ENHANCING EAST ASIAN ECONOMIC INTEGRATION Some Observations and Notes

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ENHANCING EAST ASIAN ECONOMIC INTEGRATION Some
Observations and Notes

• Fourth East Asian Congress, ISIS Malaysia, Kuala
  Lumpur, 3-5 December 2006
• J. Soedradjad Djiwandono
• Professor, IDSS-NTU, Singapore

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INTRODUCTION

• Since I dont have any original thoughts to offer
  in the subject, I dont dare to use the subtitle
  strategic issues, critical imperatives in my
  presentation as originally asked by the
  organizer.
• Instead I will merely present my personal
  observations and notes on the issues, based on
  published reports and studies by others.

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INTRODUCTION-2

• The organization
• SOME CAVEATS
• NOTES AND OBSERVATIONS
• CURRENT STATUS
• SALIENT POINTS FOR ENHANCEMENT
• ONCLUDING NOTES

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NOTES AND CAVEATS

• Economic integration and cooperation could mean
  different things for different people.
• Basically regional integration is de facto
  economic integration within a geographic region,
  while cooperation refers to policy measures
  jointly undertaken by a group of countries to
  achieve some objectives (ADB,2005)
• Economic integration could be market- driven and
  privately led or policy-induced unilateral
  action or through economic cooperation, whether
  bilateral, regional or multilateral

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NOTES-2

• Regionalization is market-driven integration
  arising from unilateral reforms of individual
  economies within a region, while regionalism is
  formal economic cooperation and economic
  arrangements of countries aimed at regional
  integration.
• We have observed through times the development of
  the framework from closed regionalism of the
  Latin American model in the 60s to open
  regionalism of Asia Pacific and others in the 90s.

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NOTES-3

• Economic integration through trade relations
  could take the simple form of getting away with
  trade barriers among members in Preferential
  Trading arrangement (PTA) to Free Trade Area
  (FTA) -gtCustom Union -gt Common Market -gtand
  Economic Union.
• In the last one member countries form a common
  market and agree on harmonization of monetary and
  fiscal policies. (ADB, 2005)

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OVERVIEW AND CURRENT STATUS

• Economists like to look at an economy as two
  sectors, real and monetary. Money and finance are
  there to support the real sectors production,
  consumption, investment and trade.
• ADB publications use 4 pillars
• (1) Regional and sub-regional cooperation
• through cross-border infrastructures,
• (2) Trade and Investment,
• (3) Money and Finance, and
• (4) Cooperation in public goods

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OVERVIEW-2

• There are various cooperation on infrastructure
  and related software development, which increase
  connectivity and contribute to economic
  integration.
• There have also been issues and challenges of
  public goods and bads, which stimulate regional
  debate and cooperation communicable and
  infectious diseases, the haze problems, and
  others.

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OVERVIEW-3

• ADB 2005 and 2006 discussed issues and prospects
  of sub-regional and infrastructure development as
  well as cooperation in regional public goods,
  including cooperation and integration of poverty
  eradication
• The reports also discussed relationships among
  the four pillars.

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OVERVIEW-4

• Focus on issues of economic integration as
  opportunities and challenges in the real sectors,
  particularly the trade and investment, and the
  monetary and finance sectors.
• East Asian economic integration is a testament of
  the interdependence within the region in the
  process of globalization.

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OVERVIEW-5

• The process of integration and cooperation
  enhancement includes insurance against crisis,
  crisis management as the adverse implications of
  global imbalances and their unwinding
• Economic cooperation and integration in these
  aspects are aimed at growth and development
  (welfare), stability as well as risk management.

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STATUSTRADE AND INVESTMENT

• Intraregional Trade Share,
• Region 1980 1990 2004
• EA 15 35 43 55
• EA Japan 22 33 44
• Asean3 30 29 39
• Asean10 18 19 24
• NAFTA 34 38 46
• EU 15 61 66 62
• EU 25 61 67 68
• Source adapted from table 3, ADB,2006

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STOCK OF IN-OUTWARD FDIas of GDP

• Economy 1980 1990 2004
• Japan 0.3/1.8 0.3/6.6 2/8
• Korea 2/0.2 2/0.9 8/6
• PRC 0.4/-- 5.4/1.2 15/2.4
• Sin 53/32 83/21 150 /95
• Malaysia 21/0.8 23/6 40/11
• Indonesia 6.5/-- 8/0.1 8/5 (05)
• Cambodia 1.8/-- 2.2/-- 47/6
• Source adapted from table 2, Kawai, 2006

