Asian Regional Integrations: Its Potential, Its Limits, and Lessons Learned from Europe
Toyoo GYOHTEN (President, Institute for International Monetary Affairs)
I. Economic Integration Progressing in East Asia
East Asia is recapturing the global attention as a dynamic growth center. China is still booming, Japan is recovering from the slump, and other economies in the region are, by and large, demonstrating the strong resilience which was severely tested during the Asian crisis of 1997. Against the backdrop of the overall recovery the process of the economic integration is progressing gradually but steadily.
There are four major areas where we see the biggest activities. First, the FTA (Free Trade Agreement), both bilateral and multilateral, in the region is proliferating. Second, the network of bilateral currency swap-arrangements between central banks in the region has almost been completed. Further enlargement, institutionalization and enhancement are being studied. Third, the process of policy dialogue and surveillance is pursued at various fora. Fourth, the idea to create and develop regional bond market (Asian Bond Market Initiative) is expeditiously studied and negotiated at several fora, both official and private. The group of central banks in the region (EMEAP) has successfully launched the pilot project of the Asian Bond Fund.
II. Motives to Promote Integration
The motives behind the move toward integration are threefold.
1) The first is to fortify the region's growth potential so that the region can play a leading role in the global economic development as one of the three pillars together with Western Hemisphere and EU. There is a certain sense of concern in the region that the steady progress of integration both in EU and Western Hemisphere may, before long, create a situation where the two giant blocs dominate the world economy while East Asia is either swallowed up or marginalized by them. Indeed, Fred Bergsten, a well-known American economist, in his article in the recent issue of Foreign Affairs, has advocated the creation of "G-2" between the US and EU as an informal steering committee to manage the world economy. Therefore, if East Asia wants to play independent and meaningful role in the global economy East Asia must step up its own process of integration so that it can make its voice heard in the global scene.
2) The second motive is to strengthen the financial system in the region. It is well known by now that the Asian crisis of 97 was prompted by the weakness of the financial system, i.e. the unhealthy balance sheet and poor governance of banks, ineffective and corrupt regulatory apparatus, and underdeveloped market infrastructure. It is deemed imperative to develop and strengthen the financial system of the region in order to avoid the recurrence of the financial crisis.
3) The third motive is to make the better use of the region's own savings. East Asia is known for its high savings ratio over 30% of GDP. So far, however, the East Asians are investing the bulk of their savings in the dollar or Euro denominated instrument of various kinds. Then, the money is recycled back to East Asia by American and European corporations and institutional investors in the form of direct investment and portfolio investment. In other words, although East Asia saves a lot, East Asia is not the master of its own savings. So far, the East Asian savings had to make the detour because of the lack of efficient and effective instruments, players, and markets. It is natural to see a growing aspiration in East Asia to make a better and more direct use of its savings for the development of the region.
III. Examples of Ongoing Integration
Let me briefly describe the current stage of development in the four major areas where the effort toward integration is progressing.
1) In the area of FTA the ASEAN member countries initiated the idea of AFTA (ASEAN Free Trade Area) in 1992. Since then, member countries have been making strenuous efforts to remove import quota and reduce tariff in their intra-regional trade. They are continuing the effort with the aim of completing the regional trade integration by 2020. Three countries in East Asia which are not members of ASEAN, i.e. Japan, China and Korea, are also moving along. All three countries have announced their intention to establish free trade arrangement with ASEAN and studies and discussions are already under way. China plans to accomplish it by 2010 and Japan by 2012. Also, these three countries have been concluding bilateral FTA with individual ASEAN members. Furthermore, in 2002 then Chinese Prime Minister Zhu Rongji proposed a joint study on the creation of a trilateral FTA among three countries. Research institutes of three countries have started their joint work.
All in all, a network of FTA in the entire region of East Asia is gradually being built. It is hoped that the accumulation of various efforts as described above will eventually provide a basic building block for a Pan East Asia Common Market.
2) As to the network of bilateral currency swap arrangement between central bank under the so-called Chiangmai Initiative (CMI) already 16 of such arrangements were concluded with the total amount of $35b. It is fair to say that the first stage of the project is now successfully completed. Needless to say, the accomplishment of a financial integration in the region is still a distant goal. The next stage will be to consider how effectively we can centralize the function of these bilateral arrangements. There are many steps and stages we need to evolve through. We may need a central body to manage the operation, we may need facilities to earmark or pool certain portion of official reserves.
The ultimate goal of our effort in this area will be the creation of AMF (Asian Monetary Fund). The review of CMI is scheduled to be held in May 2004 by participating central bank to discuss amount, modality and the linkage to IMF facility.
