,737|4,987|1.57|2.69|||
|PapuaNew Guinea|3.586|717|0.01|0.02|||
|Peru|51,933|2,077|0.17|0.29|||
|Russia|401,442|2,750|1.30|2.23|||
|UnitedStates|9,152,098|32,921|29.64|50.90|||
|ASEAN|540,654|1,168|1.75|3.01|100.00|8.60|
|ASEAN+3|65,283.981|3,323|20.35|34.95||100.00|
|APEC|17,980,103|7,129|58.23|100.00|||
|NAFTA|10,270,733|25,360|33.26|_||1|
|EU|8,478,054|22,524|27.461||||
|World|30,876,254|5,165|100.00||||

1 Taiwan data from Taiwan Govemment National Statistics. May not be directly comparable to others. Source: World Bank's World Development Indicators 2001

> GDP, another measure of economic size, is presented in Table 2.3 above. GDP tells a story that is consistent in terms of economic size and diversity with that of previously discussed measures. Among the ASEAN countries, Singapore's $21,236 (1999) is over 80 times that of Cambodia's $260. If the grouping is extended to include all ASEAN+3 countries, then Japan's per capita GDP ($34,228) becomes the highest and

> is about a hundred times greater than that of the newest members of ASEAN.

The difference in economic development among countries is even more apparent if a country's share of global GDP is measured. None of the ASEAN countries' shares of global GDP is greater than 0.50 percent, and in the aggregate, ASEAN's GDP is only 1.75 percent of worldwide GDP. If China, Japan and Korea are included, the share rises 35
significantly to 20 percent. If the APEC grouping is considered, the aggregate share jumps to 58 percent but the range of individual country shares within the group is extremely wide - from a low of 0.09 percent for Vietnam to a high of nearly 30 percent for the U.S.

Of course, the presence of the smaller Asian countries in a group is more significant the smaller the grouping. This is readily apparent in the columns showing the percent of APEC GDP and the percent of ASEAN GDP. In APEC, the U.S. makes up 51 percent of the group GDP, while the ASEAN countries (those that are also members of APEC) make up only 3 percent on a combined basis. Within ASEAN-Plus-Three (APT), the share of the ASEAN countries in the group's aggregate GDP rises to 8.6 percent. Japan has by far the largest share at 69 percent while the shares of China and Korea are only 16 percent and 6 percent, respectively.

Comparing the GDP levels of the three East Asian groupings with those of NAFTA and the EU highlights differences in economic development more than in group size. In total GDP, APEC is the largest of all the regional groupings ($18 trillion or 58 percent of world GDP) reflecting, of course, the $9 trillion GDP of the U.S. The 20 percent global share of ASEAN-Plus-Three, however, is not a great deal less than the EU's 27 percent or even NAFTA's 33 percent. ASEAN's share, on the other hand, is very small (1.75 percent) when compared to these other regions.

Another important comparison is that with the Free Trade Area of the Americas (FTAA), which is a megaregional trade arrangement (MTA)1<sup>40</sup> slated to ultimately (in 2005) include 34 countries in the Western Hemisphere. Table S.3 in the Statistical Appendix shows GDP and GNI of the countries included in this group. The FTAA's share of global GDP (1999) at 38 percent is greater than that of ASEAN-Plus-Three (20 percent), NAFTA (33 percent) and the EU (27 percent), although considerably smaller than that of APEC (58 percent). Here again, however, the major share belongs to the U.S., without which the FTAA's share would be only 8.5 percent compared to APEC's considerably higher 29 percent (excluding the U.S.). This reflects the inclusion in the FTAA of the many developing economies in Latin America and the Caribbean.

The heterogeneity of economic development within East Asia can also be seen in the structure of output (GDP), which for 1999 is shown in Figure 2.1 (value added as a percent of total GDP for agriculture, industry and services.) (Complete data for 1990 and 1999 are shown in Table S.4 in the Statistical Appendix.) As might be expected, the newer (and lesser developed) members of ASEAN, in particular Cambodia, Lao PDR and Myanmar, are more reliant on agricultural production. 41 For Singapore, the Philippines, Thailand and Vietnam, services provide the greatest contribution to output, while for Indonesia and Malaysia, the largest share comes from industrial production.

36
Figure 2.1 <!-- Start of picture text --> ASEAN Structure of Output GDOP) -1999<br><!-- End of picture text --> <!-- Start of picture text --> 70 -<br>0--_. _ ____ '__ _.__.' __v-_<br>60<br>b40<br>-- ~~~~~~~~~~~~~~~~~~~~OService<br>20 --<br>10<br>Cambodia Indonesia Leo PDR Malaysia My4imar Philppines Singaore Thailnd Vistmrn<br>NOTE: Data for Brunei Darussalam not available<br>Source: The World Bank, World Development Indicators 2001<br><!-- End of picture text --> In the aggregate, the largest<sup>contributionto output for ASEANis fromservices</sup> (47 percent of GDP), although<sup>industryisa closesecondat 39percent with mostof this</sup> being from manufacturing.<sup>(SeeFigure 2.2 belowand TableS.4intheStatistical</sup> Appendix.) In the European<sup>MonetaryUnion (EMU),'42the contributionto output from</sup> services (71 percent of GOP)<sup>farexceeds that of industry(27percent)andagriculture(2</sup> percent). Again, this is a<sup>reflectionof the widedifferencein the overall development</sup> levels of East Asia and Europe.

37
Figure 2.2 <!-- Start of picture text --> GDP Breakdown by Reglonal Group -19S9<br>a,<br>70<br>a,~ ~ ~ -<' -<br>10<br>20<br>ASEAN ASEAN 3 EMU<br>Brunei Darussalam and Myanmar not Included.<br>Source: The World Bank, World Development Indicators 2001<br><!-- End of picture text --> East Asian economies have a very high savings rate. [See Figure 2.3 showing Gross Domestic Savings (GDS) and Gross Capital Formation (GCF) 43 as a percentage of GDP for East Asian countries. Data for 1990 and 1999 can be found in Table _S.5_ in the Statistical Appendix.] For 8 out of the 12 countries included in Figure 2.3, the savings rate is above the average (in most cases well above) for economies of their respective income level.'<sup>4 4</sup> Also revealed in this figure is that most of these countries have a surplus of savings over investment. With few exceptions, the ratio of GDS to GCF is over 100 percent, which is near the average for high-income countries.'<sup>45</sup> Although the overall savings rate for the region is very high, rates for individual countries vary considerably; e.g., Cambodia's savings rate (GDS/GDP) is only 5 percent and Singapore's is over 50 percent, a difference of 45 percentage points.

38
Figure 2.3 <!-- Start of picture text --> Gross Domestic Savings and Gross Capital Formation - 1999<br>50<br>47'~~~~~~~~~~~~4<br>40 __<br>z 30 -MD 33 53~~~~~~~~2 F- S<br>24 ~ ~ ~ ~ ~ .Ž<br>201<br>p 4~~~~<br>Carnbda Indornsa LaaPDR Malaysia Myanrnar PNlippines Sigapore Thailand Vietnam China Japan Korea<br>NOTE: Data for Brunei not available<br>Source: The World Bank, World Development Indicators 2001<br><!-- End of picture text --> Investment rates (GCF/GDP)<sup>aresomewhatmoreconsistent thansavings rates</sup> economies<sup>-generallyin the rangeof 20 to 30percent(exceptfor</sup> among individual Cambodia and Myanrmar).<sup>China'srateis remarkableat37 percent,the highestamong</sup> the countries included in Figure<sup>2.3.While it can financeits current(1999) levelof</sup> investnent with domestic<sup>savings,it does not have a large savingssurplus, as do</sup> Malaysia, Singapore, Thailand<sup>and Indonesia.For a poorereconomy,even a high</sup> savings rate has little impact<sup>asit can raiseonly small amountsfor investmentso that</sup> these economies need to rely<sup>on othersourcesof funds, includingdevelopment</sup> assistance. 1<sup>46</sup> East Asia's savings and<sup>investmentrates are higher than those of other regions,as</sup> shown in Figure 2.4. In particular,<sup>ASEAN'ssavings rateof 35percent isnearlydouble</sup> that of NAFTA and one and<sup>a half timesthat of the EMIU.Of course,this is not</sup> surprising given the low savings<sup>ratesin westerncountries;forexample18 percent</sup> (GDS/GDP) in the U.S. (1999)<sup>and16 percentin theU.K.Theinvestmentratefor</sup> ASEAN is more in line with<sup>that of NAFTAandthe EMNUbut therate forASEAN+3(28</sup> percent) is pushed up by<sup>the inclusion of Chinain this grouping.</sup> 39
Figure 2.4 <!-- Start of picture text --> GDS £ GCF - Regional Groups, 1999<br><!-- End of picture text --> <!-- Start of picture text --> 40<br>Ss<br>35 -......<br>30 - 28<br>25 _ .___<br>15 - _ . -_ 10~~~~~~~~~~~~~~~~~~~~~~2 t . g I , -_<br>20<br>ASEAN ASEAN+ 3 APEC NAFTA EMU<br>NOTE: Bnrnei Darussalam and Myanmar are not included,<br>Source: The World Bank, World Development Indicators 2001<br><!-- End of picture text -->

# An **Open and Globally** Integrated **Region**

Both trade and FDI have been significantly liberalized in what the World Bank refers to as the "third wave of integration (or globalization)" beginning in the 1980s and progressing since then by virtue of transportation and communications technology, declining tariffs and lower barriers to FDI. 1<sup>4 7</sup> The effect of this globalization on East Asia is evident in the data presented below.

Trade expansion is an indication of the level of openness of an economy measured by the ratio of its total trade (imports and exports) to GDP. (See Table 2.4.) 40
Table 2.4

||**I**|**ntegrationwi**|**ththeGlobalEcono**|**my**|||
|---|---|---|---|---|---|---|
||<br>**TradeInG **|<br>**oods'**|**GrossPrivateCa**|**pitalFlows**<sup>**2**</sup>|**Gross**|**FDI3**|
||**%ofG**|**DP**|**%ofGD**|**P**|**%ofG**|**DP**|
||**1990**|**2000**|**1990**|**2000**|**1990**|**2000**|
|Cambodia|**22.4**|**40.2**|**3.2**|**6.8**|**1.7**|**3.9**|
|Indonesia|**41.5**|**62.4**|**4.1**|**8.5**|**1.0**|**4.2**|
|LaoPDR|**32.3**|**52.7**|**3.7**|**8.7**|0.7|**5.4**|
|**Malaysia**|**133.3**|201.3|10.3|16.8|5.3|**2.0**|
|Philippines|47.6|**98.5**|**4.4**|48.4|1.2|**2.8**|
|Singapore|309.9|295.3|54.6|48.5|20.7|11.6|
|Thailand|66.1|107.2|13.|**11.3**|3.0|**2.8**|
|Vietnam|79.7|96.0|n.a|10.8|n.a.|4.1|
|China|32.5|43.9|2.5|12.7|1.2|**4.3**|
|Hong Kong,China|223.5|256.2|n.a.|188.8|n.a.|89.2|
|Japan|17.1|17.7|5.4|10.3|1.7|**0.9**|
|Korea|53.4|72.8|6.2|11.5|0.7|**3.2**|
|Canada|43.8|75.8|8.1|30.0|2.7|16.1|
|Mexico|**32.1**|**60.8**|**9.2**|**6.3**|**1.0**|**2.3**|
|UnitedStates|15.8|20.7|**5.7,**|16.9|**2.8**|5.1|
|EastAsia&Pacific|48.8|**65.6**|**5.3**|**13.3**|1.5|**3.9**|
|Europe EMU|44.9|**56.3**|14.1|**49.31**|2.9|14.8|

1. The sum of merchandise exports and imports measured in current U.S. dollars, **divided** by the value of GDP in U.S. dollars.

