The South Asian Association for Regional Cooperation (SAARC) was lunched formally in 1985 during the first summit of seven South Asian countries, namely Bangladesh, Bhutan, India, the Republic of Maldives, Nepal, Pakistan and Sri Lanka. Since the formation of SAARC, several important steps have already been taken towards cooperation among the member countries, particularly, plans to accelerate economic and social development. For example, the agreement on South Asian Preferential Trading Arrangement (SAPTA) allows member countries to import commodities from one another with a tariff 10 per cent lower than those imposed on non-SAARC countries. It was also agreed that the South Asian countries would make joint efforts to eliminate poverty in the region.
What are the reasons for this enthusiasm for regional co-operation in Asia?
To answer this question, it is important to examine a number of emerging factors and pressures that are stimulating the Asian countries to enhance their co-operative efforts.
First, the challenges arising from the integration of Europe and North America have forced Asian countries to strengthen their own co-operative arrangements. During the past several decades, Asian countries have benefited substantially from the trend of relatively open trade. The success of Asia’s outward-looking strategies transformed Asia into the most dynamic region in the world. However, during the 1980s, the industrial countries increased their trade protection (1). Moreover, in the late 1980s, the European Community (EC) decided to move to a single European market for goods, services, capital and labour. In 1994, the North American Free trade Agreement (NAFTA) was signed. These new regional arrangements exert considerable influence on the world economy.
1 It is reported that among 24 OECD Member countries, about 29 of them increased trade protection during the 1980s.
Being an outsider to these important regional arrangements, Asian countries are increasingly concerned about the adverse impact of the growth of regionalism, since the emergence of an inward-looking regionalism could severely hurt the export growth and economic performance of Asia. Many interest groups in Asia are searching for a way to prevaricate against a further weakening of the world trading system.
Second, the increase of intra-regional trade among Asian countries has become an important driving force for economic co-operation in the region. North America and Western Europe used to be the principle markets for Asian exports in the 1960s and the 1970s. However, since the beginning of the 1980s, there has been a profound shift in the geographic pattern of Asian trade. In 1986, for example, the share of intra-Asia exports to total exports was 24 per cent. By the 1993, the share had increased to 35 per cent. Asia has become its own most important and rapidly expanding market (Rao, 1995).
Third, the flows of intra-regional investment in Asia has also complemented the growth of intra regional trade and reinforced the interdependence of Asian economies. Reflecting the improved economic environment in the region, Asia has been very successful in attracting foreign direct investment (FDI). Net FDI flows to Asian developing countries increased substantially from $2.8 billion in 1983 to an estimated $36.7 billion in 1993(International Monetary Fund, 1994) Japan is one of the most important sources of FDI for Asia. The dramatic appreciation of the Japanese yen after the Plaza Accord in 1985 reduced the operational costs of Japanese overseas investment and larger proportion of investment outflows began to be directed to Asia. In recent years, the newly industrializing economies (NIEs) have also emerged as one of major sources of foreign investment in Asia. Acute labour shortage, regional orientation of industrial and financial enterprises and the increasing economic maturity of NIEs were important factors in the growth of FDI from NIEs to Southeast Asia and People’s Republic of China.
Fourth, the progress on economic deregulation and liberalization in Asian countries provides a solid foundation for the success of regional co-operation. Asian countries have increasingly recognized that liberalizing trade is in their own interest. During the 1980s, while many industrial countries increased their trade protection measures, the majority of Asian countries undertook unilateral liberalization of their trade and exchange payments. Also, considerable deregulation of financial institutions and markets since the 1980s have improved the efficiently of the financial sector in many Asian countries as an intermediary that mobilizes funds of savers for investor. Among the NIEs, Hong Kong and Singapore have existed as free-trade economies for years. Trade liberalization and financial reforms have also accelerated in the Republic of Korea and Chinese Taipei. In Southeast Asia, Indonesia, Malaysia, the Philippines and Thailand have significantly reduced their tariff across the broad and eased quantitative restrictions on trade. Recently, a new wave of economic liberalization has also appeared in South Asian economies. Both India and Bangladesh have substantially reduced their quantities restrictions on imports. Pakistan, Nepal and Sri Lanka have also taken measures to promote exports and deregulate imports.