3) Establishment of an effective mechanism of surveillance is an indispensable prerequisite for the real integration of the East Asian Economy. Indeed, the effort to refine and strengthen the regional surveillance process has been made at various fora. Governors of central banks have been meeting in a group called EMEAP since 1991. Finance ministers of ASEAN + 3 countries started to have regular meetings since 1999. Their deputies also have their forum. The purpose of these meetings is obviously to conduct policy dialogue in order to achieve coordination and collaboration on the financial, monetary and fiscal issues of common interest. As one can imagine, however, this is easy to be said but extremely difficult to be done. First of all, all participants must commit to the full disclosure of relevant data and information. Transparency is the first requirement. Then, all participants must commit to accept the peer pressure even at the cost of sacrificing a part of the sovereignty over national monetary policy. I have to admit that the progress made in this area is still insignificant.
4) The idea of creating some kind of Asian bond market is now being actively discussed at various fora including both official and private and several proposals were made. Although there is no agreement reached yet and there is no clear consensus about the modality and structure of the market there seem to be certain common features which are incorporated in all proposals. Local bond markets in the region should be developed so that borrowers, both sovereign and private, are encouraged to raise long-term fund by issuing bond denominated in local currency or in a basket currency. Individual as well as institutional investors from within and without the region are encouraged to invest. Needless to say, many obstacles must be cleared before the successful launching of the operation. The development and improvement of local bond market is certainly not an easy task. There are great amount of technicalities which need to be addressed. However, one thing clear is that this is a proposal which enjoys broadly based support from all member countries.
IV. Lessons from European Experience
Now what lessons can East Asian learn from Europe in the process of the regional integration?
First of all, East Asia should be fully aware that Europe, before it has reached the current level of integration, has achieved many significant milestones, such as the completion of the Common Market, establishment of the EMU (European Monetary Union), conclusion of Growth and Stability Pact, creation of ECB (European Central Bank), and launching of EURO (European Single Currency). It was exactly the process of climbing up the ladder. It was not a big jump to the peak. It is important to know that this process of climbing up the ladder was made possible by never-tiring, step by step accumulation of vast layers of technical arrangements and the institutionalization of these arrangements.
More fundamentally, European integration could be achieved only because there were two preconditions fulfilled. First, all European members shared the strong common belief that the integration was desirable and necessary in their own perspective. Second, there was a strong political will shared between leaders to accomplish the integration at all costs.
V. East Asia's Integration a Daunting Task
When we compare the situation of East Asia with that of Europe or Western Hemisphere we have to recognize that the integration of East Asia is a daunting task.
First of all, members of East Asia are very much diverse in terms of size, stage of development, and background. It is crucial, although admittedly difficult, to generate a strong common recognition of the need and desirability of integration.
Secondly, East Asia must know that it is different from EU the structure of which is broadly horizontal with many members with comparable status. East Asia is different also from Western Hemisphere the structure of which is broadly vertical with the US as the dominant leader. Thus East Asia has to look for a stable structure of its own.
In this respect some people point out the risk of rivalry for leadership between Japan and China. It is certainly likely that Japan and China will be competing each other in some areas. However, it is extremely important to be aware of the following three points. First, neither Japan nor China can be the hegemonic and dominant leader. Both have strength and weakness. Second, hostile relationship between Japan and China is extremely damaging to the stability and harmonious development of the region. Third, Japan and China have so much to benefit from the friendly and cooperative relation as is clearly demonstrated by the recent spectacular strengthening of their bilateral economic interdependence. There are today 4,000 Japanese companies operating in Shanghai alone.
After all, East Asia is a group of disparate members. The stable structure of the region as such can only be maintained by flexible and compromising posture on all side. In this respect the role of ASEAN is important as a balancing weight in the region.
Thirdly, East Asia must foster much stronger political will to support integration. Frankly speaking this is what East Asia is still lacking seriously. It is strongly hoped that the recent sign of a growing awareness will lead to a solid and unfaltering commitment by the political leaders in the region.
VI. Seeking Own Model of Integration
In concluding, I would argue that it is neither realistic nor appropriate to try to measure the success of East Asian integration using the same rigid scale applied in the case of Europe. East Asian integration ought to be a slow process. Its structure ought to be a soft and open one. At the same time I believe that, because of the very conditions, East Asian integration can well be more resilient and viable.
(This is a transcript of the author's presentation made at the Institute of International Finance (IIF) Spring Membership Meeting held in Shanghai on April 16, 2004. Subheadings were supplemented by the editor.)