2. The sum **of** the absolute values cf direct, portfolio, and other investment inflows and outflows recorded in the balance of payments financial accoLnt, excluding changes in the assets and liabilities of monetary authorities and general govemment.

3. The sum of absolute values **of** inilows and outflows of FDI recorded in the balance of payments financial account. This indicator differs from the standard measure **of** FDI, which captures only inward investment Note: Data not available for Brunei Darussalam, Myanmar, and Taiwan; data for some countries may be for a year different than indicated.

Source: The World Bank, **Worid** Demelopment Indicators 2002, Table 6.1, pp 332-334.

The East Asia and Pacific region has a considerably higher trade/GDP ratio (66 percent in 2000) than that of the European Monetary Union (EMU) and NAFTA (i.e., Mexico, the U.S. and Canada shown separately in the above table). There is a significant difference in the level of this ratio almong the individual East Asian economies with Singapore and Hong Kong at the higher end, reflecting their roles as entrepots, and China and the smaller ASEAN countries at the lower end, reflecting the slower opening of their economies.

Another important indicator of the degree of openness in trade is the import tariff, 1<sup>4 8</sup> which has been r educed significantly over the last decade largely due to the effects of regional and global trade arrangements. (See Figure 2.5 below.) 41
Figure 2.5

# **Import Tariffs All Products**

<!-- Start of picture text --> 45.0<br>40.0 -<br>019839<br>__.0 ___ - _- : a 02000<br>3ao.0 --<br>F-25.0<br>10.0<br>5.0 ___ __ __<br>0.0<br>0< + < 4' / ,a 4' 4' CX .6'a 4 'SZ<br><!-- End of picture text --> NOTE: Eariy year, shown as 1989, actually varies by country<sup>between1988 and1994,andlater year, shownas2000,varies between</sup> 1995 and 2000. Data not available for countries not shown.

Source: The World Bank, World Development Indicators<sup>2002, Table 6.6,pp348-350.</sup> In the early 1990s, import tariffs for East Asian economi were much higher than those in NAFTA and the EU reflecting the region's<sup>developing-countrystatus' 50and</sup> the EU and NAFTA'sl<sup>51</sup> earlier trade liberalization.<sup>152By 2000,however,averagetariffs</sup> in East Asia had declined sharply, particularly in the ASEAN countries<sup>1</sup> " partly due<sup>to</sup> progress under AFTA and APEC's Bogor Declaration. As a result of<sup>China's</sup> preparations for WTO accession, its average tariff dropped<sup>from 41percentin 1992to</sup> 16.3 percent in 2000 in all products (primary and manufactured.) The level of private capital flows into a country indicates the strength of its investment climate and reflects the degree of liberalization of<sup>its financialmarkets.As</sup> seen in Table 1, this level as a percent of GDP for East Asia<sup>remains quite low(13.3</sup> percent) compared to, for example, 49 percent for the EMU. This reflects<sup>the effectof</sup> the crisis and East Asia's comparatively lesser developed financial markets.

The most significant capital flows for developing countries, including<sup>East Asia,</sup> are foreign direct investment flows. But even these<sup>were very small(3.9 percent of GDP)</sup> for East Asia and the Pacific in 2000. However, in 2001,<sup>theAsia-Pacificregion</sup> introduced the largest number of changes in FDI regimes designed to create<sup>a more</sup> favorable investment climate to attract more FDI. Out of 194 such<sup>favorable regulatory</sup> changes made worldwide, the region's share was 43<sup>percent.154</sup> East Asia's liberalized trade and FDI were instrumental in the region's<sup>growth in</sup> the 1 980s and early 1 990s. During that time, East Asia had opened<sup>up toother typesof</sup> 42
private capital flows (non-FDI), which eventually led to the 1997-98 crisis as countries in the region were ill-prepared to cope with the volatility of these types of flows. The crisis brought to an abrupt end the earlier burst of super growth, discouraged foreign investment, and caused countries in the region to become wary of such investment. Yet the importance to econornic growth of remaining open to trade and FDI is well recognized by the region's economies.

# **Concluding Remarks**

A look at East Assia's social, economic and political structures reveals a region of enormous diversity, particularly when compared with other regions of the world. While this undoubtedly presents challenges for regional cooperation in East Asia, it does not preclude it. As Tay and Estanislao (2000) point out, "diversity and cooperation are not, of course, opposites."'55 They go on to explain that if cooperation among countries is to succeed, it is more impoitant that they have "central policies and directions that all agree on" than that they be identical. This, of course, raises the question of how East Asian economies should proceed in cultivating these "central policies and directions".

Volumes of data and extensive analysis are not needed to show that Japan, for example, is a large developed economy and Lao PDR is a small developing economy and the two must, therefore, follow widely divergent paths to achieve economic growth over the next decade. However, the analysis in this chapter goes beyond that to present a picture of the major regional groupings within East Asia comparing them to one another and to other regional groups globally across various indicators. From this analysis, several questions come to mind.

What level of economic diversity in a regional grouping would maximize the benefits of cooperation for the economies of East Asia? An economy the size and developmental status of (Cambodia (GDP of $3 billion) or Lao PDR (GDP of $1 billion), for example, could be dwarfed by the economic power of a developed country such as Japan (GDP of $4 trillion) or the U.S. (GDP of $9 trillion), or by the huge potential of China with its enormous population of 1.3 billion people and GDP of $989 billion, which is at the same time a potential market and a cheap labor source.

Is it reasonable to expect that the interests and economic well being of a small developing economy in Asia would receive the same consideration as that of a highly developed western economy if both were members of the same regional group, such as APEC? Is a single regional institution the only possibility or could multiple groups comprising different but sometimes overlapping memberships serve some purpose, at least initially?

As a group, how would ASEAN, which has only a 1.75 percent share of world GDP, fare in competition with the EU and NAFTA, which have 27 and 33 percent shares, respectively? Would a group such as ASEAN-Plus-Three, with a 20 percent share of world GDP, fare better? And, of course, APEC would be even larger and more competitive, but it is perceived by some countries as not being strictly "Asian" and, therefore, not fulfilling the requirements of a true regional forum.

It can be argued that a group comprising developmentally similar economies would be a more workable arrangement in which smaller members would have more influence, but perhaps more compelling is the argument in favor of agreements between industrial and developing economies in that they can bring significant benefits to the 43
developing partners in the form of enlarged export markets, accelerated FDI, and technology transfer. _1_<sup>_5 6_</sup> While an East-West regional grouping is one possible type of _industrial country-developing country_ arrangement, a North-South regional arrangement might be more beneficial and feasible as it would involve shared history, culture, and long-established trade relationships. Given the degree of openness and global integration of East Asia as a whole, one might even ask whether a regional arrangement is necessary or desirable at all, or whether multilateralism is preferable.

Chapter II raises more questions than it answers but does inform the discussion of how to pursue regional integration in East Asia. The following chapters will bring greater clarification to this issue through an examination of East Asia's regional institutions, trade and FDI, financial systems, and monetary regimes.

44
# **Chapter III - Re(gional Institutions in East Asia**

In the second half of the 20 th century, regionalism in East Asia became more purposeful and structured as regional institutions (e.g., ASEAN and APEC) were established. This was prompted by the departure of colonialism from the region. In this environment, Asian nations were faced with the necessity of taking charge of their own economic development and solving their own political and security problems.

While there is ample evidence that Asian nations have engaged in intraregional trade for many centuries, this is not to say that Asia has followed a well-defined or purposeful strategy toward regional economic integration. Centuries ago, Asia's intraregional trade was driven by geographical proximity and the desire for profit. In the 20<sup>thcentury,regional cooperation took a more deliberateturn but the motivation behind it</sup> was more political than economic. Nevertheless, in the last ten years or so, economic and monetary cooperation within East Asia has made some progress. There is developing a strong desire, if not quite to the extent of complete commitment, to further regional cooperation among East Asian nations.

This chapter looks at regionalism in East Asia from the perspective of the region's institutions. Regional institutions have been slow to develop in East Asia and in fact are still evolving. As cooperation among the nations of the region becomes a higher priority, attention is increasingly directed toward forming the type of institution that would best serve the interests of the region and the individual countries therein. There are several regional groupings that currently represent the region in one respect or another, the most prominent of which are ASEAN (and its extensions) and APEC. This review will cover the motivation for the fonnation of these institutions, as well as their objectives and achievements.

East Asia's efforts to formalize regional cooperation into a workable arrangement for the promotion of trade, investment and security in the region have been varied but, until recently, not extensive. These efforts have been complicated by (1) the heterogeneity in many aspects of the region, (2) historical political tensions between certain countries, (3) the clesire to protect national interests and specific industries (e.g., agriculture and automobiles), and (4) Asia's already established openness in trade and FDI and its long-standing relationships with the U.S. and the EU. This has led to the formation of a number of regional cooperative arrangements.

The most prominent of these institutions today are the Association of Southeast Asian Nations (ASEAN) and Asia-Pacific Economic Cooperation (APEC). Some others that are perhaps less well known but currently operative are Asia-Europe Meeting (ASEM), Bangkok Agreement, and Australia-New Zealand Closer Economic Relations Trade Agreement (CER). There have, however, been other groups comprising East Asian nations, as well as countries outside the region, that no longer exist but that are relevant to the formation and development of currently existing institutions. Some of these are described in Table 3.1 below: 45
Table 3.1

|**Earl**<br>|**EffortsatRegiona**<br>|**lCooperation**<br>|
|---|---|---|
|**Institution**|**Dates of**<br>**Existence**|**Purpose**|
|Southeast AsianTreaty<br>Organization(SEATO)|1954-1977|StartedbytheU.S.aspartofits<br>globalanti-communistmilitaryand<br>securityalliance.Dominatedbythe<br>West withonlythePhilippinesand<br>ThailandfromSEAsia.Endedwhen<br>_<br>U.S.withdrewfromVietnam.|
|AsianandPacificCouncil<br>(ASPAC)|1966-1973|InitiatedbySouth Koreaasamulti-<br>regionalorganization against<br>communismforsecurity purposesand<br>future cooperation. Includes only<br>Malaysia,the Philippines,South<br>VietnamandThailandfromSEAsia.<br>Indonesia refusedtojoin.Dissolved<br>in1973.|
|AssociationofSoutheast<br>Asia(ASA)|1961-1963|FirstattemptbySEAsian nationsat<br>regionalcooperation initiatedby<br>Malaya andincludingthePhilippines<br>and Thailandas well.Purpose was<br>economic and cultural cooperation.<br>DissolvedwhentheFederationof<br>Malaysia wasformed amongMalaya,<br>Sabah (North Borneo), Sarawak and<br>Singapore.Bruneideclined tojoinfor<br>fearoflosingits oilrevenuesand<br>becauseofleadershipissues.The<br>Philippinesrefusedtorecognizeit<br>becauseofitsown claimsonSabah,<br>andPresidentSukarnoofIndonesia<br>strongly objectedtoaFederationof<br>Malaysia.|
|MAPHILINDO|July- Sept.1963<br>Source:**Tongzon**(199|RivalofASAincludingMalaya,<br>PhilippinesandIndonesia to promote<br>economic, military,culturaland<br>social cooperation.Focusedon<br>welfareofMelayuregionsonot<br>supportedbynon-Malaymembers.<br>EndedwhenFederationofMalaysia<br>formed.<br>8:3-4)|

46
The success of these early groups was jeopardized by territorial disputes, the preference for nationalism over regionalism, racial tensions, ideological animosity, and mutual distrust. There was obviously a need for a regional grouping that would serve to unify Southeast Asian nations to deal with divisive issues and political tensions in the face of (1) the departure of the U.S. and Britain, which left a power vacuum in the region, and the closing of foreign military bases, (2) the rise of communism, (3) the increasing economic strength of Japan, and (4) various regional disputes among themselves.