Finally, the opening up of centrally planned economies in Asia to the outside world provides enormous business opportunities for regional co-operation. An important part of the economic refor5m in the People’s Republic of China (PRC) was the “open door” policy and trade reforms. Import barriers have been substantially reduced, and external trade has been largely decentralized. Consequently, during this period, merchandise trade increased more than ninefolt from $21 billion in 1978 to $196 billion in 1994(Min Tang, 1994). Considering that 60 per cent of the PRC’s external trade is within the Asian region, there are large opportunities for regional activities for business and co-operation. Economic reforms in Vietnam and the other Indochina economies have also promoted an expansion in trade and investment in the area.
It is expected that regional co-operation will create enormous opportunities and challenges for Asian countries. The main rationale for regional co-operation rests on the exploitation of complementarities among a group of countries, which will support the efficient use of natural and human resources beyond national borders. Significant welfare gains could be obtained from greater specialization in production based on comparative advantages. Regional co-operation also enhances economies of scale by enlarging regional markets and increasing competition. In addition, these are other positive effects such as increases in the rate of technological transfer, improvement in the investment climate and other consumer demand dynamics.
The Asian region consists of economies with wide range of resource endowments at various stages of economic development. For example, the per capita income of Japan, an important indicator of the level of economic development is more than ten times that of some South Asian countries. Thus, there exist substantial complementarities among the different Asian economies. The region encompasses a wide array of different resource endowments which give rise to vast trade and investment opportunities. The scarcity of land in Japan and in the NIEs is offset by the huge land frontier in other parts of Asia. In terms of human resources, the large pool of unskilled labour in the less-developed Asian countries can compensate for the tight labour market in the fast growing economies of East Asia.
Japan is the leading economy in the region. Its rapid technological advancement and its huge capital surplus contribute to a well-developed industrial and financial sector. It maintains sizeable trade and investment outflows to the region. During the middle of the 1980s, the sharp appreciation of the yen pushed a number of domestic firms to move their production line overseas to lower cost countries.
The Asian NIEs, comprising Hong Kong, the Republic of Korea, Singapore and Chinese Taipei, also have strong industrial sector, well-developed financial markets, fairly advanced infrastructure facilities and a well-trained labour force. However, acute labour shortage and scarcity of land pushed their labour costs and property prices upwards and reduced the competitiveness of their economies in the world market.
On the other hand, the Southeast Asian countries have benefited from the outward-looking, market-oriented development strategies they adopted decades ago. An inflow of large-scale foreign investments helped the region to upgrade their industrial capacity. Recently, however, both Malaysia and Thailand have experienced some degree of labour shortages, particularly of skilled labour. At present, the former Asian centrally planned economies, comprising the People’s Republic of China, Vietnam, Mongolia, and the Lao People’s Democratic Republic, are undergoing rapid changes. Market reforms have opened some segments of their economies to foreign goods, capital and competition. They have also provided extensive opportunities for trade and investment within the region. However, to upgrade their industrial and management skills, they will also need a large amount of foreign investment and technology.
South Asian economies have suffered from slow economic growth and extreme poverty in both rural and urban areas. However, recent economic liberalization initiatives make South Asian countries very attractive to foreign investment. Owing to the relatively closed trade sectors, they are balanced to achieve great potential from integrating with east and Southeast Asian economies. All of these complementarities form a foundation for the success of Asian economic co-operation.
The formation of Asian co-operation brings many opportunities to the region. Trade is the first area in which Asian economic co-operation will contribute vast opportunities. The primary goal of co-operation is to increase the growth of trade substantially above the current level. To support the overall target, co-operative programmes incorporate components that promote intra-regional trade, expand exports to the rest of the world and diversify exports into other non-traditional areas, particularly a shift from exports of primary goods to exports of other high value-made in the areas which are not covered by GATT.
Asian economic co-operation will also create numerous opportunities for investment. In the past, foreign investment, particularly foreign direct investment (FDI), played an important role in the economic development of many Asian countries. FDI inflow to developing Asia increased almost fivefold between 1987 and 1993, and it accounted for more than 70 per cent of the total FDI inflow to all developing countries in the world (Tang and Villafuerte, 1995). The primary goal of regional co-operation with respect to investment is to enhance the attractiveness of Asian countries as destinations of foreign investments. To this end, the various mechanisms, which will facilitate FDI inflow, have become some of the most important agenda items in Asian co-operation.
