What will be the benefits of an Asian Economic Community?

Potential of an Asian Economic Community

There is a growing recognition of the importance of intensive economic integration at the pan-Asian level in the region and that the opportunity cost of not going in for intensive economic integration are substantial. There is the realisation that stimulus for future growth in the region has to come from within, given the trend of formation of regional trading blocs in rest of the world. Substantial complementarities exist between Asian economies that remain to be exploited for their mutual common benefit. For instance, while the region has economies that are surplus in capital resources, there are also economies, which have inadequate domestic savings for rapid development. The region is similarly characterised by complementarities in the demand and supply of other resources such as technology, and skilled manpower. Over the last five years, the region’s dependence on outside regions in terms of trade, investment, and banking finance has increased. The excessive dependence on countries outside the region has brought in vulnerabilities. The East Asian economies that were recovering from the Crisis of 1997 in 2000 again got into the slowdown due to the US economic recession between 2001-02. The global economic outlook is highly volatile and currently faces downside risks arising from exchange rate re-alignments, rising oil prices, rising protectionism, among other factors. There is also substantial under-utilised capacity in engineering and construction industries in Japan and Korea and the lost output because of under-utilisation of capacity could be of the order of 10-15 per cent of the GDP of the region or about a trillion dollars a year. A more intensive cooperation for matching the under-utilised capacity in some countries of the region with unmet demand in others, could go a long way in putting the region on a high growth trajectory and help Asia to re-emerge as a centre of gravity in the world economy.

The sub-regional attempts at regional cooperation that have been initiated, such as those under the framework of ASEAN and SAARC are unlikely to exploit the full potential of the regional economic integration in Asia. This is because the extent of complementarities is limited at the subregional levels. It is clear from the fact that trade of South Asian countries with the East Asian countries is much larger than the intra-regional trade. The same is the case with ASEAN. At the pan-Asian level, the diversities in the levels of economic development and capabilities are quite wide, thus, providing for more extensive and mutually beneficial linkages. The diversity in economic structure provides its own indigenous capacity and markets for dynamic industrial restructuring within the region on the basis of ‘flying geese’ patterns. It is for this reason that the success achieved so far, from the current subregional attempts at cooperation or from the ‘truncated regionalism’ as it has been termed, have been meagre.

The Asian region comprises some of the fastest growing economies in the world. Together, they form a huge market that is growing faster than any other region in the world and could form a vibrant regional grouping that would be roughly of the size of the EU in terms of GDP, will have larger magnitude of trade than NAFTA and international reserves bigger than those of EU and NAFTA put together. The formation of an Asian Economic Community (AEC) will also help the region to play a more effective role in shaping a world trading and financial system that is more responsive to its needs.