# **ASEAN**

In August 1967, Indonesia, Malaysia, the Philippines, Singapore and Thailand signed the Bangkok Declaration thus forming the Association of Southeast Asian Nations (ASEAN). 1'7 Although ASEAN was officially open to all Southeast Asian nations from the very beginning, no other country joined until 1984 when membership began to expand with the admission of Brunei Darussalam. Thereafter, Vietnam joined in 1995, Lao PDR and Myanmar in 1997, and Cambodia in 1999.

The first of seven aims and purposes of ASEAN as stated in the Bangkok Declaration is "to accelerate the economic growth, social progress and cultural development in the region [ ]. 158 (The other six aims are similar in context.) Nonetheless, it is widely acknowledged that the main impetus for ASEAN's formation was political.'<sup>59</sup> In fact, it fulfilled quite well the political needs at the time of all ASEAN members; e.g., it facilitated the restoration of amicable relations between Malaysia and Indonesia, f-ostered the alliance between Thailand (which was on the front line of the Vietnam war) and other non-communist members, provided a forum for possible resolution of the Philippines' North Borneo (Sabah) claim, and ensured Singapore's continued existence as an independent state.'<sup>60</sup> ASEAN has contributed significantly to stability in the region. Chia (1997) attributes ASEAN's political success to the "ASEAN style of conducting regional relations, emphasising the principles of accommodation and consensus in decision making and non-interference in the domestic affairs of its members, and accommodating the needs of members at different levels of economic development."'61 She goes on to acknowledge, however, that this "consensus building" has inhibited, rather than promoted, economic cooperation within ASEAN.

Southeast Asian nations had thus recognized that the political environment in the region was changing significantly and moved to align themselves so as to deal with it in a unified manner that would at the same time preserve their national interests. They also perceived the potential benefits of being aligned economically but, although this was included as a goal in the founding document, their economic plan was less clear and the outcome less successful thian it was for their political aims.

ASEAN remained a primarily political organization for nearly ten years. Only in 1976, at the Bali Summit did it begin to focus on economic cooperation with the signing of the Declaration of ASE,AN Concord. In addition to programs for action in the political, social, cultural and security areas, it devoted considerable attention to cooperative actions related to production and export of basic commodities (food and energy), industrial projects, and trade. The last of these (trade) included a provision for 47
the eventual" [. . establishment of preferential trading arrangements as a long term objective [. .]..,6 According to Tan (2000), the economic rationale for ASEAN lies in the eventual establishment of a free trade area similar to the customs union established by the European Economic Community (EEC). Mention of a common market as a goal occurred as early as 1971 at the Fourth ASEAN Ministerial Meeting. However, Hadi Soesastro emphasizes: "The founding fathers of ASEAN made it clear that regional economic integration is not the objective of ASEAN."<sup>163</sup> This is supported by Simon SC Tay's assertion that ASEAN has expressly distanced itself from "any idea of integration, such as in the European Union."'64 While ASEAN spoke of regional economic "cooperation" it never mentioned regional economic "integration". It was formally mentioned for the first time in the Hanoi Plan of Action (December 1998).165 In order to fulfill its stated objective of economic cooperation, ASEAN attempted to implement a number of economic initiatives (most of which were industrial cooperation initiatives). Through industrial cooperation ASEAN aspired to facilitate economic cooperation by developing regionwide industrial capacity as an alternative to national industrialization. While on a national scale individual ASEAN economies have small markets and limited skilled labor, on a regional scale the ASEAN market comprises around 500 million people.

The early (through 1988) economic plans initiated by ASEAN are described in Table 3.2. These early initiatives were considered extremely ineffective. Later economic initiatives, such as the ASEAN Free Trade Area, have more substance but have some inherent structural problems.

Table 3.2

||**EarlyASEANEconomicInitiatives**||
|---|---|---|
|**Initiative**|**Purpose**|**DegreeofSuccess**|
|ASEAN Industrial Projects<br>(AEP)<br>1976|Establishedlarge-scaleindustrial<br>projects utilizing rawmaterialsfrom<br>membersandproducing fortheregional<br>market.|Limitedsuccess because:<br>*<br>Plannedinhaste resultingin<br>choiceofunprofitable<br>projects.<br>*<br>Requiredconsensus<br>decisionmakingthat ledto<br>delaysand highercosts.<br>Difficultiesin negotiating<br>financing between<br>governments.<br>*<br>Privatesector, while<br>importanttodevelopment,<br>wasnotsufficiently<br>involved.<br>*<br>Lackofnational commitment<br>to marketsharing.<br>*<br>DecentralizedASEAN<br>bureaucracyhampered<br>implementation.|
|PreferentialTrading<br>Arrangement (PTA)<br>1977|Providedforpreferentialtariffrates[or<br>marginofpreferences(MOP)] onbasic<br>commodities- reduced most-favored-|Implementationwasweak<br>because:<br>*<br>Manyimportant products|

48
||**Early**ASEAN**EconomicInitiative**<br>|**s**<br>|
|---|---|---|
|Initiative|Purpose|DegreeofSuccess|
||nationtariffrates.|withhightradevalueswere<br>excluded.<br>*<br>Countriesoffered irrelevant<br>itemssuchassnowplows or<br>productsnotproducedinany<br>otherASEANcountry.<br>*<br>Highdegreeofsimilarityin<br>itemsoffered.<br>*<br>Most itemsofferedwere not<br>majorimportsofmember<br>countries.<br>*<br>Verificationprocesswas<br>costly andmade the scheme<br>unattractivetothebusiness<br>community."<br>*<br>Narrow commoditycoverage<br>andsmallmarginsof<br>|
|||preference.|
|ASEAN Industrial|ImprovedversionofAIP.Scheme|Unsuccessfulbecause:|
|Complementation(AIC)<br>1981|throughwhich membercountrieswere<br>allocated complementaryproductsin<br>specificsectorsforproductionand<br>preferentialtradeamong members.<br>Promoted import-substitution<br>industrialization.The conceptwasto<br>pursuejointproductionofanASEAN<br>carbysharing productionofvarious<br>autopartsamongcountries.|*<br>Only oneproject(automobile<br>components)was approved.<br>*<br>Similarproblemstothoseof<br>AIPincludinglong<br>bureaucraticprocedure. Was<br>supposedtoincreaseprivate<br>sectorinvolvementbutfailed<br>to dosobecause planning<br>andimplementation<br>guidelinesdrawnupwithout<br>private sectorinput.<br>*<br>Allocationofproductsto<br>members hamperedby<br>universalpreferenceforhigh<br>value-addedcomponents.<br>*<br>Thuseach country,except<br>Singapore,developeditsown<br>automobileindustrywith<br>participationofMNCs.|

49
||EarlyASEANEconomic Initiatives||
|---|---|---|
|Initiative|Purpose|DegreeofSuccess|
|ASEANIndustrial Joint<br>Venture(AIJV)<br>1983|AprivatesectorversionofAlPs.Same<br>privilegesasenjoyedunderAIPsbut<br>hasmoreflexibility.Investorscan<br>locateprojectsinanyparticipating<br>country.Opentonon-ASEANnations<br>aslongasmajority ownershipbyat<br>leastone member.Emphasisonequity<br>andmarketsharing,unlikeAIC's<br>reciprocity.|Veryfewprojects thatwere<br>proposedwereeverimplemented.<br>Mosthadforeignequity<br>participationand fewwere<br>ASEAN-wideincoverage.<br>Reasons for lackofsuccess:<br>*<br>Delays duetobureaucratic<br>processes.<br>*<br>Members unwilling to<br>participateinjointventures<br>with preferential tariffs<br>becauseofthreat toown<br>industries.<br>*<br>Members unwillingtoimport<br>productsofprojectsunless<br>own productswereimported<br>byothermembers.|
|TheBrand-to-Brand<br>Complementation(BBC)<br>1988|ReplacedAIC.Similarto theAIC<br>schemeexceptthatBBCencourages<br>economiesofscaleinautomotive<br>production throughexchangeof<br>componentparts forspecifiedbrands.<br>Atthispoint,ASEANeconomic<br>strategycompletelyshifted from import<br>substitutiontoexportpromotionwith<br>foreign capital investment.|<br>ASEANcountriestried toprotect<br>their ownstrategicindustriesand<br>economicinterestsandplaceda<br>banorconsiderable impediments<br>upon the importation of<br>completedvehicles.Indonesia did<br>notevenparticipateinBBC<br>schemeuntil1995.|

Sources: Tongzon (1998: 59-65), Thongpakde (2001: 50), and Tan (2000: 249-257).

This industrial-type cooperative effort (which is a different approach from the PTA effort, also included in the above table) would involve resource pooling and market sharing and, thus, would allow ASEAN economies to take advantage of economies of scale and a large combined market. These schemes would enable individual countries to specialize in manufacturing specific components as a means of developing large-scale industries (e.g., automobiles). This should increase complementarity among regional economies and eventually increase intraregional trade and investment. Finally, industrial cooperation would shift the focus of industrialization from a national level to a regional level. As regional industrialization grows, regional cooperation should increase leading to further industrialization and so on. 167 Theoretically, this plan should have worked, but in reality it did not. As outlined in the above table, the various industrial cooperative efforts were largely unsuccessful due to problems related to implementation, financing, and private sector involvement. ASEAN's early attempts at economic cooperation did not contribute to the remarkable economic performance of the ASEAN countries at the time. This was rather the result of ASEAN's trade and investment links with the rest of the world.

While ASEAN's early initiatives were rather ad hoc and piecemeal, they did give ASEAN members an introduction to economic cooperation. The next step was to embark on the path to forming a free trade area.

_50_
# **ASEAN Free Trade Area (AFTA)**

As revealed in the foregoing discussion, ASEAN was largely unsuccessful in its early attempts at economic cooperation. Therefore, it perceived itself to be in a disadvantageous positioni in the early 1990s when the world was experiencing a surge in regionalism, which eventually culminated in the formation of the following: **168**

- Asia-Pacific Economic Cooperation's (APEC) Free Trade Area (FTA) - 1989

- North American Free Trade Area (NAFTA) - 1994

- European Union (EU) - 1995

- MERCOSUR. - 1991

* Others - 87 (out of a total of 194) agreements were notified to the GATT/WTO in the 1990s, including the aforementioned.'<sup>6 9</sup>

This deepening and widening of trade blocs in North America and Europe caused ASEAN concern that its exports would face restricted access to the large markets of the EU and NAFTA. Additionally, investment funds from these two areas could be diverted away from ASEAN countries to their respective intraregional members. At the same time, there was considerable uncertainty as to the conclusion of the Uruguay Round of the GATT which was stalled at the time. Although ASEAN initially resisted joining broader regional fora, it did eventually agree to join APEC, reflecting a dawning realization that ASEAN was too narrow to succeed in an environment of increasing globalization. By that time, it also felt sufficiently consolidated so as not to be swallowed up by a larger APEC'<sup>70</sup> but, on the other hand, felt the need to speed up the formation of AFTA to further ensure ASEAN's role in the region and the world. l7 ASEAN's response to this environment of increasing regionalism and an uncertain multilateral trading system was to create the ASEAN Free Trade Area (AFTA) in 1992. AFTA initially was conceived as a regional tariff reduction program to be carried out in phases through 2008 (later moved forward to 2003). Subsequently, this program was gradually broadened to include other activities consisting of customs initiatives including harrmonization of standards, an industrial cooperation scheme (AICO), a framework agreement for the intraregional liberalization of trade in services, and the endorsement in principle of the concept of an ASEAN Investment Area (AIA). The AFTA agreement was originally signed by six members (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) with Vietnam joining in 1995, Lao PDR and Myanmar in 1 997, and Cambodia in 1999.

