The Future of Asia: Charting a Course for Asian Economic Integration

Montek Singh Ahluwalia
Deputy Chairman, Planning Commission, Government of India

I feel greatly privileged to be invited to speak at this prestigious international conference on "The Future of Asia". I would like to compliment the Nihon Keizai Shimbun for regularly bringing together participants from different parts of Asia to discuss issues of common interest for our continent.

The theme of this year's conference is particularly pertinent in view of the changes which have taken place in the world in the last fifteen years or so. Asian countries have opened their economies to foreign trade and investment and have aggressively integrated with the global economy. They have generally done well in this process and Asia has the best record of economic development and poverty reduction compared with any other region. This has given us confidence to think of deeper economic integration among ourselves. Regional integration is taking place in Europe and in North America in parallel with the steps to achieve multi-lateral liberalisation. The concept of Asian economic integration is therefore a logical development as a means of promoting the common prosperity and well-being of the people of Asia.

In other parts of the world, successful regional integration has been driven by prior political closeness. Asia is different in this respect because it includes a much greater diversity of countries at very different levels of development and also with very different political systems. However, commonality of economic interests is also a powerful driver and there are strong economic forces which justify greater integration. In the case of Asia, unlike Europe, it is possible that economics will lead in the integration process and politics will follow.

I would like to use this opportunity to share some thoughts on how India looks at the prospects.

We, in India have long admired the remarkable economic performance of many Asian countries, which led people all over the world to view Asia as a success story in development. In fact, when India embarked on a process of economic reforms in the 1980s, the move was in part stimulated by the demonstrably superior performance of East Asian countries such as South Korea, the Taiwan province of China and later China itself and the countries of South-East Asia, all of which demonstrated that market oriented policies, with a particular focus on exports, could be a recipe for rapid economic growth and poverty reduction.

Economic reforms in India have been successful in raising India's growth rate from 3.5 percent in the 1960s and 1970s to just under 6 percent in the 1980s and 1990s. The economy has grown at an average rate of 6.5 percent in the last three years and we expect to average 7.5 percent in the next two years. We are aiming at taking the economy to an 8 percent growth path thereafter.

Our assessment that India has the capacity to grow at 8 per cent per year is shared by many observers. A much quoted recent study by Goldman Sachs has identified Brazil, Russia, India and China as the set of large emerging markets projected to grow rapidly over the next thirty years. Within the group, India's potential growth rate has been projected to be the fastest - around eight percent per year - faster even than China, which is currently, and has been for many years, the fastest growing economy, but is expected to slow down in future. According to this study, by 2040, India will become the third largest economy after the USA and China. This projection has been adopted by the US National Intelligence Council's 2020 report "Mapping the Global Future".

We recognize that these projections are not guaranteed outcomes and there is a great deal we need to do to realize our potential. The process of economic reforms must be carried forward and the government is committed to doing so. We will continue the process of reducing the import tariffs to bring them in line with those in other countries in East Asia. We will actively encourage foreign investment from Asia and other parts of the world.

One of our major priorities is to upgrade our infrastructure, including especially roads, electric power, ports, railways and irrigation. In all these areas, our objective is to bridge the gap between our infrastructure and the standard of infrastructure in East Asia. The government proposes to achieve this objective through a combination of expanded public investment and private public partnerships, wherever possible.

Our experience in attracting private investment into infrastructure is mixed. We have had very good experience in telecommunications and ports. It has been more difficult in the area of electric power, but we are trying to overcome these problems. We are currently planning a major expansion in airports infrastructure based on public private partnership. The expansion plan for roads will be dominantly in the public sector but we are planning a significant role for private sector BOT projects in this area in stretches where the traffic density is high.

Large investments are also needed in the health sector and in education, particularly in rural areas, to make up the gaps which exist in social indicators. We have done less in these areas than we should have, and we are taking steps to correct these deficiencies.

India's economic reforms are similar in many ways to the changes that have taken place elsewhere. We are trying to create an environment in which the private sector is given freedom to compete and innovate supported by infrastructure as good as in our competitor countries. We have opened up the economy to trade and foreign investment. We are restructuring the role of government to get it out of business wherever the private sector can do the job and focus its energies on areas where the private sector is unlikely to act and on creating regulatory structures in infrastructure which create a credible environment for private investment. The main difference with India's reforms is that they have been implemented at a more gradualist pace than in many other countries.

This gradualism should not be mistaken for lack of conviction. It is, rather, the inevitable consequence of India's democratic polity. India has worked hard over 60 years to build a functioning democracy in which an electorate of 700 million exercises its franchise regularly, and often change governments in the process. We take pride in the highly participative nature of our democracy, but this does mean that policy changes must be made at the pace at which consensus can be built. This slows the pace, but it has the advantage of building a broad base of support, which ensures political continuity and sustainability.