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OBSERVATIONS

• Intra regional trade as a share of East Asias
  total trade has risen from 22 in 1980 to 44 in
  2004 (including Japan, from 35 to 55).
• These figures are less than EU, but higher than
  NAFTA and other groupings
• Asean 3, from 30 to 39
• Asean, from 18 to 24

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OBSERVATIONS-2

• The degree of EA economic integration through
  trade is high. And this has not been at the
  expense of extra-regional trade
• In general FDI to EA economies has been on the
  rise. Outward FDI has also been increasing
• Trade and Investment, both market driven and
  policy-stimulated have contributed substantially
  EA integration

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OBSERVATIONS-3

• FDI inflows into EA quadrupled from 1980 to 2005.
  Its 21 of World FDI recently (Kawai, 2006)
• EA FDI outflows also increased from 5 to 14,
  most of them within EA, from Japan NIEs to
  China and Asean, and from Asean to Asean and PRC
  (Kawai,2006)

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OBSERVATIONS-4

• Pattern
• MNCs investments in manufacturing for export
  contributed highly on EA openness and integration
  through production network and supply chain
• It started with Asian NIEs, followed by Asean and
  then PRC

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OBSERVATIONS-5

• The process of integration started with market-
  driven, private-led of FDIs and trade, following
  unilateral liberalization in the 80s and since
  90s supported by regional cooperation
  (AFTA-CEPT,1992)
• After the Asian crisis unilateral liberalization
  on non-discrimination trade policies have been
  substituted by FTAs, which are discriminatory
  (Sally,2006)
• Nonetheless EA share of global GDP had increased
  from 17 in 1980 to 29 in 2005, due
  significantly from trade and investment

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Trade and FDI Regimes(Sally,2006)

• Asean free trade Singapore, other old Asean
  relatively liberal trade policy and FDI regime
  (ave tariffs under 10, low non-tariff barriers),
  with pockets of protection in agriculture and
  services. And new Asean are still highly
  protected
• PRC has swung from extreme protection to rather
  liberal
• Japan and South Korea reluctant to further
  liberalize trade and FDI, while Taiwan did
  liberalize substantially in the run up to its WTO
  accession

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MONEY AND FINANCE

• Monetary and financial cooperation and
  integration have been attracting a wider region
  and involving bigger number of countries /
  economies
• May be it is partly due to the fact that they
  started to become an agenda after the Asian
  financial crisis that affected badly many
  economies in EA

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MONEY-2

• In fact, the prominent motivations of monetary
  and financial cooperation and integration have
  been the building of financial architecture to
  insure against the reappearing of crises and to
  cope with them when arise
• Recently, the issues of global imbalances and how
  to address the adverse effects of their unwinding
  have been added to the discussions on monetary
  and financial cooperation and integration

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MONEY-3

• Motivations
• Externally, the success of EU, which was crowned
  with the introduction of Euro in 2001 coupled
  with the fear of being marginalized.
• Internally, the devastation of the financial
  crisis, which was generally accepted as
  significantly caused by weak financial sector,
  unsustainable external exposures of the private
  sector in addition to inflexible ER regimes.

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MONEY-4

• As mentioned before, recently the fear of the
  adverse effects of the global imbalances also
  motivates cooperation
• Of course regional monetary and financial
  integration is also a natural outcome of the
  financial globalization process

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WAYS AND MEANS

• Two institutional frameworks have been
  instrumental in functioning as vehicles here,
  ASEAN3 finance ministers who meet annually since
  2000 and EMEAP (the executives meeting of East
  Asian and Pacific Central Banks) among central
  bankers since 1991 (Nesadurai, 2006)

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WAYS-2

• Financial integration proposed and formed through
  the two institutional frameworks covers 4 areas
  (Montiel,2004)
• Resource pooling
• Surveillance
• Capital market development,
• Exchange rate cooperation

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WAYS-3

• Resource pooling
• With the backdrop of the crisis the need to
  minimize ER volatility, and to support stronger
  financial sector in the face of contagion several
  concepts have been ushered in, from the unborn
  AMF to the CMI (Asean 3 Finance Minister in
  2000)
• Followed by bilateral swap arrangement (BSA)
• Proposals to make BSA multilateral

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WAYS-4

• Surveillance
• Concepts of self help mechanism, peer group
  review (group therapy?) to effectively review
  economic development and policies of member
  countries have been floating around since the
  crisis began
• Need to resolve in effort to strengthen present
  mechanism of Asean Surveillance Process (ASP) of
  the Asean Secretariat and Regional Economic
  Monitoring Unit (REMU) of the ADB
• IMF medium-term strategy of multilateral
  surveillance

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WAYS-5

• Capital Market Development
• High savings and high investments pre crisis,yet
  private sectors had to tap London or New York
  capital markets for financing as well as
  investing (Sheng).
• Asian Bond Fund ABF1 and ABF2
• Issues needs for means of financing or
  channeling saving, liquidity or long term
  investment?