The framework for AFTA's reduction of tariffs on goods traded within ASEAN (that meet a 40 percent ASEAN content requirement) is the Common Effective Preferential Tariff (CEPT), which originally stipulated that tariffs on all manufactured and processed agricultural products would be reduced to 0-5 percent within 15 years. However, with the completion of the Uruguay Round and APEC's formation of an FTA over the next two years, ASEAN decided in 1994 to shorten the timeframe to 10 years so that AFTA's goals would be achieved by 2003.172 This deadline was for the ASEAN6 and was later changed to 2002 for all but a few products. The deadline for Vietnam is 2006, for Lao PDR and Myanmar it is 2008 and for Cambodia it is 2010.

The CEPT schemre contains four lists: the Inclusion List (IL), the Temporary Exclusion List (TEL), the Sensitive List (SL), and the General Exceptions List (GEL). The IL has two schedules - the normal track and the fast track. Tariffs for items on the normal track must be reduced to 0-5 percent by 2002, or 2003 for a small number of 51
products. Fast track goods were to have their tariffs reduced to the same level by 2000. By 2003, the average CEPT tariff rate for products in the IL will be about 2.7 percent, compared to 12.76 percent in 1993 when the reduction program was initiated. Average CEPT tariff rates for the years from 1998 to 2003 are shown in Table 3.3.

Table 3.3

|||**AverageC **|**EPTTariff**|**Rates**|||
|---|---|---|---|---|---|---|
||1998|1999|2000|2001|2002|2003|
|Bruneil|1.35|1.29|**1.00**|0.97|0.94|0.87|
|Indonesia|7.04|5.85|4.97|4.63|4.20|3.71|
|Lao PDR|**5.00**|5.00|**5.00**|5.00|**5.00**|**5.00**|
|**Malaysia**|**3.58**|**3.17**|**2.73**|**2.54**|**2.38**|**2.06**|
|**Myanmar**|**4.47**|**4.45**|**4.38**|**3.32**|**3.31**|**3.19**|
|**Philippines**|**7.96**|**7.00**|**5.59**|**5.07**|**4.80**|**3.75**|
|**Singapore**|**0.00**|**0.00**|**0.00**|**0.00**|**0.00**|**0.00**|
|**Thailand**|**10.56**|**9.75**|**7.40**|**7.36**|**6.02**|**4.64**|
|**Vietnam**|**6.06**|**3.78**|**3.30**|**2.90**|**2.89**|**2.02**|
|**ASEAN**|**_**<br>**5.37**|**4.77**|**3.87**|**3.65**|**3.25**|**2.68**|
|**NOTE:Camb**|<br>**odianotinclu**|**dedinorigina**|**ltable.**||||
|Source:ASEA|NSecretariat|as**cited**at|<http:llwww.u|s-asean.org/|afta.htm>||

Products can be excluded from the CEPT by placing them on one of the other three lists. The TEL is for items for which tariffs will eventually be reduced to 0-5 percent but are temporarily protected by delaying the reduction. Items on the SL are unprocessed agricultural products, which were added to the CEPT in 1994 and are due for tariff reduction by 2010. The addition of these products was considered a very important step, as it was an indication of liberalization in the area of agricultural trade, nearly always difficult to accomplish. Only the GEL items (which satisfy Article XX of the GATT) may be permanently excluded from tariff reductions for very specific reasons. The 2001 package of tariff cuts under the CEPT includes 55,680 tariff lines in the IL (84.7 percent of total tariff lines), 8,660 lines in the TEL (13.4 percent of total), 829 lines in the GEL (1.3 percent of total), and 360 lines in the SL (0.6 percent of total). The long-term goal of ASEAN is to have zero tariff rates on nearly all imports by 2010 for the original signatories, and by 2015 for the four newer members.<sup>74</sup> AFTA's CEPT scheme is considered a significant improvement over ASEAN's earlier PTAs. For example, in the CEPT, concessions are granted on a reciprocal product-by-product basis, meaning that a member country can receive concessions from partners only for items the country itself is liberalizing. Members are thus encouraged to maximize the number of tariff lines in their liberalization schemes. 1<sup>75</sup> The PTAs were open-ended (no timeframe), the choice of preference items was voluntary with the designation of "sensitive" items left up to individual countries, and the reduction of non-tariff barriers (NTBs), although included, was not rigorously pursued. Contrarily, the CEPT has a definite timeframe for completion, SL and GEL items are subject to specific definitions and restrictions, and countries must eliminate all 52
quantitative restrictions on<sup>productsfor whichthey receive concessionsand eliminate</sup> other NTBs on products within<sup>fiveyearsafter receivingconcessionson them.</sup> Another problem with the<sup>earlier PTAswas the practice of "padding inclusion</sup> lists." To prevent this, the<sup>CEPT productsare defined on a sectoral basis but exclusions</sup> from the CEPT are defined<sup>at a moredisaggregatedlevel.176The question remains,</sup> however, whether AFTA will<sup>actually resultin benefits accruingto the ASEAN member</sup> countries.

The potential benefits of AFTA<sup>have been assessed in several studies using a</sup> Computable General Equilibrium<sup>model(CGE).177A study by DeRosa (1995) usedthe</sup> model to deterrnine the effects<sup>of AFTA on the original fiveASEAN countries; i.e.,</sup> Indonesia, Malaysia, the Philippines,<sup>Singapore,and Thailand.(Bruneiwas a member of</sup> ASEAN at the time of the<sup>study but DeRosa did not includeit becauseof its small size</sup> and poor data records.) The<sup>simulationresults for trade areshown in Figure3.1.</sup> Figure 3.1 <!-- Start of picture text --> Effects of AFTA and MFN Liberalization on ASEAN<br>Trade<br>10 -9.<br>28- - -_<br>0 6 Q~~~~~~~~~EAFTA<br>4 2 -__ 2.42.9 . MFN liberalizaton<br>2<br>0<br>ASEAN trade with the Trade within ASEAN<br>world<br><!-- End of picture text --> Source: DeRosa (1995: Figure<sup>2, 3)</sup> The figure shows that trade<sup>creation does occur under AFTA -at about the same</sup> level for both "trade within<sup>ASEAN"(by $2.9 billion,or 19 percent) and "ASEAN trade</sup> with the world" (by $2.4 billion).<sup>However,underthe MFNliberalizationscenario,trade</sup> creation within ASEAN is<sup>somewhat smaller ($1.7billion) and trade with the world is</sup> much greater ($9.1 billion)<sup>than under the AFTA scenario.The enormousdifference</sup> between the two scenarios<sup>in creation of trade with the world is attributed to the</sup> exploitation of the "wider<sup>differences in the sourcesof international comparative</sup> advantage between the ASEAN<sup>countriesand their internationaltrading partners,</sup> especially the major industrial<sup>countries." 178Asfor agriculture,Indonesia, Malaysia,</sup> 53
Philippines and Thailand would experience some rise in production under AFTA, but not nearly as much as under MFN liberalization.

The simulation also shows that the expansion of production and exports in various economic sectors is about the same under the AFTA and MFN liberalization scenarios. However, improvements to economic welfare (real expenditures on final demand, or real absorption) are much smaller for most countries under AFTA than under MFN liberalization. Only Singapore and (Malaysia to a lesser extent) show improved economic welfare under AFTA because of their relatively open economies, which would bring benefits to them from the creation of new trade and the diversion of trade away from the rest of the world.

Overall, the DeRosa (1995) study (supported by a 1996 study by Lewis and Robinson) finds that an MFN liberalization scenario yields significantly larger gains in trade and economic welfare than does an AFTA scenario for ASEAN5.

A recent study by Fukase and Martin (2001) assesses the effect of AFTA on the new ASEAN countries (Cambodia, Lao PDR, Myanmar, and Vietnam) also using a CGE model.'<sup>79</sup> The authors look at benefits/costs on an AFTA-only basis and on an extended MFN liberalization basis. The authors decompose the sources of welfare change into (1) welfare gains from trade creation, (2) welfare losses from trade diversion, and (3) welfare gains from terms-of-trade improvements in a country's exports. Simultaneous changes in these three components determine the net effect of AFTA.<sup>80</sup> The findings of this study are summarized in Table 3.4.

Table 3.4

|**Impactof**<br>|**AFTAonASEAN NewMembe**<br>|**rCountries**<br>|
|---|---|---|
|**ASEANMemberCountry**|**OverallEffect**|**MajorSpecific Effects**|
|Cambodia|Somewhatbeneficial|Tradediversion offsetsbenefits<br>oftradecreation.Terms-of-trade<br>gains from improvedaccessto<br>partnermarketsarelimited.Entry<br>intoAFTAimportantin<br>stimulatingdevelopmentofnew<br>revenue sources,suchasVAT.|
|LaoPDR|Economically beneficial|**_Importside:_**Tradecreating,thus<br>reflectinghighshareofASEAN<br>countriesin LaoPDR'simports<br>andslightlyhigherinitialtariff<br>rateslevied onASEANgoods.|
|||**_Exportside:_**Positiveeffectson<br>mostimportant export<br>commodities (wood productsto<br>ASEANandgarmentstoEU).<br>AFTAalsoreduces vulnerability<br>to shocksrelatedtosmallnumber<br>ofexports,solikelytostimulate<br>exportsinprocessedfoods,<br>animalproductsand some labor-<br>intensiveindustries.|
|Myanmar|Economically beneficial|Gainsfromtradecreation(from<br>tariffreductions)onlypartially<br>offsetbycostsoftradediversion|

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<!-- Start of picture text --> Impact o AFTA on ASEAN New Member Countries<br>ASEAN Member Country Overall Effect Major Specific Effects<br>(from reductions in imports from<br>partner countries). However,<br>gains are small because<br>Myanmar's tariff rates already<br>low. Most gains are from<br>improved terms-of-trade from<br>tariff cuts in partner countries.<br>Vietnam Somewhat beneficial Benefit is small because<br>Vietnam's share of trade with<br>ASEAN is initially small. Also,<br>gains from improved access to<br>partner markets limited because<br>exports to ASEAN are via<br>Singapore where protection is<br>nearly zero. AFTA benefits<br>agricultural sector through better<br>._______________ access to ASEAN markets.<br>Source: Fukase and Martin (2001)<br><!-- End of picture text --> Overall, the simulation results for the new member countries in Fukase and Martin (2001) are consistent with those for the ASEAN5 countries in DeRosa (1995) and in Lewis and Robinson (1996). All new member countries are positively affected by AFTA, although the effects are relatively small. Also in line with DeRosa's findings, Fukase and Martin report that benefits increase if AFTA commitments are extended on a non-discriminatory basis (MFN liberalization), which implies that "AFTA may be used as a useful stepping ston.e to further liberalization because it exposes domestic industry to greater competition, and creates a situation where there are substantial benefits from reducing the trade diversion associated with discriminatory liberalization."'<sup>81</sup> The simulation shows that Vietnam especially stands to benefit in this way implying "that the sectoral protection currently given to capital-intensive and 'strategic' industries is costing Vietnam's economy as a whole, imposing substantial implicit taxes on the rest of the economy."'<sup>8 2</sup> The above quantitative analyses address the _static_ benefits and costs of membership in AFTA. **[t** is equally, if not more, important to examine the _dynamic_ effects of an RTA. This would involve the assessment of any factor that would impact the economic growth rate of a member country over the medium- to long-termn. While current literature does not support a theory that RTAs _always_ lead to dynamic gains for developing countries,1<sup>83</sup> the possibility that dynamic effects of regional integration might contribute to growth through AFTA is examined by Fukase and Martin (2001). The authors determine the degree of convergence (in this case, narrowing of the difference between national per capita income over time)1<sup>84</sup> as the means to assess this growth. As far as developed countries are concerned, there exists some strong evidence that an RTA increases trade between members leading to the convergence of per capita incomes across countries. The EC, the European Free Trade Association (EFTA), and the U.S. and Canada are cited as exarmples of regional groupings that experienced this after signing RTAs.'<sup>85</sup> However, there is little work in this area related to developing countries.

