Impacts of increasing integration: Challenges in trade, finance and the environment

By Delhi 2013 on Thu, 23 May 2013

Written by Jayant Menon, Lead Economist, Trade and Regional Cooperation

Regional cooperation and integration (RCI) has played an important role in Asia’s growth and development, and will have to play a role in managing the consequences of this ascendancy going forward. To sustain region wide economic growth, greater regional integration allowing for freer flow of trade and investment across the region is desirable. A prerequisite for this is greater and sustained regional cooperation. Continuous dialogue and cooperation, if not coordination, in macroeconomic policy should also be considered. But increasing regional integration brings with it both benefits and costs. 

This item continues the discussion started in an earlier one, focusing on the trade and finance dimensions of RCI by looking at their impacts and the challenges they pose, as well as managing associated environmental consequences. Given the impasse at the World Trade Organization (WTO), the proliferation of free trade agreements in the region is not surprising. Concerns are rising over the impacts of the “Asian noodle bowl” of often overlapping agreements. Although a successful conclusion to the Doha Round would be optimal, the need to harmonize free trade agreements through consolidation, with a view toward eventual multilateralization, is the way forward. A WTO Round has never collapsed before, and the rise of discriminatory regional blocs may eventually facilitate, rather than substitute, for such a conclusion has precedence in the previous Uruguay Round. 

Irrespective of what transpires, domestic reforms, through national unilateral actions, will need to play a complementary role. This is necessary to deal with the incumbency issue of concentrated market power, irrespective of nationality, that could pose as barriers to entry in many sectors. The Indian case provides a good example of how national reforms need to complement international commercial policy. Should India first pursue a free trade agreement (FTA) amongst its states, where different taxes and subsidies continue to distort prices, before pressing ahead with the 30 or so FTAs they are pursuing? And furthermore, what kind of trade policy landscape would it find itself with once all of these FTAs are finally implemented? Surely this cannot be an end as far as trade reform is concerned. In the absence of a multilateral agreement, unilateral multilateralism will be required to sort out the mess.

Turning to international finance, there have been impressive developments with the Multilateralized Chiang Mai Initiative (CMIM) over a relatively short period of time.  However, the critical question as to whether there reforms are sufficient to provide the region with a working option in the event of a crisis remains an open one. The need to expand regional financial safety nets further, to increase the diversity of its membership, and to streamline procedures for activation are urgently needed. Hopefully, these changes can be implemented before, rather than because of, the next crisis.

Increasing integration has resulted in convergence, where the poorer countries are rapidly catching-up to the richer ones. Another challenge facing Asia is ensuring that convergence across countries occurs without significant increases in inequality within countries. While more rapid growth in the poorer countries of the region has reduced per-capita income differentials with the more developed ones, the distribution of these gains have been uneven and income inequality within these countries has worsened. It would appear that inter-country differences in economic conditions are being replaced by intra-country differences.  All kinds of in-country inequities have remained stubbornly high or have increased, including rural-urban, along ethnic lines and across gender. Rapid growth has tended to favor owners of capital over labor; high-skilled over low-skilled workers, and urban and coastal areas over rural and inland regions.

What is alarming is the increase in polarization, both economic and social, in these converging countries, but also in other developing members of the region. These factors can threaten social cohesion, and pose major risks to social stability. High and/or rising income inequality can also threaten growth itself, as well as the poverty elasticity of growth. But economic growth alone, however robust or rapid, cannot address the multidimensional nature of poverty, deprivation, or vulnerability. To address these issues, growth must become more inclusive. It must not only address poverty, but also deal with aspects of equity, equality of access, and opportunity, and provide protection to the vulnerable in the various facets of daily living. There were also major differences across the subregions, with Southeast Asia faring better than most others. RCI can play an important mitigating role in limiting polarization within countries, as well as narrowing differentials across subregions, although increasing investment in education and health, together with land reform, remain the critical challenges at the national level. 

Finally, unless future growth is more environmentally sensitive, its sustainability and consequent benefits, especially to the poor, will be at risk. Climate change will affect all countries, but its negative impacts are likely to be more severely felt by poor people and poor countries. This is because they are more vulnerable due to their high dependence on natural resources and climate-sensitive sectors, such as agriculture and fisheries, and their limited financial and institutional capacities to cope with climate variability and extremes, including the natural disasters that they induce. This will be particularly true for the least developed countries in the tropical and subtropical regions of Asia. Climate change therefore poses a serious risk to reducing poverty and inequality, and threatens to undo decades of development efforts. 

Although this item draws on the discussion that took place at the seminar at the ADB’s 2013 Annual Meeting, the views expressed are those of the author’s alone.