The transformation that has taken place in our policies has given us a new perspective on the importance of the Asian region. We have always attached emotional importance to the concept of Asian unity and identity. Our first Prime Minister, Pandit Jawaharlal Nehru was perhaps ahead of his times when he saw the mighty possibilities that Asian unity could offer to its nations. Many of the factors that drive Asian cooperation and inter-dependence today, such as globalization and trade liberalization, had not emerged in his lifetime. Nevertheless, he was clearly driven by a common vision of Asia when he spearheaded two important Asian movements of his time - the Asian Relations Conference in Delhi in 1947 and the Bandung Conference in 1955.

The dynamics of globalization and the growing economic potential of Asia, justifies the resurrection of that vision of Pan-Asian regionalism. Driven by this vision, India has been striving to strengthen relations with its Asian partners - with Japan, China, Korea and countries in the ASEAN region. We have a similar vision of South Asia, unshackled from historical divisions and bound together in collective pursuit of peace and prosperity.

We believe that cooperation between India and East Asian countries in the 21st century is economically logical and will help to make this century the century of Asia. It was in this context, and with this vision of an Asian century, that a decade ago, our Government unveiled the "Look East" policy, which is now a vital part of India's foreign policy.

This is not a mere political slogan. Our "Look East" policy has a strong economic rationale. East Asia- including Japan, China, South Korea and ASEAN - is now India's largest trade partner, ahead of EU and also ahead of the US. This region is an important source of Foreign Direct Investment into India. Japan's investments in India are growing. South Korea has become an important investor in recent years. Singapore and the other South-East Asian countries have also begun to invest.

At present, the inflow of Foreign Direct Investment into India is about $5billion per year, if we exclude portfolio investment in Indian equities by Foreign Institutional Investors. This is a big increase from $100 million when the reforms began, but it is far below our potential. China, for example, attracts FDI of $60 billion. China is a larger economy and would be expected to attract a larger flow. There are also differences in the definition which if corrected, increase the Indian figures. Nevertheless, the existing flow is below the potential. An economy of India's size and growth prospects should be able to absorb three times the level of FDI it currently does. The government is committed to creating an environment in which this increase will take place and we believe that a large part of the increase could come from Asia.

The Indian economy is also set on the path of greater openness in the area of trade and this makes greater integration with Asia inevitable. Our trade to GDP share has been increasing, but compared to the East-Asian countries it is still low. We expect this share to increase substantially as a consequence of open policies. Asia, with its highly diversified production base, spanning the highest technology in Japan, very high technology in South Korea, and proven competitiveness and quality in other East Asian countries, is bound to have a large share of this increase.

These economic considerations have guided our policies towards our neighbours in Asia.

India greatly values its relations with Japan and believes that as the second largest global economy, Japan has a natural central role in Asia's global future. During Prime Minister Koizumi's visit to India last month, the two Prime Ministers signed a Joint Statement, which adds a new "strategic" orientation to the India-Japan global partnership in the "new Asian era" and lays down a concrete "Eight-fold Initiative" for strengthening it. The Joint Statement recognizes that India and Japan will be two of the key anchors in the new emerging Asian era, with a broad convergence in their long-term interests and concerns. We have together agreed to explore the feasibility of an India-Japan Economic Partnership Agreement.

India seeks friendly and cooperative ties with China and we are working to improve our relations in all areas without allowing our differences to define the agenda of our relationship. During the visit of the Chinese Premier Wen Jiabao to India last month, India and China agreed to establish a "strategic and cooperative partnership for peace and prosperity". This reflects the consensus between the two sides that there is more than just a bilateral dimension to their relations. These have now acquired a long-term, global and strategic character with growing influence of the two countries on the regional and global stage, and growing convergences between them on regional and international issues. Trade and economic ties between the two countries are expanding rapidly and the two countries have now decided to examine the feasibility and benefits of an India-China Regional Trading Arrangement. I am particularly happy to say that Chinese firms are investing in India and Indian companies, including especially those in IT and pharmaceuticals where we have some strength, are investing in China.

With the ASEAN, we have a partnership that is steadily expanding and has the potential to become a catalyst of economic integration in our region. The potential for beneficial co-operation is recognized by both sides. At the third India-ASEAN Summit, we signed an agreement on India-ASEAN Partnership for Peace, Progress and Shared Prosperity. We have started evolving a Free Trade Agreement with ASEAN. We already have an FTA with Thailand and a Comprehensive Economic Cooperation Agreement with Singapore.