55
The authors' conclusions in this area lack strong conviction. In their assessment, they look at three possibilities through which dynamic effects of regional integration could contribute to growth for ASEAN members: (1) productivity growth through the accumulation of knowledge, (2) accumulation of physical and human capital, and (3) accelerated domestic reforms. Growth depends on changes in these variables and their rates of change can be affected by regional integration. While the authors find little direct correlation between regional integration and growth, they do find the possibility of an indirect effect through the accumulation of knowledge or of factors of production (physical and human capital), which in turn would lead to increased growth. They caution, however, that it is important to be "open to" the countries that have these things to begin with. In other words, it is possible that if a member of a regional group is open to an extra-group country having large "stocks of knowledge" but then switches to dealing instead with an intra-group country having lower stocks, this could have negative effects on a country's productivity level and, hence, its rate of growth.

In summary, it appears from the above assessment that AFTA would bring welfare gains to its members; however, the effect on non-members in the region needs to be examined as well. It is possible that a wider grouping would bring even more benefits to members.

# **Other ASEAN Activities**

While AFTA's primary activities relate to its tariff reduction program, it is engaged in other programs for intraregional cooperation. Some major programs include the following.

ASEAN **Industrial Cooperation Scheme (AICO)** - This program, initiated in 1996, replaced ASEAN's earlier unsuccessful industrial cooperation plans. AICO is designed to attract technology-based investments and is open to any company that is incorporated and operating in an ASEAN country and has a minimum of 30 percent ASEAN equity. It must also be engaged in resource sharing in areas such as technology, markets or raw material purchases. AICO proposes to attract investments by establishing simpler and faster approval procedures, offering the 0-5 percent AFTA tariff scheme and removing non-tariff barriers. However, the non-tariff incentives are to be determined by each country and have not been specified. Products must have ASEAN content of at least 40 percent and each project must have a minimum of two companies in two ASEAN countries. Although not much information is available on the success of AICO, there were at least 90 approved AICO applications as of April 2002. Thailand is involved in over half of the projects (two countries per project) while Indonesia, Malaysia and the Philippines are also heavily involved. Singapore and Vietnam are members of just a few projects. Most of the projects are in the automotive industry with a few in electronics, food processing, and others. 1<sup>8 6</sup>

**Service Liberalization** - In 1995, ASEAN adopted an agreement on trade in services. Negotiations to liberalize intraregional services cover seven sectors: financial services, tourism, telecommunications, maritime transport, air transport, construction and business services. ASEAN members must comply with the principles of the General Agreement on Trade in Services (GATS) to eliminate all market access limitations. ASEAN is trying to set a higher standard than provided for in the WTO's GATS. (Lao PDR, Myanmar and Cambodia are not WTO members.) So far, two rounds of

56
negotiations (including three packages of commitments) have been completed in the seven sectors with agreements from the first round having already been implemented. A third round of negotiations is scheduled to begin in 2002 and be completed in 2004. **ASEAN Investment Area (AIA)** - The Framework Agreement on the ASEAN Investment Area was signed in October 1998 in Manila. Manufacturing, fisheries, mining, agriculture and forestry sectors are to eventually be covered by the AIA. The agreement calls for the irmmediate opening up of all industries for investment and the granting of national treatment, with some exceptions, to ASEAN investors by 2010 and to all investors by 2020. Some exceptions may be specified in a Temporary Exclusion List (TEL) and a Sensitive List (SL). The goal is to phase out the TEL for the manufacturing sector by 2003, except for Cambodia, Lao PDR and Vietnam, which will have until 2010 for the phase-out.

# **ASEAN Extensions - ASEAN Plus Three**

ASEAN has in recent years explored the possibility of expansion to include other East Asian countries. An. early attempt was made in 1990 when Malaysia's Prime Minister Mahathir proposed the formation of an East Asian Economic Group (EAEG) including ASEAN6, China, Japan, Korea, Hong Kong, and Taiwan. The proposal was changed into a caucus that was to function within APEC and the name was changed to the East Asian Economic Caucus (EAEC). The caucus was not enthusiastically received in Asia, and was vehemently rejected by the U.S., which believed a broader forum like APEC would bring more benefits to the region. The caucus has therefore remained behind the scenes.

ASEAN Plus Three (APT) is probably the best known of the ASEAN extensions and comprises ASEAN members plus the Northeast Asian countries of China, Japan and Korea. It is an informal group whose formation was motivated by the East Asian crisis. It does not have its own secretariat but meets at the invitation of ASEAN. The first meeting of the group occurred in December 1997. The APT process has been driven by ASEAN; however, the Plus-Three countries have played a major role in influencing its agenda. The group's activities have expanded so they now include meetings of finance, economic, and foreign ministers, as well as of national leaders.

To date, APT's contribution to regional cooperation has been in the monetary/financial area, particularly through its efforts related to the Chiang Mai Initiative. There are signs recently, however, that APT is beginning to be viewed as more than a monetary forum. Recent literature and media reports allude to the possibility of APT becoming a more formalized group and even that it could be instrumental in the formation of an East Asian bloc. The advantage of this particular group, of course, is that it includes countries of both Northeast and Southeast Asia, bringing in three of the most powerful countries in the region. Of particular importance is the inclusion of China, whose competitive potential in the region is causing concern among ASEAN members and, consequently, whose cooperation is viewed as potentially valuable. Japan's inclusion is also seen as invaluable because of its long-standing prominence in the region in trade and investment. And, of course, Korea, as one of the newly industrializing economies, should not be excluded.

57
# **ASEAN's Significance**

Since the inception of ASEAN, Southeast Asia has enjoyed political stability (with a few exceptions) and relatively long periods of economic growth (interrupted by the 1997-98 crisis). How much of this is attributable to the effectiveness of ASEAN, however, is unclear. Those who credit the growth and stability of the recent past to ASEAN emphasize the important role of the "ASEAN Way" (consensus decisionmaking, sensitivity to the interests of others, and non-interference in the internal affairs of neighbors). Also perceived as a contributing factor to past successes is ASEAN's growth strategy of "regional integration within the global economic system." Soesastro and Morrison (2001) refer to these two success factors as the "ASEAN Formula".<sup>187</sup> ASEAN's loosely knit or "soft" structure was necessary and well serving in the past when the emphasis was on keeping the organization together just to accomplish anything at all. While the "ASEAN Way" worked well at that time, the appropriateness of ASEAN's non-interfering and non-confrontational style is being questioned in view of today's complex and globalizing world.'<sup>88</sup> ASEAN has been perceived as ineffectual and bureaucratic, indecisive and unable to deal with the problems of the region (e.g., the East Asian crisis and the haze problem in 1996-97). It has even been criticized by its own secretary-general, Rodolfo Severino, who claims that ASEAN has lost direction and does not know how to proceed beyond tariff reduction. In his words, "Regional integration seems to have become stuck in framework agreements, work programs and master plans."189 A more structured and rules-based institution is seen by some to be necessary.'<sup>9 0</sup> Many are of the opinion that ASEAN needs to go beyond its current configuration. ASEAN's economic cooperative efforts have until recently been centered on trade. Increasing intraregional trade and investment is often a primary goal of regionalism and an indication of the success of a regional group. However, Ariff (2000) emphasizes that this is "not sufficient to bring about a greater regional economic integration."'19 1 Our analysis of intraregional trade intensity in Chapter IV will show that intraregional trade in East Asia, although greater than that of the EU and NAFTA, has actually declined over the last 10 years. However, intraregional trade may not be the best measure to evaluate the effectiveness of ASEAN/AFTA. AFTA was intended to reduce tariffs and thus make the region borderless in order to lower production costs. In this sense, AFTA is different from conventional FTA agreements. ASEAN's intention for AFTA is explicitly stated as being not to increase intra-ASEAN trade but rather to make its products internationally competitive. "It is not in the interest of ASEAN countries to increase their trade with other ASEAN countries at the expense of third countries. Their extra-regional linkages are very valuable."1<sup>9 2</sup> Therefore, if intraregional trade has not increased since AFTA was initiated, perhaps it cannot be claimed as a failing of AFTA since that was never its intention.

Recent analysis, however, suggests that ASEAN has also failed in this intention, i.e., to lower production costs in order to become more competitive. A November 2002 interim report of an independent study conducted by McKinsey & Co.'<sup>93</sup> found that ASEAN is not attractive to investors because it is small, fragmented, and the cost of doing business there is higher than necessary because of varying product standards and excessively bureaucratic customs procedures. This is particularly true when compared to 58
doing business in China. The report advised ASEAN to develop more commitment to deeper integration and to free up the movement of goods, services, capital and labor suggesting that this would increase its power in international negotiations.1<sup>9 4</sup> Perhaps the time has come when continuing to guard national sovereignty at the expense of regional progress is no longer in the best interests of the region or of the nations therein. ASEAN has provided important regional leadership for over 30 years and has been a core group for APEC. Its extension to an ASEAN-Plus-Three (APT) configuration is seen as a positive move and if the APT group thrives and develops in line with the changing needs of the region, it could become a viable regional institution for East Asia.

# **APEC**

APEC began as a ministerial meeting in 1989 with twelve countries (Australia, Brunei Darussalam, Canada, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and the United States) attending. Since then, nine more countries have joined (China, Hong Kong, Taiwan, Mexico, Papua New Guinea, Chile, Peru, Russia and Vietnam) making a total of 21 countries. As is evident from the list of members, APEC is a multilateral forum encompassing the Pacific Rim as opposed to just East Asia. It is also atypical for a regional institution in that it is informal and loosely structured, unlike the EU.

The chairmanship of APEC rotates each year to a different country. All APEC members submit ideas and proposals to the chair for the agenda for the coming year. This is seen by many as one of APEC's strengths. No country can dominate the action agenda under this process and the agenda ends up being an amalgam of the best ideas submitted to the country chairing APEC.

APEC adopted ASEAN's consensus-style decisionmaking process as its mode of operation. The APEC leaders also agreed to alternate the annual meetings between ASEAN and non-ASEAN countries. Singapore, an ASEAN country, was selected for the ASEAN Secretariat. All these decisions elevated the importance of ASEAN in the APEC forum.

APEC has pioneered another unique feature, "open regionalism". This means that the countries adhere to GATT/WTO consistency. "'Open regional co-operation', or open regionalism, under which liberalization is applied without discrimination to non-members on a multilateral basis a la WTO, is a basic principle of APEC." 195 Trade liberalization, trade facilitation and economic and technical cooperation (Ecotech), or capacity building, form the three main legs of APEC. A discussion of these follows.

