Regional Cooperation and Asia's Economic Performance

- Haruhiko Kuroda, President
Asian Development Bank

Asia as a whole has achieved unparalleled dynamism over the past four decades. As a result, poverty has declined notably and millions of people are living better lives.

However, progress has not been uniform, and further reduction of poverty in many countries remains a challenge. One of the lessons of history is that economies that are more market-oriented and integrated with the outside world are more likely to achieve sustained high rates of growth and poverty reduction. Increased openness and integration are important contributors to the East Asian economic miracle, and to the dynamism of PRC and, more recently, India.

Much of the integration among Asian economies in the past was market- and private-sector led. In recent years, the global trend toward regional cooperation, and a desire to enhance productivity and international competitiveness, have prompted Asian countries to forge closer ties through various schemes such as free trade agreements (FTAs). Trade facilitation measures and increased connectivity among markets would help to maximize the benefits of these FTAs. Asia's efforts at greater cooperation and integration can be seen as "open regionalism" and a stepping stone to its integration with the rest of the world.

Let me provide a few illustrative examples of trade agreements within the region. In East Asia, the ASEAN Free Trade Area (AFTA) is well into its implementation phase and appears to be on track to achieve its goal of a free trade area by 2010. A number of free trade agreements have also been signed or are under negotiation between members of the ASEAN and PRC, Japan, and Korea. As these agreements expand, the proposed free trade area for the whole of East Asia may come closer to reality.

In South Asia, intra-regional goods trade is a modest 6% of the sub-region's total trade, compared with about 40% in East Asia . Intra-regional trade thus has a significant potential to grow further, and the South Asia Free Trade Agreement (SAFTA) that was signed last year is a positive step in that direction.

Since the 1997 financial crisis, monetary and financial cooperation has also gained substantial momentum in East Asia. The crisis forced us to realize that, with increased interdependence among countries within the region, a negative shock to one economy could easily be transmitted to other economies in the region.

Since then, the members of the ASEAN+3, which comprises members of the ASEAN together with PRC, Japan, and Korea, have engaged in regular policy dialogues. They have established a network of bilateral swap agreements under the Chiang Mai Initiative to provide liquidity support. And they have implemented measures at the regional level to boost bond market development in order to reduce the currency and maturity mismatch problem. As the effects of the crisis have now faded, closer economic interdependence among East Asian countries, through intra-regional trade and investment and public-private partnerships, is likely to sustain the momentum in monetary and financial cooperation.

More recently, the geographic scope of cooperative agreements has expanded across the different sub-regions of Asia, and we are now seeing initial signs of cooperation and integration in Asia as a whole. The India-ASEAN Comprehensive Economic Cooperation Agreement, the recent strategic partnership agreement between PRC and India, the Pakistan-PRC protocol agreement on tra de, and the Bangladesh India Myanmar Sri Lanka Thailand Economic Cooperation (BIMSTEC) are some examples of regional economic initiatives across sub-regions.

(Source: ADB Press Release,May 3, 2005)

Speech by Sadakazu Tanigaki, Minister of Finance, Japan

Introduction

It is a great pleasure for me to speak at this Governors' Seminar "A Road Map for Asia's Economic Cooperation and Integration."

First, I would like to talk about the merits of regional integration, and the steps and strategies for successful integration. Then, I will outline regional cooperation in East Asia, which is being promoted jointly by the Association of Southeast Asian Nations (ASEAN), China, Japan, and Korea, the so-called ASEAN+3 framework. Finally, I would like to touch on my expectations for the ADB in promoting regional cooperation.

Merits of Integration

Asia is a region of great diversity. It is also a region blessed with diligent and capable human resources as well as with a vast pool of savings. It is essential to maximize these advantages in strengthening regional cooperation. To date, policy efforts on regional cooperation have been active in East Asia. I see a similar momentum for regional cooperation starting in South Asia, and recognize the potential for regional cooperation in Central Asia and Afghanistan.

Japan has been actively promoting monetary and financial cooperation in East Asia under the framework of ASEAN+3 Finance Ministers' Meeting and hopes that such regional cooperation will expand all over Asia in the future. Regional cooperation and integration should contribute to the growth of the global economy and should not be exclusive of other regions.

Regarding economic integration in Asia, I would like to draw your attention to three key merits for its economic growth.

