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Creating an Asian Economic Community
Wednesday, 30 March 2011 00:19

Creating an Asian Economic Community offers the prospect boosting the region's economic development, providing mechanisms for tackling common problems, and strengthening Asia's voice on the world stage.  To this end, the Asian Development Bank (ADB) has recently made proposals regarding the institutions that would be necessary for creating such a community.


While Asians will always insist that Europe does not provide a model for a possible Asian Economic Community, the ADB's proposals have a decidely European 'look and feel'.  How realistic and sensible are they?


International trade and investment through production networks have been a big driver of East Asia's economic development.  Over the past decade, they been underpinned by a flurry of free trade trade agreements. 


But apart from these production networks, East Asian economic integration is weak, especially in the areas of finance and migration.  In Central Asia and South Asia, regional integration is particularly weak.  In addition, there are a host of common problems that the region must tackle like natural disasters, climate change and other environmental problems, infectious diseases and infrastructure deficiencies.


This is why the ADB has proposed creating an Asian Economic Community as "a strong, prosperous, outward-looking economic community, regionally integrated yet connected with global markets, and with responsibility and influence to match its economic importance".  This community would involve "a single regional market, connected by integrated infrastructure networks, where trade, investment, and people could move freely, along with closer economic, monetary, and financial cooperation and perhaps even, ultimately, a single currency". 


According to the ADB, "the creation of such an economic community requires Asia to evole toward a new regional architecture made up of stronger institutions for regional integration (IRI) with greater powers delegated from their member countries and closer links with each other". 


This community is not for today or tomorrow.  It should be an aspiration for the future.  But the ADB offer three sets of recommendations for shaping the Asia's institutional architecture for the creation of an Asian Economic Community.


First, overarching IRIs like ASEAN in Southeast Asia, SAARC in South Asia, PIF in the Pacific, and the Trilateral Summit in North East Asia all need to be strengthened.  "They need to create more effective, autonomous secretariats, equipped with stronger agenda-setting and surveillance powers, adequate financial and human resources, and clear legal mandates; establish clearer and more objective membership rules; develop enhanced decision-making rules; and build stronger links both with each other and with national agencies in order to promote closer integration among Asia's subregions.  At the intraregional level, ASEAN+3 and the East Asia Summit both need to establish a secretariat."


Second, "functional institutions" need to be developed.  Asia already has a number of such institutions like the Asian Bond Market Initiative, and the Cross-Border Transport Agreement of the Greater Mekong Subregion.  Other promising areas for future cooperation include health, disaster management, and student exchanges. 


The ADB also recommends creating an Asia currency unit (ACU) as a basket of the currencies of the 13 ASEAN+3 countries.  An ACU could aid economic surveillance, facilitate regional exchange rate coordination and be used to denominate regional financial assets.  For Asia, the creation of a regional currency is best regarded as a long-run goal, the culmination of an Asian Economic Community. 


Third, the ADB recommends establishing new pan-Asian institutions and empowering existing ones.  New pan-Asian institutions could include: a Pan-Asian Infrastructure Forum, an Asia-Wide Free Trade Area, an Asian Monetary Fund, an Asian Financial Stability Dialogue, an Asian Legal Advisory Council, and several regional public goods forums dealing with issues like natural calamities, climate change, and health concerns. 


Regarding the Free Trade Area, it is proposed that an optimal solution would be to adopt a sequential, bottom-up approach from an East Asia Free Trade Agreement (ASEAN+3, meaning China, Japan and Korea) to a Comprehensive Economic Partnership in East Asia (ASEAN+6, that is, including Australia, India and New Zealand) and eventually to a Free Trade Area of the Asia-Pacific (with all APEC countries, including the US).  In other words, inclusion of the US in an Asian free trade agreement would be the very last in the line. 


What to make of all these proposals?  Do they make sense?  Are they realistic?


This grandiose scheme for pan-Asian institutions, underpinned by the frequent call for countries to surrender some national sovereignty to regional organizations, is very European in approach.  As the ADB argues, Asia is changing.  ASEAN has endorsed a more formal legal identity for its core institutions.  And Europe is not as different as it once seemed.  European governments and electorates remain deeply attached to national sovereignty and institutional accountability.


But Europe in 1950 is very much different from Asia in 2011 or 2020 or 2030.  Europe achieved political reconciliation between its main protagonists, after almost a century of war and economic depression.  This reconciliation was encouraged by the Americans, and seen as necessary in the face of the Cold War with the Soviet Bloc.


Looking ahead to 2020 or 2030, Asia has many imponderables.  Can Asia continue to quarantine economics from security issues?  That is, will economic development continue to defy the region's political rivalries, numerous border disputes, and lack of political reconciliation?  How will China manage its inevitably growing political and social tensions?  How will Japan cope in a post-tsunami and nuclear crisis context?  What will happen to North Korea?  Will ASEAN be torn apart by centrifugal forces, as China, Japan and the US try to hold onto pieces of this fragile and unstable group of countries?


Even if the basic pieces of the Asian puzzle stay in place, Asia will look more and more like the Americas. 


Each region has one big power (namely US and China) which fluctuates between being a bully and a brother to its neighbors.  These big powers will dominate their regions which have love-hate reltionships with their regional power.  Their currencies will be the world's leading reserve currencies.  They will lead negotiations for free trade agreements (FTAs) -- already in Asia, a regional free trade agreement could easily be built around China's FTAs. 


Each region also has another giant (Brazil and India) with immense potential, but which is never realized because large sections of the population are kept in poverty by bad policies.  Then there are countries like Canada and Japan, which are very closely integrated with the rest of their regions, but which are havens of social and political stability.  And last but not least, there is a swag of other countries which either don't count for much (Singapore and Chile) or are seemingly stuck in middle income traps (most other countries).  Each region has a bunch of subregional initiatives, most of which are not very successful, except for the North American Free Trade Agreement and possibly the ASEAN Free Trade Agreement.  


All things considered, a realistically ambitious agenda for Asia over the coming decades would be a region-wide FTA, the resolution of problems like North Korea, successful management of political and social pressures in China, and the containment of rivalries between China and Japan, and China and India.


One curious thing in this ADB report is the virtual absence of the US from all of the ADB's proposals.  This is curious for several reasons:


(i) the US is the major market for Asia's exports -- this is different from Europe where most trade is intraregional;


(ii) the US dollar, not the yen, is the most commonly used currency in the region -- again, this is different from Europe where the euro is the regional currency;


(iii) four Asian states have military alliances with the US, and most countries in the region see the US as the ultimate guarantor of peace in the region;


(iv) the most dynamic trade policy development in the region is the Trans-Pacific Partnership, which the US is seeking to lead with Japan, but which would not include China at this stage -- the TPP cuts right across the proposal to build up a regional trade agreement from the ASEAN+3 countries;


(v) no less than President Obama himself has declared that the US would like to be part of community-building initiatives in the region.


All things considered, the most sensible proposal for community building in the region is not an Asian Economic Community, but an Asia-Pacific Community including: East Asia (and possibly India); US, Canada, Mexico and Chile; and Australia and New Zealand. 




Institutions for Regional Integration, Asian Development Bank.


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