Home .Governing globalization Is Asia a region?
Is Asia a region?
Sunday, 20 March 2011 01:27

Is Asia an economic team that works together through trade, investment, finance and migration?  Or is Asia a group of countries that share common borders which are barriers to cooperation, rather than gateways to friendship?


Most regrettably, Asia does not play together sufficiently as an economic team.  It is indeed a great pity because creating a real "Team Asia" would be the best strategy for achieving peace, prosperity, security and stability in the region.


In examining these questions, the first thing to recognize is that the very idea of Asia is a European creation.  The word is reportedly of Greek origin, and is usually attributed to Herodotus (about 440 BCE) as a reference to Anatolia or Persia, as distinct from Greece or Egypt.  And then in Classical Antiquity, Europeans thought of the world as having three continents -- Europe, Africa and Asia.


It is therefore not surprising that Asia, as a foreign invention, should be extremely diverse and be the home of many different civilizations -- Buddhist, Confucian, Hindi and Muslim, to name just a few.  So in analyzing Asia, it is useful to follow the lead of the Asian Development Bank (ADB) and break the Asian region into a number of "sub-regions" like East Asia (including North East and South East Asia), Central Asia, and South Asia.  For its own institutional reasons, the ADB excludes West Asia and Russian Asia.


Turning now to the question of regionalism, it is important to note that neighbors can have very different relations.  Terrible conflict reigned between France and Germany in the past, and reigns between India and Pakistan today, notwithstanding recent "cricket diplomacy".  Indeed, wars and conflict most often take place between neighboring countries.  And the potential for avoiding conflict is one of the great benefits of regional cooperation.


As the European Union and ASEAN have shown, regional cooperation and integration can be the basis for partnerships of shared prosperity.  But there are also fragile examples, like China and Japan, where economic cooperation fosters prosperity, but where political tensions threaten this economic cooperation, as longstanding historical and political problems are held in suspense.


Regarding the possible creation of an Asian community, in recent years, political leaders from countries like Australia, China, India, Japan and Korea have made various proposals.  And President Obama has said clearly that the US would like to be part of any community building in the region.


So in this first of a series of articles on Asian regional cooperation and integration, we will look at the extent to which Asia is already well integrated.  In other words, is Asia playing together as an economic team?


The flagship for East Asia's economic cooperation is the series of production networks and supply chains which link together many East Asian economies.  These were created following the appreciation of the Japanese yen after the 1985 Plaza Accord.  Foreign direct investment (FDI) from Japan, and then Hong Kong, Korea and Taiwan outsourced large amounts of labor-intensive manufacturing activities, like electronics and automobiles.


East Asia's most advanced economies produced the high-tech parts and components, and sometimes even came up with the product designs.  China and ASEAN economies specialize in the lower-skilled phases of production.


As a result, over 50 per cent of trade in the Asia-Pacific region takes place between countries in the region.  This high share of intraregional trade now exceeds North America's intraregional trade, and is heading in the direction of the European Union's figure of 65 per cent for intraregional trade.


But this high figure for the Asia-Pacific region is dominated by East Asia whose trade with the region is about 50 per cent of total.  For other Asian sub regions, intraregional trade is very much lower.  East Asia's high intraregional trade is substantially driven by FDI, two-thirds of which comes from East Asian countries.


All of this must surely be a sign of how closely East Asia is integrated?


In reality, it is not so simple.  More than 70 per cent of "final demand" (demand for final consumer products) for Asia's manufacturing export production comes non-Asian markets like North America and the EU.  The high figures for East Asia's intraregional trade reflect the massive trade in parts and components within East Asia's complexly fragmented supply chains.


Much of East Asia's manufacturing production and trade is a manifestation of "Factory Asia" which buys lots of natural resources from Australia and Africa, and then exports the factory production to North America and the EU.  Asian export production for Asian consumers represents less than 30 per cent of exports.  Many of Factory Asia's products, like the iPhone, are even designed outside the region.