## **APEC's Trade Liberalization and Facilitation**

In 1994, APEC leaders adopted the Bogor Declaration which commnits members to achieve free trade and investment by 2010 for developed countries and by 2020 for developing countries. The following year, a guideline for reaching this target, the trade and investment liberalization and facilitation (TILF), was provided by the Osaka Action Agenda. The guideline calls upon APEC members to announce their intentions to reduce 59
tariffs or take other trade enhancing actions in Individual Action Plans (LAPs). Members then review other countries' IAPs and "watch" for implementation. In 1996, the APEC process developed one step further by asking countries to submit their Individual Action Plans for public viewing. Countries submitted their first IAPs in 1997, allowing leaders and the general public to better evaluate the APEC process. However, since IAPs are non-binding commitments to liberalization by individual economies, a rigorous review is necessary to see if countries actually implement their plans. The IAP mechanism for implementing liberalization makes analyses of country commitments a difficult task.

One recent study'<sup>96</sup> has developed an in-depth scorecard for the LAP process. It scored 18 out of the 21 APEC countries in 13 areas including tariff and non-tariff measures, services, investment standards and conformance, customs procedures, intellectual property rights, competition policy, government procurement, deregulation, rules of origin, dispute mediation and business mobility. It did not produce rankings for the three newest members (Peru, Russia and Vietnam) because of insufficient data.

The results are mixed. Countries committed themselves to liberalization in concrete terms only until 2000. The countries' commitments are characterized as Uruguay Round-plus-alpha ('a'). "However, 'a' turned out to be small in many economies and areas."1 The Individual Action Plan annual revisions in 1997 and 1998 were minimal, reflecting countries' reluctance to commit themselves to more trade liberalization measures before what was supposed to be the beginning of the next World Trade Organization (WTO) round in Seattle in 2000. The findings of this study, as well those of a study by the PECC Trade Policy Forum, are shown in Table 3.5.

Table 3.5

|STUDY|FINDINGS|
|---|---|
|Yamazawa/Urata<br>(2000)|AverageSingleTariffs:<br>*<br>Reduced tobelow5percentin three economies.<br>*<br>Reducedto5-10percentinnineeconomies.<br>*Willbe reducedto10percentinthe nearfuture in three<br>economies.<br>*Tariffsofmorethan20percent remainonsensitive<br>productsin eighteconomieswithnocommitmenttotheir<br>gradualreduction.|
||Non-TariffMeasures:<br>*Industrialized membersstillimpose NTMsofmorethan<br>20percentfrequency' <sup>98 </sup>onseveralsectors.<br>*<br>SomeAsian developingmembers imposeNTMsofhigh<br>frequency onmanysectors.<br>*Papua NewGuinearemovedallNTMsin1997.<br>*ThePhilippines andThailand currentlyhaveimposedhigh<br>frequencyNTMsbutreportedintheirIAPs future plans<br>thattheywillremovethem.|

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|**STUDY**|FINDINGS|
|---|---|
|TradePolicyForum,<br>PECC'<sup>99</sup>|*<br>SimpleaveragetariffsforAPEC have falleninthe1995-<br>98periodbutexperiencedanincreasein1999.Tariffs<br>declinedfrom about11percenttoabout7percentduring<br>thistime.|
||*The increaseintariffsin1999representsachange in<br>approachdue toUruguayRoundcommitments.Countries<br>beganapplyingtariffs to agriculturalproducts. Before this<br>time,agriculturalproductswerelistedundernon-tariff<br>measures.Therefore,theincreaseintariffsin1999 isnot<br>seenasanincreaseinprotectionism.|
||*Hightariffsremaininthe followingareas:food,<br>beveragesandtobacco;agricultureandhunting; textiles;<br>and fishingsectors.Peaktariffsareusedinareaswherea<br>country does nothaveacomparativeadvantage.|
||*Thestandard deviationintariffsdeclined fromnearly30<br>percenttounder10percent between1995and1999.The<br>reportstates,"lowerdispersionimplylessdistortionsand<br>thus gainsinwelfare."|

Between 1995 ancd 2000, the average tariff rate for APEC members decreased from 12 percent to 8 percent.200 Figure 3.2 shows a country-by-country picture of significant reductions in tariff levels.

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Figure 3.2

**Trends in East Asian Average Tariff Rates (as reported in APEC Individual Action Plans)**

<!-- Start of picture text --> 45.0 -<br>40.0 _-- - - - - - - - - - - - - - - _ _ __-_- - _ -__-_- - - -__- - - -_-__- _ - -_-__- _ - -_-_ _-_ - -_-__- _ - -_-<br>35 .0 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -_ _ _ __ _<br>30.0 - - ---------------------------- ~~~~~~~--- - *-China<br>---------- _-u _Hong Kong<br>Indonesia<br>c 25.0 -- - - - - _-_-_-_-_-__-_ < _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ Korea<br>eS\ \ -uMalaysia<br>o. 20.0 ------ Philippines<br>--_- Singapore<br>I 5 - ' -w - --------- --------------- - Thailand<br>10.0 - - - - - - -<br>5.0 -- -- - -- -- __ - -- __ -- _ _ - -- _ -___ ------- _ __ --------_ _ __<br>0.0<br>1988 1993 1996 1998 2000<br><!-- End of picture text -->

**Note: Figures are simple average tariff rates.** Source: **Japan, METI (2001:** Fig. 1.2.1, 19)

This figure indicates that East Asian economies have liberalized trade. These tariff reductions, however, cannot be attributed solely to the effect of APEC's TILF program but also derive from the GATT/WTO framework as well from AFTA's CEPT process, as previously discussed.<sup>20</sup> ' A 1999 APEC Economic Committee study (an update of the original 1997 study) estimated that APEC's trade liberalization and facilitation measures, committed to date (i.e., 1998), would "expand the region's annual income (GDP) by US$75 billion (at 1997 prices), or 0.4% of the region's total GDP."<sup>202</sup> (This is in addition to annual income gains created from the remaining Uruguay Round commitments, which would be 0.7 percent of GDP or $114 billion.) APEC members were shown to benefit more than nonAPEC economies, and if dynamic effects are included, income gains would be $90-lOS billion.

The study also estimated greater gains in real income from trade facilitation measures than from the trade liberalization measures that were included in the model. Of the estimated 0.4 percent total increase in GDP, 0.25 percent was from trade facilitation and 0.16 percent from trade liberalization. Of the aforementioned $75 billion gain to the region's annual income from both trade liberalization and facilitation, $46 billion would be from facilitation alone. Trade facilitation refers to trade measures that reduce trade costs (except for trade liberalization measures such as tariff cuts). These include activities such as streamlining customs procedures, aligning domestic standards with international standards in certain sectors, establishing MRAs (mutual recognition arrangements) in the telecommunications sector, reducing paper document use, enhancing business mobility through use of a special travel card, and others.

62
On the other hancd, if real income gains from "full" trade facilitation (i.e., beyond what is committed to date) are compared to gains from "total" tariff elimination (i.e., 100 percent tariff reductions extended by APEC members to both members and nonmembers), the gains from facilitation would be less than from tariff elimination. However, the study also emphasizes that "trade facilitation has a large undeveloped potential for the improvement of economic efficiency and productivity."<sup>2 03</sup> Non-tariff measures (NTMs) pose a significant problem for trade liberalization. NTMs for both industrialized and developing countries are in many cases of more than 20 percent frequency on several sectors and are not considered to be WTO consistent but rather are for the purpose of protecting domestic producers. Furthermore, while a few countries (e.g., the Philippines and Thailand) have future plans to remove their NTMs, many countries give no indication that they plan to reduce them.<sup>204</sup>

# **ECOTECH**

By most accounts, Economic and Technical Cooperation (Ecotech) has been the hardest element of APEC to define and agree upon. In 1994, Indonesia insisted that development cooperation should be the "third pillar" of APEC, in addition to trade liberalization and facilitation measures.<sup>205</sup> However, the proposal was very negatively received as a possible distraction from the liberalization program. Members could not agree upon a name, signifying resistance to the idea or signifying a misunderstanding of the real intent of the proposal. The developed countries seemed to see it as a request for development funds. The developing countries viewed it as a way of building capacity. The 1996 Manila Declaration attempted to clarify that Ecotech was not "foreign aid" and that the effort was intended to take advantage of the expertise, technology, experience, and information available in the APEC countries.

In the beginning, E]cotech had other problems as well. "A typical APEC Ecotech activity is a pet project proposed and coordinated by a member, financed mainly by the sponsor, and partly supported by APEC."<sup>206</sup> In an attempt to extricate Ecotech from this "pet project" syndrome, the Manila Declaration attempted to build in some accountability by stating that the effort should be goal-oriented with measurable criteria. The following priority areas were identified.<sup>207</sup>

1. develop human capital

2. develop stable, safe and efficient capital markets 3. strengthen economic infrastructure 4. harness technologies for the future _5._ safeguard the quality of life through environmentally sound growth 6. develop and strengthen the dynamism of small and medium enterprises

# **APEC's Significance**

APEC has made a substantial contribution to the Asia-Pacific region's economy. One estimate shows that the impact of APEC trade liberalization is "equivalent to one fourth of the full impact of implementation of the Uruguay Round (UR) trade liberalization."<sup>20 8</sup> Given the magnitude of the coverage of issues in the Uruguay Round, not to mention that it took nine years to negotiate, the impact is large.

63
APEC brings a mix of economies that are complementary to the economies in ASEAN. In addition, countries at different stages of development with different factor endowments combine to produce better growth potential. As APEC's membership continued to grow, the loosely configured group began to look more global than regional. This has resulted in all the problems associated with being a larger forum (e.g., difficulty in reaching agreement and slow decisionmaking.) APEC contributed to the unfortunate results of the Seattle 1999 World Trade talks by not being able to agree on an agenda to bring to the negotiating table.

APEC is credited with fashioning a new model of economic cooperation that covers a broader array of issues than usual. Its work agenda includes improving competition policy and detailed facilitation issues, as well as other items. But the comprehensiveness of the approach has not been matched by the effectiveness of results. Non-binding Investment Principles are weak, competition policies have been discussed but no guidelines have been drafted, and involvement in WTO negotiations has not always been productive.<sup>20 9</sup> The APEC International Assessment Network (APIAN)<sup>210</sup> issued its first policy report on APEC in 2001. The report acknowledged the many accomplishments that APEC has made but came up with twelve recommendations for improvement in the organization. Among these twelve, the following are the most concrete recommendations.<sup>2 11</sup>

- IAP commitments should be specific, concrete and measurable to the extent possible.

- APEC members should be accountable for their LAP commitments.

- The APEC secretariat should be strengthened, including the creation of longer-term professional positions and the designation of a Secretary-General with a multi-year term of office.

- APEC should better integrate finance and development.

- Academic engagement should be encouraged.

The APIAN report explains, "APEC's particular blend of idealism and realism has produced a "soft" or "weak" institution [. . .] that can neither 'bind' trade agreements nor authorize punitive actions against members whose trade policies are inconsistent with APEC norms. 2 It also reports that APEC lacks the internal capacity to monitor and evaluate the implementation of key programs.

In fact, at the end of 2001, APEC ministers came to the same conclusion and agreed that the LAP peer review process needed to be strengthened in order to increase "objectivity and transparency". In furtherance of this goal, new elements were added to the process including "the appointment of a formal review team for each peer review exercise and the commissioning of an expert to conduct independent in-country research and analysis together with presentation of a written analytical report.",<sup>213</sup> Japan and Mexico were the first to volunteer for review under this new system and the results for these two countries were published on the APEC web site in August 2002. This is obviously an advancement for the APEC process but it remains to be seen how many member countries will volunteer to be reviewed in this way given that the results are made available to the public.