The first is the economy of scale driven by the expansion of the market. Since the Asian region contains more than half the world's population, it could make up a truly mega-market beyond national boundaries. Notably, the ratio of intra-regional trade in East Asia has dramatically increased in recent years. This is a sign that the potential of a regional integrated market has turned into reality.

The second is complementarity. In Asia, comparative advantages vary from country to country. Some are industrial, while others are agricultural. Some excel in sophisticated manufactured goods, others in versatile products. Some have knowledge-intensive industries, others a labor force that is inexpensive and plentiful. Thus, regional integration in Asia can generate an even greater synergy effect than by simply adding up the strength of each country.

The third is the stabilization of the regional economy. Based on the lessons from the Asian currency crisis, there are a number of policy initiatives to build a regional framework for monetary crisis prevention. There have also been initiatives to strengthen linkages of policy-making in the region in order to create a regional economic structure that is resilient to global economic changes.

Steps and Strategies for Integration

How then should we promote regional integration in Asia? While referring to the case of EU integration, I want to emphasize that, a step towards economic integration has already been taken in Asia.

Progress must be made on all fronts-money, goods, and labor. In the case of the EU, the process began with the coordination of production. With regard to the monetary aspect, various efforts, such as the introduction of the ECU as a common calculation unit, were made for the stability of each currency in the region.

In Asia, on the other hand, monetary and financial cooperation under the ASEAN+3 framework, such as the Chiang Mai Initiative and the Asian Bond Markets Initiative, have taken precedence as a policy response to the Asian financial crisis. Japan has been actively involved in these initiatives. However, recently, initial progress has been witnessed on the policy front such as free trade agreements and economic partnership agreements (EPAs), thus expanding intra-regional trade in Asia considerably. As for labor mobility, liberalization measures have been progressively implemented in the U. In Asia, EPAs include provisions for labor mobility.

As the level of economic integration advances, policy coordination on macroeconomic and structural issues will become increasingly important. In the EU, policy coordination has played a significant role in the operation of the European Monetary System. Also under the ASEAN+3 framework, regional surveillance has been strengthened and active policy dialogue is being conducted.

Monetary and Financial Initiatives by ASEAN+3

Now, I would like to outline the monetary and financial cooperation under the ASEAN+3 framework to which Japan and other member countries have been actively contributing.

The first area of our regional cooperation is to build a regional framework to prevent and resolve currency and financial crises in Asia. Since 2000, the ASEAN+3 countries have been actively promoting the Chiang Mai Initiative (CMI), focusing primarily on building a network of bilateral swap arrangements. The network has expanded to a total of US$39.5 billion worth. At the ASEAN+3 Finance Ministers' Meeting tomorrow, several measures to enhance the CMI will be discussed. The second area is the strengthening of regional economic surveillance. Adequate monitoring of regional economic situations is essential for crisis prevention through the early detection of irregularities and swift remedial policy actions. This monitoring is also indispensable in providing immediate assistance in the event of a crisis. Since 2002, through the ASEAN+3 Finance Ministers' process, we have been regularly conducting policy dialogue on country-level economic situations and policy issues three times a year.

The third area is the development of bond markets in Asia. One of the fundamental causes of the Asian currency crisis was the pattern of capital flow, which allowed for outflows of domestic savings and inflows of short-term capital. To constantly channel the domestic savings for investments in the region and to eliminate mismatches of currency and maturity in regional financing, the development of bond markets in the region is an extremely important task.

For this purpose, Japan has been vigorously promoting the Asian Bond Markets Initiative (ABMI). Concrete outcomes have already been achieved in this Initiative. One example is the issuance of collateralized bond obligation, or the so-called Pan-Asian Bond, in collaboration with the Korean Ministry of Finance and Economy. Another example is the flotation of local currency-denominated bonds issued by Japanese companies abroad, with a credit guarantee by the Japan Bank for International Cooperation.

At the ASEAN+3 Finance Ministers' Meeting tomorrow, it is expected that a new mechanism to continue the ABMI's momentum will be discussed.

Expectations for the Asian Development Bank

To promote economic cooperation and integration in Asia is a unique mandate for the ADB as a regional development bank. In this context, there are five points, in particular, that I expect from the ADB.