In sum, East Asia's economies are closely integrated through their manufacturing production networks, but their markets for consumption are very much less integrated.


What about Asia's other sub-regions?  Intraregional trade is virtually non-existent (at around 5 per cent of total) in other regions.  In South Asia, high trade barriers and political tensions inhibit intraregional trade, while weak infrastructure connections are the main problem in Central Asia.


When it comes to services, intraregional trade is quite low in East Asia, at one-quarter of total, although it is now rising with growing intraregional tourism.  Intraregional trade in services is virtually non-existent for Central and South Asia.


Let's now take a look at labor migration in Asia.  This is a topic which should be at the heart of building a regional community.  We should remember that free movement of labor was one of the very first provisions of the European Union, dating back to the 1950s.


There are many obvious complementarities in Asia which should support migration.  Some poorer countries, like the countries of South Asia, Philippines and Indonesia, have very high population growth rates, while other countries like Japan, Korea and China are either experiencing or face the prospect of declining populations.


Despite these favorable complementarities, labor migration is very low in Asia, despite an uptick in recent times.  Many countries, notably Japan, are reluctant to accept migrants other than high skilled ones.  And as the recent global financial crisis has shown, when crisis strikes, recipient countries are quick to send surplus migrants home.


Overall, Asia's growing number of migrants tend to leave the region, even though it is the world's most dynamic.  There is only one exception where many people from Central Asia have migrated to Russia.


The most noticeable trend in Asian migration is the rise in illegal migration, including both human trafficking and smuggling to service East Asia's massive sex industry.


The last aspect of regional integration that we will examine is financial integration.  Despite improvements in the past decade, thanks to the Asian Bond Market Initiative, Asia's financial systems are overall weakly developed and weakly integrated.


This is in large part the result of governments using banking systems to direct lending to favored enterprises and industry sectors, rather than encouraging financial systems to become dynamic and efficient.  In association with this, financial systems are highly regulated, and stock and bond market development have been hindered.


Asian capital markets are much more integrated with US and European financial centers where East Asia's massive savings are mainly invested.  Japan in particular holds very few Asian assets (only 2 per cent of its total foreign assets in 2008).


This is a great opportunity lost for the region, as there are a great many investment opportunities and needs, especially in the infrastructure area.


The overall conclusion is that the level of economic integration in Asia is quite low.  Despite the very impressive economic development, Asian countries have a greater tendency to interact with North America and the EU when it comes to trade, investment, finance and migration.


Does this matter?  If so, what should be done?


It matters a great deal.  As a general rule, it should be easier to do business with one's neighbors.  The distances are shorter.  The cultural differences are less.  And the gains from trade with neighbors should be great.  Working together with neighbors should also lay down the foundations for peaceful relations, as neighbors see the benefits of cooperation, rather than conflict.


As the world economy struggles to break out of the global financial crisis, it is now also clear that North American and EU markets will grow much more slowly in the future.  Thus, to maintain their high growth path, Asia's dynamic economies have an even greater interest in working together and benefiting from each other's high growth.


There are many things that Asia can do to work together.  A free trade and investment agreement for the region is essential to provide for open markets for everyone.  One sticking point has been the lack of a free trade agreement between China, Japan and Korea.


Another major stumbling block has been inadequate infrastructure which limits the connectivity of Asia's markets.  The ADB has estimated that meeting Asia's massive national and regional infrastructure needs requires investment of as much as $8 trillion between 2010 and 2020.


Countries could also benefit greatly from allowing free labor migration.  Modernizing and liberalization financial markets are also essential.


All of this points to the need to create a full-fledged Asian Economic Community.  This would require political reconciliation between many squabbling countries, and political leadership, despite the reluctance of many countries to lead.


The one positive outcome of Japan's triple crisis of earthquake, tsunami and nuclear problems has been the outpouring of community spirit in Asia (as well as the rest of the world).


The time is ripe to harness this goodwill, and move ahead quickly to create a meaningful Asian Economic Community.



Institutions for Regional Integration: Towards an Asian Economic Community




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