64
# Concluding Remarks

Although the development of regional institutions was not an initial goal of East Asian integration, most :East Asians would now like to see a strong regional institution in place to lead the region toward closer cooperation and deeper integration. Regional cooperation has reached the stage in East Asia where more structure and leadership is needed. However, most find the current condition of regional institutions in East Asia to be discouraging. The ASEAN Secretariat is viewed as powerless, slow moving and directionless. APEC is seen to be weakening as an economic forum. In addition, there are numerous other fora,, task forces, committees and working groups that are often referred to as "talk shops" and are attributed with little real accomplishment. Even with all the existing institutions to choose from, proposals for new groups continue to emerge. Two proposals have been made in recent months by Thailand and Singapore, both of which are reportedly seeking more zealous economic integrative efforts than those so far provided by currently existing institutions.<sup>214</sup> While proposals for new fora are not unusual, the current proliferation of suggestions implies dissatisfaction with the region's current institutions. It is apparent that the quest for a dynamic, effective regional institution is ongoing. This may not be entirely undesirable as E,ast Asia is still at an early stage of regional integration and an experimental approach to institution building could have some advantages and may be preferable to locking into one forum from the outset and later finding it difficult to change or dismantle. Also, it is not a given that several institutions cannot coexist and be beneficial provided they do not work to the detriment of one another. However, along with an increase in the rLumber of broadly similar institutions comes the risk that the region's focus and energy will be diluted or dissipated. While the new and innovative are to be encouraged, there needs to be caution that the result is not simply more of the same, rather than a move closer to a vibrant, effective institution that serves the needs of the entire region.

65
l Maddison (2001: 18) 2 Abu-Lughod (1989: 8) 3 Frank (1998: 52) 4Frank (1998: 166) 5 Braudel defines a "world-economy" as a "fragment of the world, an economically autonomous section of the planet able to provide for most of its own needs, a section to which its internal links and exchanges give a certain organic unity" (Braudel 1984: 22).

6 Braudel (1984: 484) Braudel comments that although lengthy, his discussion of this topic is not complete in that, among other things, he could have included Japan which constructed its own world-economy after 1638 encompassing Korea, the Ryukyu islands, and Formosa, and trade with the Chinese and Dutch (Braudel, 1984: 533).

> 7 Braudel (1984: 484)

8 Today, the basic measures of the size of an economy are population, land area, income (gross national income or GNI), and output (gross domestic product or GDP). These measures will be used later in the paper to give a picture of Asia's current economic size; however, because of the limited availability of historical data, only population and GDP figures are presented in Chapter I.

9 There are many sources of statistics available for early historical periods that are considered reliable, some compiled as far back as the early 1900s. It should be noted, however, that data on population and GDP prior to the 20'h century are speculative and variable. Despite their sometimes significant differences, these statistics tell essentially the same story and are useful in determining trends. The population and GDP figures of Maddison (2001) are presented in the Historical Appendix in some detail because they embody the latest research, are comprehensive (include different types of statistics for many countries and regions) and are consistently derived and, therefore, are comparable. (See Notes on Statistics at the end of the Historical Appendix for details on the method of compilation and problems associated with the use of these data.) This is not to say that other data sources are unreliable and, in fact, other sources, in addition to Maddison, are used in the discussion throughout this chapter.

10 While the territories/countries included in the population tally for a particular region (Europe and Asia) are broadly consistent among sources, some differences may occur.

I] Based on all three sources (Bennett, Clark and Maddison).

12 Maddison (2001: 29) 13 The relationship between demography and economics is complex. Many studies have shown that as a country's wealth increases its fertility and mortality decline on average, with reductions in mortality typically preceding reductions in fertility. However, there is also evidence that per capita GDP growth is negatively affected by a rapid growth in population and that the changing age structure of a population has an effect on economic growth as well. In fact, the relationship between population growth and economic development shifts over time. [See World Bank (2001c: Chapter 3), and referenced works therein, for further discussion on this topic.] 14 Frank (1998: 171) 15 Frank (1998: 174) 16 Data on global production and income are difficult to obtain and that which is available varies significantly from one source to another.

17 The estimates referred to are updated and revised in a more recent (1993) book by Bairoch from which this table is sourced. Bairoch cautions readers that GNP per capita data for the 18'h century are not, and probably never will be, reliable. He explains the derivation of his estimates and, for comparison, presents the estimates of other historians in Chapter 9, pp. 101 -110.

18 Bairoch (1993: _95)_ 19 Bairoch and Levy-Leboyer (1981: 14)

**20** Braudel (1984: 534)

21 I$ = international dollars - see Notes on Statistics at end of Historical Appendix for definition. 2 Maddison (2001: 117) 23 Maddison (2001: 117)

> 24 Maddison (2001: 44)

25 Maddison (2001: 44 and 258) 66
|26Hanley andYamamura(1977) and Howe(1996)ascitedinFrank(1998:106-107)<br>27Maddison(2001:47)|
|---|
|28Landes(1969:13-14)ascitedinMaddison(2001:47)|
|29Maddison(2001:47)|
|30SeeFrank(1998) forahistoricalassessmentofEuropeanandAsiantechnology includinggun<br>manufacturing,shipbuilding,printing,textile production, metallurgy,andtransport.Heprovides<br>convincing evidenceofAsia'sstrengthsinall theseareas.<br>31Bairoch(1993:93)|
|32Chaudhury andMorineau(1999:1)|
|33Historians dividethetradingworldinavarietyofwaysbutthe traderoutes areessentiallythesame.<br>ThesearebasedontrademapsappearinginFrank(1998).Fordetailedmapsoftrade routes and goods<br>tradedoneachseeFrank'sChapter2.<br>34 Feldbiek(1991: 96)|
|35Feldbak(1991:96)|
|36Verenigde Oostindische Compagnie- Dutchtradingcompany.Seefollowingsectionon'GlobalTrade'|
|<br>fordiscussionofthesecompanies.|
|37ThePortuguesemade"limitedbeginnings"inintra-Asian tradebutthistradewasnot partoftheiroverall<br>strategyfortradeintheregiotn,asitwaswiththeDutch(Prakash1999:181-182).|
|3Prakash(1999:181-183and187-188)|
|<br>39Gaastra(1999:189)|
|40Prakash(1999:186)|
|41Frank(1998:179)fromBarendse(1997:ChapterI)|

42 At the time in Asia, commerce was considered an unacceptable occupation for upper-class men. Therefore, the women of the lamily conducted the business using their servants as liaisons for communicating with the outside world. 43 Pomeranz and Topik (I 999: 28-31) 44 Steensgaard (1991: 6) 45 See footnote 35 of Chaudhury and Morineau (1999: 8) for the origin of this phrase and citations of its reference in other literature. 46 Chaudhury and Morineau ( 1999: 2-3) 47 Feldbnek (1991: 96-97) 48 Including Kaoru Sugihara (Osaka University), Heita Kawakatsu (Waseda University) and Takeshi Hamashita (Tokyo University). 49 Akita (1999: 143) _50_ Sugihara (1990: 143) 51 Sugihara (1985: 146-147) 52 Japan's trade with Asia differs between the two tables (1.6 and 1.7), although both are sourced from Sugihara (1990). It is presumed, although not certain, that this is because the data is for different time periods and includes different countries in the "Asia" grouping.

5 Sugihara(1990: 135-136) 54 Sugihara (1985: 146) as cited in Akita (1999: 144) **55** Akita (1999) and Sugihara (1990) Frank (1998: 138) 7 Frank (1998: 61) 58 Feldbaek (1991: 96)

**59** The first two paragraphs of this section draw heavily from Maddison (2001: 66-69 and 117-118). 60 Maddison (2001: 66)

61 This system of trade can be defined as a type of ritualistic commerce that involved the exchange of "gifts" of specific quality between the Chinese rulers and those with whom they dealt, be it native chiefs and kings or foreign "barbarians". The relationship of each of these groups to the central authority of China was reflected in the type and quality of gifts given and received. Among these, silk was a strong status symbol and even came to be used as a form of currency. Although the tribute system was based on culture, politics and social status (as opposed to economic gain) it "helped define a vast common market, giving it its currencies, defining tastes that helped create markets worth producing for, and creating the standards (both of fashion and of behavior) by which its elites recognized in each other the people they could deal 67
|withwithouteitherlowering themselvesor runningtoomuchriskofdefaulf'(Pomeranz and Topik,<br>1999:14)|
|---|
|.<br>**62**Frank (1998:111)|
|**63**PomeranzandTopik(1999: 51-53)|
|64This discussionisdrawnprimarilyfrom Frank(1998:84-92),exceptasnoted.<br>|
|65Bouchon(1999:43)<br>|
|6Bouchon(1999:46-47)|
|<br>67Sanderson(1995:153)SandersoncitesSansom(1961),Reischauer(1956),J.W.Hall(1970)insupport.|
|<br>**68**J.W.Hall(1970:113) ascitedinSanderson(1995:153)<br>|
|69Maddison(2001:67)|
|**70**Hall (1970:121, 123,126)ascitedinSanderson(1995: 153-154)<br>7|
|'Frank(1998:105)<br>|
|72Maddison(2001:69)|
|73Tarling(1992:467-68)ascitedinFrank(1998:106)|
|74Therearevarious theoriesastothemotivationforthisisolationismincludingfearofChristianity.|
|However,Sanderson(1995:148)believeseconomicandpoliticalfactorsplayedagreaterrole,suchas<br>|
|Tokugawa'ssuspicionoftheEuropeandesireforJapaneseterritoryandtheirfearofthegrowing powerof<br>|
|thosedaimyo involvedintradewithEuropeans.|
|<br>75Sanderson(1995:148)|
|76Sanderson(1995:148-149)<br>|
|77Frank(1998:107)<br>|
|78ThisdiscussionisdrawnprimarilyfromFrank(1998:92-104).<br>|
|79Frank(1998:96)|
|<br>**80**Frank(1998:97)|
|**81**Reid(1993:23)ascitedinFrank(1998:98)|
|**82**Frank(1998:103)<br>|
|3Frank(1998:99)|
|<br>**84**Reid(1990:89)andTarling(1992:479)ascitedinFrank(1998:104)|
|<br>85Frank(1998)referstotheremarksofPerlin(1993:143)when he says"eventhelowly cowrieshell<br>di liildil dihIdidAli dh|
|connecteeconomc, potca,ansocaprocessesanevents ntenanantantcoceansante|
|lands andpeoples adjoiningthemon allsides.Forallofthemwerepartandparcelofasingleglobal<br>|
|marketplaceinwhichsupplyanddemandregulatedrelativeprices"(Frank1998:137).|
|, <br>**86**Frank(1998:133)|
|<br>**87**Ofcourse,preciousmetalswerealsocommoditiesintheir ownrightand,thus,couldgenerateaprofit|
|throughtheir productionandsaleaslongasthesalepriceremainedbelowthecostofproductionand<br>transortSeeFrank(1998:133-139)forathorouhdiscussionofthistoic|
|p. g p.<br>88Seedefinitionof"rix-dollars"in"NotesonStatistics" in theHistorical Appendix.<br>|
|**89**ItwouldbepossibletoconvertAttman'srix-dollars totonnesofsilver(andviceversa forMaddison's|
|<br>table)andanestimatemadeforatotalamountintonnesforeach50-yearperiod,butthiswouldbetime-<br>i ihi iii hiii|
|consumngandournteresteresmorendetermnngpatternstancomparngstatstcs.|
|**90**Frank(1998:135)|
|**91**Prakash(1986:84)|
|<br>92Sanderson(1995:151)|
|<br>**93**Atwell (1982:71)andReid (1993:27)ascitedinFrank (1998:145).Frank alsoreferstoresearch by<br> '|
|Ikeda (1996) andVonGlahn(1996b) suggestingthatJapan exported silverupto themid-I8hcentury.|
|94Barrett(1990)reviewsanumberofpreviousestimates(byAlexandervon Humboldt,EarlHamilton,<br>|
|AdolfSoetbeer,MichelMorineau,B.H.SlichtervanBath,and others,includingNef,Attman, TePaske,<br>|
|KobataYamamuraandKamiki)to arriveathisestimates(Frank1998:142).|
|, <br>95Frank(1998: 147-149)|
|<br>9'Frank(1998:149)|
|97Wallerstein(1980:108-9) ascitedinFrank(1998:153)|
|**98**Prakash(1986: 86)<br>|
|**"**Chaudhuri(1986:64-65)|
|<br>'°°Frank(1998:153)|
|<br>**101**Chaudhury and Morineau(1999:3-5)|

68
102 Chaudhury and Morineau (1999: 8) 103 Steensgaard (1987: 142)

> 04 Chaudhury and Morineau (1999: 8)

105 Portuguese explorer who discovered the route to India (end of 15th century) and opened the sea route around the Cape of Good Hope.

