With Western economies facing serious challenges, regional cooperation,
greater intra-Asia trade and development will define the region's future.
Over the last several decades,
Asia has become increasingly integrated with the rest of the world, its rapid
development driven largely by exports to the United States and European Union
(EU). Yet, as the world’s main economic arteries shift eastward, intra-regional
integration within Asia still lags behind. The recent global financial crisis
and economic fall-out is quickly changing that dynamic, however. Indeed, as
strong, stable economic growth in the West, particularly in the U.S. and EU,
remains elusive, regional markets are becoming more attractive among Asian
countries, highlighting the importance for enhanced integration. Despite
challenges, this trend toward regional integration should continue in 2013.
Currently, over half of world
trade takes place between members of regional trade agreements, and Asia is no
exception. However, in Asia, as in other parts of the world, regional
integration is uneven. While Southeast Asia is shoring up its economic
integration efforts through the Association of Southeast Asian Nations (ASEAN) Economic Community Blueprint for
2015, with plans to continue attracting foreign direct investment, capitalize
on the growth of its neighbors (mainly China and India), and accelerate the
pace of its trade facilitation measures through a single market strategy, South
Asia remains weakly integrated through the South Asian Association for Regional
Cooperation (SAARC) both economically and politically.
Regionalism, not Protectionism, Can Help Mitigate Global Uncertainty
In fact, Asia has reason for
optimism about the capacity of regional trade to compensate for weak markets in
the U.S. and the EU and to reduce vulnerability to external shocks. In 2012,
opinion leaders in Southeast Asia said that they were most positive about the
ASEAN Economic Community compared to all other regional trade agreements in
Asia. Indeed, while East Asian economic cooperation has mostly been driven by
market forces, Southeast Asia has taken significant strides in formalizing its
region as a single market and production base through ASEAN. Intra-regional
trade and trade with China now accounts for more than 37 percent of ASEAN’s
total trade, up from around 26 percent in 2000. At the same time, trade with
the U.S. has fallen from 20 percent in 2000 to 10 percent in 2011, and trade
with the EU from 15 percent to 11 percent in the same period.
On the other hand, progress on
SAARC’s goal of a South Asian Economic Union by 2020 remains relatively slow.
Though intra-regional trade in South Asia recently surpassed $2 billion
following the full implementation of the South Asia Free Trade Agreement, it
represents only 5 percent of the region’s total trade volume, compared to
ASEAN’s 22 percent and the EU’s 55 percent. However, South Asia has made
strides integrating with the rest of Asia. For example, while only 1.3 percent
of South Asia’s parts and components are traded within the sub-region, 56.3
percent go to East Asia. This represents the enormous potential that exists for
South Asia’s future trade among its own region.
Such economic integration in the
region is becoming increasingly important to help stave off and overcome global
economic shocks. Prior to the last-minute resolution that saved the U.S. from
falling off the “fiscal cliff,” the UN Social Commission on Asia and the
Pacific warned that if the U.S. were to fall, it would have dire consequences
for Asia, decreasing growth by as much as 2.2 percent in some countries. To
reduce their dependency on developed countries’ economies, Asian countries need
to diversify their export markets and take advantage of the efficiencies and
growing demand that regional trade offers.
Avoiding the Middle Income Trap
While trade is an important part
of regional economic integration, it remains only one piece of the puzzle. To
avoid the dreaded “middle-income trap” (where countries attain a certain level
of income but remain stuck there), Asian nations must prioritize other aspects
of regional integration, including:
- Investment in infrastructure. Infrastructure
development is essential to Asia’s economic and political development. In order
to address this issue, ASEAN has recently set up the ASEAN Infrastructure Fund,
financed by member nations as well as the Asian Development Bank and private
equity, to mobilize resources for critical infrastructure development.
- Increased cooperation in education and skill
development. A recent publication by the Asian Development Bank stated that “a
deeper level of economic integration, which is required for sustainable
development, calls for regional cooperation in skills development.” Such
cooperation could take the form of regional and sub-regional “technical and
vocational education and training” (TVET) strategies, such as creating regional
and national qualifying frameworks and encouraging national commitments to
invest in critical areas like high-skilled manufacturing.
- Cooperation in technological innovation and
research. ASEAN member nations have taken steps toward such cooperation through
the Krabi Initiative, which encourages collaboration across the region on a
host of science and technology issues, from green technology and food security,
to exploiting new technologies such as digital media and social networking for
development and innovation.
Addressing Socioeconomic and Environmental Challenges
Regional cooperation in Asia
should not be considered solely as a means to accelerate economic growth, but
also as an effective way to address broader socioeconomic and environmental
issues facing the region. It will, for instance, play a key role in women’s
economic empowerment in the region. Women business owners and managers in Asia
often do not have the same access to business opportunities as men. However,
through groups such as the ASEAN Committee on Women and the South Asia Women’s
Entrepreneurship Symposium (SAWES), they are able to form regional networks
that provide a platform for them to access information and contacts essential
to running a business and advocate for change in areas that are stifling their
potential. (Read about The Asia Foundation’s support for these networks.)
Regional cooperation will also be
integral to managing the impact of environmental issues, such as water
scarcity, energy production and distribution, urbanization, climate change, and
disaster recovery and management. Establishing and implementing fair and
practical water-sharing and conservation arrangements is critical, with river
systems like the Mekong, Indus, and Ganges all crossing national borders and
essential to local livelihoods. Over the last couple of years, the Asia-Pacific
has experienced 70 percent of the world’s natural disasters. This has led to a
stronger push toward regional forums and programs to prepare for and manage
disasters through information-sharing, as well as collaborative
disaster-management planning efforts. Data management and sharing and the use
of innovative ICT tools to provide more timely and accurate predictions,
communications, and responses are also being explored regionally to minimize
the impact of such disasters.
While greater intra-regional
trade and investment represent a logical “next door” opportunity for Asian
economies, this shift doesn’t come without challenges. To lessen reliance on
U.S. and EU markets, Asia will need to modify the structure of its regional
trade from a focus on raw materials or semi-finished products to those higher
up the value chain. Another challenge will be to ensure that smaller, poorer
Asian countries also benefit from increased regional interaction. Finally,
intra-regionalism can only be successful if the regional entities nurture their
links and cooperation with other regions.
But, the most important challenge
of all remains making regional cooperation work for the people of Asia. The
political will and institutional commitments to regional integration relies on
the capacity and interest of individuals, civil society, and businesses to take
the lead and give life to the concept.
Véronique Salze-Lozac’h
Véronique Salze-Lozac’h is The Asia Foundation’s director for Economic
Development Programs based in Bangkok, Nina Merchant-Vega is assistant
director, Katherine Loh is a senior program officer, and Sarah Alexander is a
program fellow for the Economic Development Programs. This article initially
appeared on The Asia Foundation’s “In Asia” Blog.
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