What should be the Scope of Asian Economic Community?

Areas of Regional Economic Integration

The scope of the proposed AEC should extend to all areas of mutual interest where the complementarities exist. The major areas of cooperation include monetary and financial cooperation, formation of a regional trade bloc, foreign direct investment and transfer of technology and skills, among other sectors. In what follows we outline some issues concerning cooperation in these areas.

Monetary Cooperation for Exchange Rate Stability

The experience of the past suggests that the region has suffered from severe exchange rate fluctuations. Absence of adequate foreign exchange safety mechanism forced the region to take resort to IMF packages that have cost several countries in the region several percentage points of GDP. Therefore, an important area of regional cooperation would be to create some mechanism for greater stability in real effective exchange rates. It is argued later in this volume that substantial regional funds under a possible Reserve Bank of Asia are essential for achieving stability of real effective exchange rates and for an orderly response to external shocks, see Agarwala, this volume. Some progress has been made in this direction with the creation of the ASEAN+3 Swap Arrangement (see Wang, in this volume). However, the funds available under these arrangements without IMF conditionality are only about $ 3 billion, grossly inadequate for meeting the balance of payments security of Asian countries. The available swap funds need to be expanded and greater independence from IMF programmes is required. Furthermore, another step to invigorate the Swap Arrangement would be to extend it to all JACIK countries. This will be possible by extending it to cover India. India has had bilateral swap arrangements with some of the ASEAN countries.12

Financial Cooperation for Reviving Demand

As observed earlier, some countries of the region have large excess capacity in sectors such as construction and IT and some others have large unmet demands in these areas. In such a scenario, regional pump-priming or regional Keynesianism could be quite effective in reviving demand for utilising the excess capacity. Regional efforts can be particularly successful if a suitable mechanism can be devised for funding such regional Keynesianism without adding to the Government expenditure in the surplus countries. The proposed Reserve Bank of Asia can help here. One possible option is creation of an Asian SDR backed by deposits of surplus countries (which are currently going mostly to the US) which will be used to finance infrastructure and IT investments in the region. The borrowers could be regional companies (such as Channel Tunnel Company for the UK and France) jointly owned by governments and private sector in the region. The Asian SDR can be used increasingly as a unit of account and as reserve asset in the region, see Agarwala, this volume. A mechanism also needs to be created for seeding and developing viable Regional Infrastructural Projects such as Asian Railway, Asian Highway, Asian power grid, Asian gas grid or pipeline, Asian satellites, Asian Information Infrastructure (such as a broad band cable). Such projects would not only facilitate trade and other economic exchanges within Asia but would also generate a lot of demand for the idle capacity for engineering and construction industry in Asia. Besides funding regional projects, some of the JACIK countries are projecting a tremendous demand for infrastructural investments in the coming years. India, for instance, has projected US$ 500 billion of investments in infrastructure development over the coming decade.13

A Regional Trade and Investment Arrangement (RTIA) to Facilitate Exploitation of Complementarities

The relevance of a regional trading bloc for the JACIK region is to be evaluated on the basis of relative costs and benefits. The presence of substantial diversity in the endowments and levels of development of JACIK countries provides a prima facie justification for a RTA.14 The studies conducted by RIS have found considerable evidence of complementarities between the JACIK countries’ production and trade structures, see Sinha-Roy, this volume. Formation of an RTA may help in exploitation of these complementarities for mutual advantage. The experience of APEC shows that countries are less enthusiastic of liberalisation without any reciprocity.15 Hence, open regionalism may not be an effective means of trade integration. The experience available from EU and NAFTA suggests that deeper and wider forms of economic integration are necessary for realising the full benefits of integration such as efficiency seeking industrial restructuring. Furthermore, trade policy liberalisation needs to be accompanied by additional measures such as freer capital mobility, harmonisation of customs procedures and product standards and mechanisms to ensure an equitable distribution of gains. RIS studies conducted in computable general equilibrium (CGE) model framework have shown that a trade liberalisation in the framework of an RTA in JACIK could produce annual efficiency gains worth US$ 147 billion. However, when an RTA is combined with investment liberalisation and mobility of skilled manpower, the gains from integration add up to US$ 210 billion representing more than 3 per cent of combined GDP of JACIK economies. What is more, all the JACIK countries benefit from integration, see Mohanty et al this volume.

Intra-regional FDI, Transfers of Technology and Skills

Complementing the monetary and financial cooperation and formation of an RTA, will be the greater intra-regional exchanges of technology, skills and FDI. The resource endowments and skill bases of JACIK countries are complementary to each other. Japanese (and increasingly Korean) MNEs are leading sources of FDI in the region. Japan has also established its leadership as a source of technology in a number of industries such as semiconductors, automobiles, industrial automation, electronics and some chemicals. Korea, China, India, Singapore are also emerging sources of technologies in different areas. The share of JACIK in worldwide generation of technology as measured in terms of share in US patents has gone up from 14 per cent to 22 per cent over the 1990s, see Sinha-Roy, this volume. Furthermore, the technological capabilities of Asian countries are essentially complementary in nature. For instance, Korea in auto, consumer electronics, semiconductors, shipbuilding; China in consumer electronics and light engineering; India in biotechnology, pharmaceuticals and computer software, and so on. Within industries too, there are patterns of complementarity. For instance, in IT industry East Asia has huge hardware capacity and some countries like India, and the Philippines have the software capacity. A similar situation exists in chemicals, pharma, biotech, etc. This emerging pattern of complementary capabilities provides a great potential for intra-regional FDI and technology transfers. Already intra-regional FDI contributes a substantial proportion of FDI inflows in a number of Asian countries such as China (70 per cent), Thailand (55 per cent), Malaysia (44 per cent). Furthermore, Asia has its own model of industrial restructuring, viz. flying geese model, which provides for industrial specialisation and division of labour based on changing comparative advantage.16 Asia also combines a number of economies that are deficient in skilled manpower and human resources such as Japan, Singapore, Malaysia, with those that are relatively plentiful in these resources such as India, China, and the Philippines. The formation of economic community would help these complementarities to be exploited for mutual advantage, as demonstrated by the CGE computations of welfare gains.