There is a steady development of friendly and cooperative relations between India and South Korea over the last thirty years, since the time these two countries established diplomatic relations. South Korea has responded positively to India's opening up and, as I have already mentioned, they have made important investments in India in the past few years with the distinct prospect of more to come.

These policy initiatives vis-à-vis Asia are the logical consequence of our new economic policies which emphasise openness and integration. An open and fast growing India will, we believe, have much to offer to Asia, helping to knit the continent together in a manner never seen before. It is with this conviction that India espouses a vision of an Asian Economic Community, which encompasses ASEAN, Japan, China, South Korea, and India - the five pillars which may form the initial core to drive Asia's emergence as the epicentre of global economy.

It is relevant at this point to quote from the speech of our Prime Minister, Dr. Manmohan Singh to the Third Indian - Asean Business Summit in October, 2004:

Such a community would release enormous creative energies of our people. One cannot but be captivated by the vision of an integrated market, spanning the distance from the Himalayas to the Pacific Ocean, linked by efficient road, rail, air and shipping services. This community of nations would constitute an "arc of advantage" across which there would be large scale movement of people, capital, ideas and creativity. Such a community would be roughly the size of the European Union in terms of income, and bigger than NAFTA in terms of trade. It would account for half the world's population, and it would hold foreign exchange reserves exceeding those of the EU and NAFTA put together.

We appreciate that it will take a great deal of time, energy and perseverance to translate this vision into reality. But we should at least start thinking about the idea and develop the roadmap for its realization.

Some initiatives towards Asian regional cooperation have already gained momentum. Developments such as the Chiang Mai Initiative, the creation of an Asian Bond market, the proposal for an Asian Exim Bank, are examples which highlight the emergence of a distinct Asian consciousness. Their reach could be expanded. Another encouraging development which would point to a cooperative architecture in Asia is the East Asia Summit to be held in Malaysia towards the end of this year, with the participation of ASEAN, Japan, China, South Korea and India. This could prove to be the beginning of a more permanent forum, leading to the creation of an East Asian Community.

Studies by a leading Indian think-tank show that economic integration within the East Asian Community has the potential to generate welfare gains of up to US$ 210 billion. Another recent joint study by Asian Development Bank, World Bank and the Japan Bank for International Cooperation concludes that developing countries in Asia need to spend more than a trillion dollars over the next five years on roads, water, communications, power and other infrastructure to cope with the rapidly expanding cities, increasing populations, and the growing demands of the private sector. Monetary and financial cooperation in Asia, designed to mobilize the huge foreign exchange reserves of Asian countries for development of regional commons and regional infrastructure, could have the potential of creating hundreds of billions of dollars of additional output to overcome these constraints.

The major countries of Asia are already engaged in developing preferential trading arrangements between themselves. India too is actively pursuing these possibilities. This should continue, but we must also keep in mind that the larger East Asian Community offers the opportunity to build a broader regional trade and investment architecture which can overcome the sub-optimal benefits of bilateral arrangements and build stronger synergies and deeper complementarities for greater mutual advantage.

Cooperation for ensuring energy security can be another highly lucrative collective endeavour for the East Asian Community as many of its members are amongst the largest consumers and importers of energy in the world. Two possible areas of such an Asian energy cooperation could be building an Asian Strategic Petroleum Reserve and creating an Asian Emergency Response System. The cooperation could also extend to cover the joint patrolling of the sea-lanes through which pass the bulk of the oil and gas supplies for the region. The possibility of building an Asian gas or oil pipeline is also promising through collaborative efforts.

Cooperation in the development of transport infrastructure and connectivity is another area of promise for the East Asian Community. In addition, collective venture in core technologies for addressing the digital divide and nutritional and health related issues also presents opportunities for fruitful cooperation especially in fighting the common challenges of poverty and underdevelopment in the region.

The possibilities are indeed enormous. Prime Minister Manmohan Singh and Prime Minister Koizumi articulated this in the Joint Statement signed on April 29, 2005 during Prime Minister Koizumi's visit to India, when they said this Community of nations would constitute an "arc of advantage and prosperity" which would act as an anchor of stability and development for Asia and beyond.

Ladies and Gentlemen, today, Asia stands at the cusp of exciting times, which hold a bright promise for our future collective endeavours. We share the responsibility to shape our collaboration to liberate the creative energies of the entire region. We must put in place a political and economic architecture which is conducive to Asia's emergence as a pre-eminent region of stability and prosperity. This can make the 21st century the Asian century in the truest sense. India seeks closer and wider engagement with her Asian neighbourhood and is willing to work closely with them to realize this shared aspiration.

Thank you.

(Excerpted from the speech delivered at The Future of Asia 2005 Conference organized by Nihon Keizai Shimbun in Tokyo on May 25, 2005)

See Previous Write Ups