The first point is support for cross border infrastructure development. To capitalize on the scale benefit of regional integration, it is essential to improve key infrastructure such as cross-border transport, telecommunications and power transmission. It is also important to unify the rules for power interchange to ensure its effective use. The ADB is making significant contribution in this regard, as is the case with the Greater Mekong Subregion Program, and I hope that the similar assistance will be strengthened in South Asia and Central Asia. The second point is assistance for strengthening regional financial markets. In order to channel regional savings for regional infrastructure, the ADB's regional departments can facilitate financial sector reform. The Private Sector Operations Department provides supports to catalyze private capital flows and to strengthen private financial institutions. The Treasury Department is expected to contribute to the development of regional bond markets by issuing local currency bonds. It is essential for the ADB to establish systematic linkage between the roles of these departments, so that the ADB can increase its effectiveness as a whole.

The third point is promotion of intra-regional cooperation on trade. The ADB has played a key role in promoting dialogue among countries of the Greater Mekong Subregion (GMS) and Central Asia to facilitate intra-regional trade, for example, by harmonizing customs procedures. It is also important for the ADB to supplement private financial institutions by trade finance facilitation.

The fourth point is the facilitation of immigrants' remittance to their home country. Globalization enhances labor mobility, thus increasing the number of immigrants. In this respect, the ADB is expected to expedite its study on remittance. The final point is the encouragement of policy dialogues on regional economy to help exchanges of views on economic policies of each country. While the ADB already plays a significant role in regional surveillance, I hope the newly expanded Office of Regional conomic Integration will intensify and strengthen its role in this field.

Concluding Remarks

I hope my observations and the following comments of the honorable speakers will be helpful in exploring the possibility of future regional integration in Asia. I would like to close by underlining that Japan is committed to promoting economic cooperation and integration for the further prosperity of the region.

(Source: ADB Press Release, May 3, 2005)

Speech by Rakesh Mohan, ADB India Governor

We are meeting at a time when developing Asia has achieved its best growth since the 1997 financial crisis. This has been possible due to continued strength in external demand, buoyant domestic demand and a marked revival of business investment. However, the emerging global macroeconomic scenario has some discernible dark clouds in the horizon. These have arisen due to imbalances in growth among major world economies, continued high oil prices, which are predicted to remain sticky in the foreseeable future, and the continuing twin-deficits in the USA. Firming up of interest rates in global markets and inflationary pressures in some developing Asian countries are distinct possibilities in case the larger macroeconomic imbalances remain un-addressed.

In coming years, as the global economy goes through the process of addressing these
challenges, Asia would need to share the burden. It is possible to play our role in this
adjustment process through coordinated action and increased economic cooperation so that developing Asia can avoid paying a disproportionate cost. While major economies play their role for orderly adjustment of the imbalances, developing Asia needs to be firmly committed to successful implementation of reforms, nurturing domestic investment and demand, strengthening financial systems, and above all, to following policies and strategies that facilitate “inclusive” growth.

I am glad that the ADB has hosted a Governors’ Seminar on the theme of “A Road Map for Asia’s Economic Cooperation and Integration”. The seminar was timely and relevant for policy makers in the region. The starting point for any such economic cooperation is normally trade. Today, the largest trading partner for developing Asia is developing Asia itself, with very significant potential for further intensifying intra-regional trade.

Confining economic cooperation to trade would be missing the larger potential of this region. Trade agreements are the most common form of regional cooperation—there has been a fair amount of progress in the ASEAN region and attempts are well underway to expand trade cooperation in the East and South Asian regions also. However, there are other areas of economic cooperation that have significant potential. These include financial cooperation, cross-border infrastructure, joint harnessing of natural resources, initiatives for environmental sustainability and energy needs, common natural disaster warning and management systems and joint research in frontier technologies. I trust that ADB will continue in its efforts to facilitate and foster the progress on economic cooperation in the region. I am particularly encouraged by ADB’s initiative in setting up an “Office of Regional Economic Integration” that can play a complementary role to regional multilateral and bilateral efforts that are already under way.

India, for its part, has intensified its efforts in engaging more actively with ASEAN and other Asian countries on a comprehensive basis. We are engaged in negotiating an FTA with ASEAN, a comprehensive Economic Cooperation Agreement with Singapore and an FTA with Thailand and are exploring frameworks for active economic cooperation in all areas with the People’s Republic of China and Japan. Our commitment to furthering Asian integration is, therefore, clear and firm.

(Source: ADB Press Release, May 3, 2005)