Regional cooperation and integration in a changing world

By Delhi 2013 on Mon, 29 April 2013

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

With Asia’s continuing rise and growing impact on the global economy, regional cooperation and integration (RCI) is expanding, bringing with it both benefits and costs. To sustain region-wide economic growth, an integrated market for the free flow of trade and investment across the region is necessary. Some degree of cooperation, if not coordination, in macroeconomic policy should also be considered.

Intraregional trade in Asia, as well as South-South trade, has grown substantially. But the trade landscape is becoming increasingly complicated with the proliferation of free trade agreements (FTAs). As of January 2013, the economies of Asia were party to 109 ratified FTAs. This has raised concerns over distortions associated with the so-called “spaghetti” or “noodle bowl” effect. As with trade, financial integration in Asia has also been expanding, though less rapidly and from a low base. 

The monograph prepared for the seminar at the 2013 ADB Annual Meetings entitled “Regional Cooperation and Integration in a Changing World” attempts to address some of the financial and trade aspects of integration in Asia. It has two self-contained sections. Section 1 focuses on the costs and benefits of regional integration in general, and concludes with some pointers specific to financial integration. Section 2 deals with trade integration and related policy challenges.

Some of the key conclusions are summarized below.

Like any policy or strategy, the goal of integration must be an improvement in welfare and quality-of-life—both within and across countries. Regional integration can expand markets and input sources, better allocating resources across the region, thus accelerating economic growth. It can also improve risk-sharing. But there are also downside risks, ranging from potential contagion to growing income inequality and polarization.

While the level of Asia’s financial integration may have increased, its benefits in terms of consumption and investment risk sharing have been limited. The majority of Asia’s savings also continues to be intermediated outside the region. Closer economic links helped reduce income disparities across Asia, but inequality within countries has risen. Large portions of Asia’s population have not benefited from increased prosperity overall. The cascading effect of the ongoing Eurozone crisis is a vivid reminder of the contagion risk for systems overly integrated and where not all pre-conditions are in place.

While collective regional policies have their merit, unilateral policies can benefit individual countries and the region; it remains important to use national policies to maintain the integrity of domestic institutions. This is ably demonstrated by the current complication in Asia’s trade policy landscape, following the plethora of FTAs. Indeed, FTA proliferation has been greatest in Asia, where the global multilateral impasse has helped create an Asian noodle bowl, with more than 100 ratified FTAs involving at least one Asian economy.

Two key proposals have been advanced to disentangle the Asian noodle bowl: consolidation—which creates a regional FTA to harmonize bilateral FTAs; and multilateralization—which grants nondiscriminatory preferences to nonmembers, eliminating preference discrepancies. The ASEAN-led RCEP could pave the way for consolidating ASEAN FTAs under a single regional agreement, although it is still too early to tell. Multilateralization can proceed from a consolidated regional FTA, or economies can seek multilateralization independently; but they both must overcome competing interests that lose from the dilution of preferences.

Although consolidation and multilateralization are not mutually exclusive— consolidation is a means; multilateralization is the end—history shows that unilateral actions (of which multilateralization is a special case) are not only feasible but account for most trade liberalization to date. The argument that unilateral actions such as multilateralization lack the proper incentives and are therefore impracticable ignores the lessons of history. Nonetheless, policymakers handling trade in Asia and in other regions continue to face considerable challenges, but none of which are insurmountable.

In sum, it is fair to say that countries in Asia have made impressive progress in regional economic integration. and cooperation. ADB has helped and continues to help facilitate this process. The region’s diversity, development pattern and global links have generated a unique Asian model of regionalism—dynamic, open, multi-track, and multispeed—which enhances prosperity not only in the region, but also in the rest of the world. Asia’s open regionalism underscores the importance of strengthening trade, investment, and capital flows within the region while maintaining strong ties with, and remaining open to, the rest of the world. It aims to build a regionally integrated and globally connected Asia.  Although we have come a long way towards realizing this goal, challenges remain, and much work still needs to be done.

We would like to invite readers to send questions that they may have for the panel to askrci@adb.org. Following the seminar, another item will be prepared, summarizing the discussions from this seminar, and posted here.