How can the Asian Economic Community be Built?

Building Blocs for the Regional Economic Cooperation in Asia

A Phased Approach to Integration

In order to make it manageable, Asia would have to approach regional economic integration in a phased manner. This is the approach that has been adopted by the successful regional blocs of today, viz. EU and NAFTA that started with an effective skeleton comprised of a core group of countries before expanding the membership later to others.

In view of the attempts already made at regional economic integration, the Asian economic community in its initial phase, it is argued, be built of five strong blocs of Asia that might form a core group, viz. Japan, ASEAN, China, India and Korea (JACIK). Once the process of integration is consolidated and some gains of integration are visible, AEC could be thrown open to other economies of the region.

JACIK countries currently combine between them fourteen of the largest and fastest growing economies with vast complementarities. For instance, they combine between them a population of 3 billion or a half of the world population and a GNP of over $ 7.2 trillion comparable to that of EU in 2000. In terms of purchasing power parity, the JACIK will have a gross national income of $ 13 trillion, much larger than either NAFTA or EU. JACIK’s exports will add up to $1.37 trillion compared to $ 1.2 trillion of NAFTA. The combined official reserves of the JACIK economies at $ 1.3 trillion in 2002 are much larger than those of the US and the EU put together. Therefore, the region would have a sufficiently large market and financial resources to support and sustain expedited development of the region’s economies.

Some process of cooperation among the JACIK economies has already started. An important step was taken under the Chiang Mai Initiative launched in May 2000 with a currency swap plan established between 10 member states of ASEAN and Japan, China and South Korea linking the international reserves of these countries.9 It covers a series of bilateral swap arrangements that would allow participating countries to draw, automatically, on 10 per cent of available capital without triggering any linkage to conditions imposed by IMF programmes. The ASEAN Plus Three Swap Arrangement was concluded at the annual meetings of the ADB in Honolulu in May 2001.

Most of the JACIK countries are also involved in trade liberalisation with other partners. A China-ASEAN Framework Agreement for free trade and investment arrangement was signed at the 2002 summit followed by similar agreements signed by India and Japan with ASEAN, see Kesavapany and Sen, this volume. A number of bilateral free trade agreements are also taking shape in the region, e.g. Japan-Singapore, India-Singapore, India-Thailand among many others.

On a parallel track, the other member of JACIK, viz. India has also intensified her economic cooperation with the other JACIK economies. Since 1991 India has adopted a Look East Policy to strengthen her economic cooperation with East Asian countries. India now has a Summit level dialogue partnership with ASEAN and has signed a Free Trade and Investment Agreement with the grouping in 2003. The India-ASEAN trade has trebled since 1991 to cross US$ 10 billion in 2001. It grew by 30 per cent over 1999/2001 after recovering from the shadow of the 1997 crisis. ASEAN countries account for nearly 10 per cent of India’s bilateral trade with their importance being higher for India’s imports. India has emerged as an important and growing market for ASEAN countries for not only manufactured goods but also for services such as tourism, engineering, construction, shipping and transport, and telecommunication, among others. Indian companies have operated some joint ventures in ASEAN countries as in rayon, edible oil refining, carbon black, etc. for long time. But in the 1990s some of the ASEAN companies also emerged as sources of investments in India as well. With the growth reviving in most of the ASEAN countries, their importance as a source of investment is bound to rise, as observed by Asher and Srivastava, later in this volume.

India has engaged China at a high-level with Premier Zhu Rongji visiting India in January 2002 reciprocated by Prime Minister Vajpayee in June 2003. The Sino-Indian trade turnover grew from about $300 million to nearly $ 5 billion by 2002 registering an average annual growth rate of 32 per cent, much faster than the growth of trade of either country. In 2003, the bilateral turnover crossed $7.6 billion representing growth of 56 per cent over 2002. A joint study group has been set up to study prospects for closer economic cooperation. The India-Korea trade has also grown about five times over the 1990s to over US$ 2.2 billion. It has grown by 48 per cent in the year ending March 2004 to US $ 3.2 billion. Korea has emerged as the fifth largest source of FDI for India. A number of Korean companies are now the leading players in consumer durables with some like Hyundai beginning to use India as a global production hub. Japan had become an important trade partner and source of FDI already by 1980s.

Besides a large (US$ 500 billion) market, the Indian economy has shown strong fundamentals and has sustained one of the fastest growth rates in the world, over the past two decades, and macroeconomic stability in the region. India has been noted by Goldman Sachs for her potential to ‘show the fastest growth over the next 30 and 50 years’.10 India has intensified her global and regional economic integration with a decade of economic reforms and the economic structure is fast converging with the ASEAN levels in terms of trade and investment policy. As is shown elsewhere India and other JACIK economies have considerable complementarities between them