ASEAN aims to create an ASEAN Economic Community by 2015, while the signing in May 2012 of a Trilateral Investment Agreement by the People’s Republic of China, Japan, and the Republic of Korea was a milestone in cooperation between three countries that together account for nearly 20% of global GDP and trade. The pact could lead to a three-way, free trade agreement (FTA) between the economic giants. Financial cooperation in ASEAN+3 has been accelerating. The region’s emergency financial safety net, the Chiang Mai Initiative Multilateralization (CMIM), has doubled in size as decided by officials in May 2012, although it is yet to be made operational.
Economic integration in Europe
Europe’s sovereign debt and banking crisis threatens to tear apart the 17-nation eurozone, ending decades of government efforts to harmonize economies in the region. Meanwhile, Asia continues to boost cooperation and integration among its many countries.
Given that Europe’s experiment with economic integration seems to be on the verge of failure, is Asia heading in the wrong direction? No, Asia’s push for greater integration makes sense.
Europe needs to find a new balance between three policy alternatives: imposing austerity to cut fiscal deficits; providing support for economic growth; and ensuring policy consistency and predictability to restore confidence to the jittery financial markets that threaten to bring down the single currency framework. To do that, Europe may need greater economic integration, not less. Common Eurobond issuance, greater coordination on economic policy, and a commitment by the region’s leaders to the single currency may be the only way to avoid economic and financial collapse.
Differences between Asia and Europe
The differences between ASEAN and the EU are stark. Integration in ASEAN and in Asia has been market driven, outward oriented, and institution light. Conversely, the European project was conceived and driven by politicians, and is internally oriented and institution heavy.
Asia consists of a highly disparate set of economies in terms of size, natural resources, human capital, and governance. Against this backdrop, its remarkable progress in building consensus on enhanced cooperation during the past two decades has occurred because nations have been realistic about what is achievable.
Progress of regional integration in Asia
Asia is leading growth in trade through its increased openness. Intraregional and South-South trade is growing faster than trade with Europe and the US.
Asia’s financial integration has lagged trade integration. Asian investors prefer to invest in their home markets or in mature markets such as Europe and the US. In 2010, only 24% of the region’s cross-border assets were held in Asian equities and 7% in the region’s debt securities. But as advanced economies restructure their fiscal balance sheets, financial integration in Asia is likely to increase as financial markets in the region develop to accommodate Asia’s vast savings. These savings can be put to use in the region, including corporate equipment investment and infrastructure investment, for example.
Although Asian markets are more closely connected to global markets than to each other, regional financial integration has accelerated across Asia since the 2008 financial crisis. The internationalization of the yuan is likely to boost regional cooperation and integration, particularly in East and Southeast Asia. Given the state of the global economy, Asia is at a pivot point. Increased trade and financial integration is a welcome development. But policymakers need to understand the potential benefits of regionalism and its potential pitfalls.
The impact of integration cannot be overemphasized. Closer economic links have reduced income disparities in Asia, but they may also have contributed to widening inequality in countries as, for example, workers in a given sector may lose their jobs because of competition from neighboring countries. Access to financial assets that can cross borders yields returns to only a small group of the urban-based population. Indeed, income inequality has worsened in many countries in Asia, which can be the cause of political and social problems.
Ensuring resilient economic integration in Europe
Integration is not the same as cooperation. As opportunities arise the natural process of economic integration in Asia will accelerate. That comes with benefits and risks, so regional cooperation is needed to manage those risks without jeopardizing the benefits. One risk is financial contagion during a crisis. Cooperation in providing a regional financial safety net is needed. In ASEAN+3, the CMIM is a start, although it has a long way to go before it can become truly effective.
We live in a financial world with great uncertainties. The next crisis could be rooted in vulnerabilities as yet unseen. Domestic safety nets alone may be inadequate to deal with these new unforeseen vulnerabilities, especially if future contagions do not mirror past events. Ironically, the region’s resilience may stand in the way of building a better financial safety net. The belief that Asia has unlimited resilience is bravado and naiveté. We must use Asia’s resilience to prepare the safety nets to protect against future shocks.
As Asian integration strengthens, we must, unlike Europe, allow markets to drive the process, with the region’s governments and institutions cooperating to smooth the process and manage potential future contagion in a region where economic and financial ties are growing.