10 Morineau (1999: 125) 107 Chaudhury and Morineau (1999: 3-4) 108 The Yuan (Mongol) pericid extended from 1279 to 1368 and the Ming period, from 1368 to 1644. 109 Information in this paragraph based on Ptak (1994: 35-44). 110 Frank (1998: 62) " Frank (1998: 84) 112 Frank (1998: 91) '13 Frank (1998: 62) 114 Maddison (2001: 97)

**1"5** Bairoch (1993: 88)

116 Maddison (2001: 115) '7 Desai (1971) as cited in EBairoch (1993: 89) 118 Bairoch (1993: 54)

**119** Maddison (2001: 116)

120 Bairoch states that more recent research shows that in some remote regions industrial activity survived for a long period so that the lower level of de-industrialization is probably more accurate (Bairoch 1993: 89-90). 121 Bairoch (1993: 90) 122 For "real income" he adjusts the figures for the differences in the purchasing power of currencies. His estimates are in 1960 US dollars and prices. 123 Bairoch (1993: 95-96) 124 Maddison defines the "drain" as "the colonial burden as measured by the trade surplus of the colony." In this way, he is attempting to "compare the colonial burden in the two countries as a share of their own national income, and the colonialist's gain as a share of their respective national incomes" (Maddison 2001: 87). 125 Maddison (1989: 645-64() 126 Maddison (1989: 646) 127 Tongzon (1998) 128 Pomeranz and Topik (1999) 129 Maddison (2001: 86) 130 Chia Siow Yue (1997) 131 Fan Gang (2000: 27) 132 Fan Gang (2000: 28) 133 The choice of regions is based on trade and investment partner relationships and is restricted by the limitations of time and space: in this paper.

134 See Table G. 1 in the General Appendix for a list of regional fora worldwide including their membership and date of inception.

135 Kawai and Takagi (2000: 12) 136 Numbers of tables and figures that begin with "S" are in the Statistical Appendix, those beginning with "G" are in the General Appendix and those starting with "H" are in the Historical Appendix.

137 These are consistent with indicators of economic size used by the World Bank. GNI measures the total domestic and foreign value a,dded claimed by residents. It comprises GDP plus net receipts of primary income (compensation of enmployees and property income) from nonresident sources. This was gross national product in previous editions of the World Development Indicators. GDP is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output. See World Bank (200 lb: 15) for an explanation of calculation methods and data sources.

138 ASEAN, APEC and other "regional institutions" are discussed in detail in Chapter III.

139 Brunei's ranking is not provided but is most likely a little higher than that of Singapore. The World Bank reports little data for Brunei and that which is reported is done so in a separate grouping (unranked) of small economies with populations between 30,000 and I million.

69
140 See Table G.2 in General Appendix for description of various types of trading arrangements. **141** Agriculture's share of an economy generally declines as an economy develops.

142 The World Bank's World Development Indicators series provides a breakdown for the EMU as opposed to the EU.

143 Includes investment in fixed assets of the economy (such as land improvements; plant, machinery and equipment purchases; and construction of roads, railways, schools, offices, etc.) and net changes in inventories, per World Development Indicators 2001.

144 For low-income countries (Cambodia, Indonesia, Lao PDR, Myanmar, and Vietnam) the average GDS is 20%; for lower middle-income countries (Philippines, Thailand and China) the average is 30%; for upper middle-income countries (Malaysia and Korea) the average is 23%; and for high-income countries (Singapore and Japan) the average is 23%. World Bank (200 lb): 189 145 As estimated by the World Bank. 146 World Bank (200 lb: 189) 147 World Bank (2002: 326) 148 Import tariffs may also be imposed to obtain fiscal revenues as well as to protect certain domestic industries from foreign competition. Nontariff barriers, such as quotas, prohibitions, and licensing schemes, are also used for protection but they are not included in this data since they are difficult to combine into<sup>an</sup> aggregate indicator.

14 Singapore, Hong Kong, and Japan being notable exceptions.

150 Although tariffs were reduced significantly after the completion of the Uruguay Round in 1993, average import-weighted tariffs fell to about 2.6 percent for high-income countries but only to 13.3 percent for developing countries. World Bank (2001b: 316)

**151** In Figure 1, Mexico's average tariff appears to have risen during the 1990s but, in fact, this rise is recent in that Mexico raised most of its MFN import tariffs by 3 to 10 percentage points in 1999 to generate additional revenue for the government and these surcharges were retained for 2000. These increases, however, did not apply to countries having FTAs with Mexico. USTR (2000a: 284).

152 Although officially established in 1995 and 1994, the EU and NAFTA, respectively, had been<sup>making</sup> efforts toward liberalizing trade long before that (particularly in the case of the EU), whereas Asia has been slower to liberalize. 153 Except for Vietnam, which as a new AFTA member is allowed a longer period of time than older members to reduce its tariffs.

|**154**UNCTAD(2002:7)|
|---|
|_155_TayandEstanislao(2000:9)|
|156WorldBank(2001a)|

|**157**TheorganizationalstructureofASEANwillnotbediscussedinthispaper.This information(historical|
|---|
|and current)ispresentedindetail in several worksincludingTan(2000:22-31)andTongzon<sup>(1998:6-11).</sup>|
|<br>158TheASEANDeclaration(BangkokDeclaration),Thailand:8Aug.1967,<http://www.aseansec.org>.|
|159SeeKartadjoemena(2001:211)and referencescitedinTan(2000:21).<br>**'60**Tan(2000:11)|
|161Cfiia(1997:8)|

|162DeclarationofASEAN Concord,Indonesia:24Feb.1976,<http://www.aseansec.org>.<br>|
|---|
|163Soesastro(2000a: 202)|

'64 Tay (2000: 160) **165** Ariff (2000: 46)

|166Thongpakde(2001)|
|---|
|<br>**167**Tongzon(1998:58-59)|

168 See Appendix for list of members in each organization.

169 Fukase and Martin (2001: 7)

**170** Soesastro and Morrison (2001: 63)

**171** Urata (1998: 37)

**'72** Toh (1996: 55)

**173** US-ASEAN Business Council Web site <http://www.us-asean.org/afta.htmn>.

74 US-ASEAN Business Council Web site <http://www.us-asean.org/afta.htrn>.

175 Fukase and Martin (2001: 3) 176 Tan (2000: 270) 70
177 The CGE model is possibly the "most important tool used to quantify the costs and benefits of RIAs." (Fukase and Martin, 2001: 2). It is a simulation model that "measures how simultaneously reducing tariffs and nontariff barriers on either a preferential or a nondiscriminatory basis affects economywide variables, such as gross national expenditures and the exchange rate, and the prices and quantities of primary commodities and industrial goods produced, consumed, and traded." (DeRosa, 1995) 178 DeRosa (1995: 4) 179 The authors note "application of CGE models to the new member countries has been seriously constrained by data availability." They therefore use different types of CGE models for different countries: Vietnam - a standard multi-region and multi-sector GE model with data from GTAP (Global Trade Analysis Project) was used; Lao PDR and Cambodia - a small single-country model with only one production sector and highly disaggregated tradable sectors was created; Myanmar - a highly stylized EXCEL® spreadsheet model was used. [See Fukase and Martin (2001: 2) for further details.] 180 Key variables include: size, openness and factor endowments; trade patterns and protection structure of integrating and partner countries; and key parameter values such as the elasticity of substitution between domestic goods and imports and between imports from different sources (Fukase and Martin, 2001: 3). **181** Fukase and Martin (2001: 5) 182 Fukase and Martin (2001: 4) 183 Fukase and Martin (2001: 144) 184 Convergence generally has a broader meaning. For example, the EU (through the Maastricht Treaty) views convergence as the alignment of members' economic and monetary policies with convergence criteria of price stability, low long-term interest rates, stable exchange rates, and sound public finances. (Carbaugh, 2002: 275) 185 Ben-David (1993) **186** ASEAN (2002) 187 Soesastro and Morrison (2001: 57-62) **188** Tay (2000: 164-165) clairns that ASEAN's principle of non-intervention has not entirely stopped it from becoming involved in its members' internal affairs. He cites two examples: (1) ASEAN's involvement in the resolution of the Cambodlian conflict and (2) its "intervention" in Myanmar/Burma in the form of advice on the political situation and encouragement toward dialogue with the pro-democracy opposition. **189** Wain (2002) '90 Ariff(2000) **19'** Ariff (2000: 57) **192** Ariff (1997: 86) 193 The study was commissioned by ASEAN to assess its competitiveness and was based on microeconomic analyses and sector studies, including interviews with over 100 investor executives. Comparisons were made with the EU, MERCOSUR and NAFTA.

194 Various publications, including The Asian Wall Street Journal and the Business Times (Singapore) via Dow Jones Interactive at <http://www.djinteractive.com>.

'9" Urata (1998) 196 Yamazawa and Urata (2000) 197 Yamazawa and Urata (2000: 58) 198 "The NTM frequency of a product for each country is the percentage share of NTMs actually imposed on the product concemed. A 20% frequency means that a dozen core NTMs are imposed, which can include major effective NTM s and cannot be justified under any circumstances as WTO-consistent." [Yamazawa and Urata (2000: 96)] 199 Trewin and Azis (2000) 200 Australia DFAT (2001: 3) 201 Also, in Indonesia's case, tariffs were lowered on chemical, metal and agricultural products as part of its structural reform under the IMF's financing program after the crisis. (Japan METI, 2001: 20) **202** APEC (1999: iii)

**203** APEC (1999: 20)

204 Yamazawa and Urata (2000: 65-66) 205 Elek and Soesastro (2000: 220)

**206** Yamazawa (1997: 143)

71
207 Elek and Soesastro (2000: 222)

**208** APEC (1999: 3)

**209** Petri (2000: 104)

210 The APEC International Assessment Network is a collaborative, independent project among participating APEC Study Centres to track and assess the design and execution of select APEC initiatives. 1 Feinberg and Ye (2001) 212 Feinberg and Ye (2001: 9)

**21** APEC (2002)

214 Prime Minister Thaksin Shinawatra has proposed an economic forum called the Asian Cooperation Dialogue (ACD) that would comprise countries in East Asia, South Asia and the Middle East. The first meeting of this group was held in June 2002 with 17 countries attending. Its precise goals are not known. Another forum recently proposed by Singapore is considerably more ambitious. It has been labeled the ASEAN Economic Community (AEC) and is mentioned in the same vein as the European Economic Community. <http://www.djinteractive.com> 72
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