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WAYS-6

• Global imbalances, identified as current account
  deficits and surpluses and their counterparts,
  the saving gluts (Bernanke) or liquidity
  gluts (Rajan, 2006) and investment deficient
  (Rajan,2006)
• Weak investment that goes hand in hand with high
  savings reflects weak capital market,
  characterized by the lack of high grade equities
  (Eicengreen,2005). Is there problem of market
  failure? (Crockett, 2006)
• Or the possibility that financial intermediation
  is not up to the task of mediating desired
  domestic savings and investments (Sheng, 2006).

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Ways-7

• Exchange Rate cooperation
• There have been various arguments showing the
  post crisis trend of ER pattern in EA
• The bi polar system (Mussa,2000, Fisher 2001),
• the return of the Bretton Woods System or
  otherwise also known as Bretton Woods II (Dooley,
  Landau and Gerber, 2003 and 2006),and
• the prevailing Asian Dollar System (McKinnon,2004)

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Prevailing ER Regimes

• The Asian ER regimes could be grouped
• Pegged or fixed system in different versions
  (Hong Kong, Malaysia and PRC before July 2005)
• Freer floating system (Thailand, South Korea,
  Indonesia)
• Exchange rate band (Singapore, PRC and Malaysia)
• The diverse ER regimes in EA shows that there is
  neither cooperation nor coordination in ER

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ENHANCING-1

• Trade and Investment
• making soft and partial FTAs to be effective and
  minimizing the noodle or spaghetti bowl effects
  of proliferating FTA in the region
• Reviving the enthusiasm of trade policy reforms
  (Sally,2006). PRC (and India) could lead this
  move, which would motivate other economies to
  follow.

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ENHANCING-2

• SURVEILLANCE
• The trauma from the devastation of Asian
  contagion, still fresh to some, like Indonesians,
  has recently revived at least to some as the
  possibility of a new crisis from hard unwindings
  of global imbalances
• The good news is that monetary authorities in the
  region seem to be very aware of this and
  responsive to the regional surveillance as
  proposed in the IMF

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ENHANCING-3

• CAPITAL MARKET
• Theres been substantial progress in deepening
  Asian bond markets in terms of size, issuer base,
  market infrastructure, legal and regulatory
  framework (Kawai,2005).
• But more needs to be done to reap the benefits of
  deepening of bond market for both channeling
  savings and means of financing.

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ENHANCING-4

• A robust capital market that makes financial
  intermediation effective is very much needed to
  address the problem of finance
• pre crisis Asia EA savings went to New York and
  London and coming back as short term capital
  inflows.
• post crisis Asia to correct market failure and
  to contribute to soft unwinding global imbalances

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ENHANCING-5

• ER COOPERATION
• Economic argument would aim to the ideal world of
  the creation of monetary union. But, we have
  observed how monetary authorities in the region
  cautiously stated that even this could only be
  achieved in a distance future
• The current diverse ER regimes in EA have been
  proceeding with the tendency for most countries
  to accumulate high international reserves

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ENHANCING-6

• So the world as it is approach would look at
  the ER regime (s) suitable for the region in the
  future with a view to the above conditions.
• The past experience (and current?) of different
  versions of dollar-pegged regimes plus the
  concern of the US source of global imbalance
  would motivate EA to adopt more than one
  currency-pegged system.

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ENHANCING-7

• Kawai (2006) has been arguing for different
  basket of currencies to peg, like dollar-euro-ACU
  basket
• In the recent conventional wisdom of inflation
  targeting some argue for the new holy trinity
  of combining fiscal anchor, floating ER and IT or
  flexible ER,IT and monetary rule (Taylor)

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ENHANCING-8

• What PRC would do with its ER and the management
  of its more than one trillion US dollar reserves
  would be important factor to ER arrangement
• Will any decision come on this with the US latest
  effort to pressure PRC on more appreciation of
  RMB?

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CONCLUDING NOTES

• In all cases the issue is on how to manage and to
  develop current arrangements and frameworks
  already in place or operation before venturing to
  new ones
• Policies must be predicated not on ideal world,
  but on the world as it is (Azis,2006). These
  require consideration on the status of
  institutions, limitations constraining the
  working of any arrangement, whether sequencing is
  called for,etc.

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CONCLUDING NOTES

• Progressing on stages, the use of multi- speed
  and multi-track approach have been proposed by
  many, which seems to be the right approach
  suitable with the issues mentioned before
• After all pragmatism or eclecticism has been the
  trademark of Asia.