Another opportunity of regional co-operation in Asia is an opportunity for infrastructure development. It is well accepted that improvement of infrastructure linkages including transportation, communication and power supply are important for the success of regional co-operation. In fact, Asian countries are to maintain their momentum of growth, the problem of infrastructure bottlenecks needs to be addressed. Many Asian countries already have ambitious plans for the long-term development of infrastructure.
However, the formation of Asian Economic Co-operation does not only bring the opportunities to the region. It poses a number of challenges. First, the Asia-Pacific region comprises a diverse group of countries at different stages of development. While disparities in the level of income and size of the economy could generate complementarities, they also entail substantial difficulties for co-operation. An important issue in the process of regional integration is the distribution of costs and benefits among the participating countries. Trade liberalization and market integration tend to accentuate the inequalities among the member countries. As a result, the benefits of co-operation are not equally shared among the participating economies. Therefore, Asian countries should exert considerable efforts to devise and implement a co-operative arrangement, which provides an equitable sharing of costs and benefits.
Second, regional co-operation requires strong political will and sustained commitment from all the particular governments. At the national level, there is a need for implementing appropriate policies relating to tariffs, employment regulations, finance, foreign investments and foreign exchange. Some groups of people will lose (or gain) more than others. Interests groups in the member countries will lobby against market integration in order to protect their own interest. Also, the ability of the national government to provide adequate social infrastructure such as education and training, and to strengthen the legal framework to facilitate the development of regionalism, is important.
Third, open regionalism, though consistent with multilateralism, is not easy implemented. Bhagwati (1994) discussed some of the possible adverse developments. Since larger economies are often more inward-looking than smaller economies, the establishment of a large trading bloc precludes the need for opening up to other countries. In addition, interest groups within the bloc will view the bloc’s market as their own and will resist extra-bloc liberalization. Moreover, with the simultaneous formation of trading blocs worldwide, the interaction among these blocs will create uncertainties for the world trading system (De Melo and Panagariya, 1993).
In conclusion, there has been a dramatic change in the attitude towards regional co-operation among Asian countries in recent years. The increasing interdependence in the form of intra-regional trade and investment among Asian economies has become an important driving force for economic arrangements. Another key reason for greater co-operation among Asian countries is the adverse impact on the region of the integration of the European and North-American markets. Moreover, the success of deregulation and liberalization in Asia and the recent opening up of former centrally planned economies provides a solid foundation for regional co-operation.
The APEC, AFTA and SAARC type of regional integration has been the major driving force for reducing tariffs trade barriers among Asian countries. In addition, subregional co-operation, which promotes collaboration in areas other than free trade, is one of the most dynamic co-operative arrangements in the region. It entails lower risk and costs. Therefore, it is short-term arrangement prior to the establishment of more comprehensive regional integration arrangements. In particular, it is relevant to countries in transition from a centrally planned economy and other economies, which have changed from a system with inherent bias against exports to a market-oriented and export-led growth strategy.
Regional co-operation could also provide enormous opportunities for Asian countries, given the substantial economic complementarities among the Asian economies and considering that business opportunities generated in trade, investment and infrastructure development and other social issues.
On the other hand, the formation of Asian economic co-operation poses a number of challenges to the region. Trade liberalization and market integration involve a great amount of sharing of cost and benefits among participating countries. Considerable efforts have to be exerted to design and implement a fair system for the distribution of national policies and costs and benefits. Since co-operation involves modification of national policies and practices, it will also require strong political commitments from the governments concerned. In turn, these governments will also have to provide adequate social infrastructure and strong legal framework to facilitate co-operation.
REFERENCES:
1.Bhagwati, Jagdish. Regionalism and Multilateralism.Cambridge University Press, Cambridge, 1994.
2. De Melo, J.D. and A. Panagariya. Introduction, in New Dimensions in Regional Integration, Cambridge University Press, Cambridge, 1993.
3. International Monetary Fund, Balance of Payments Statistics Yearbook, Part I, 1994.
4. Rao, Narhari. Intra-Asian Trade: Trends and Prospects. Organization for Economic Co-operation and Development, 1995.
5.Tang, Min and Myo Thant. Growth Triangle: Conceptual and Operational Considerations, in Growth Triangles in Asia: A new approach to Regional Economic Cooperation, M. Thant, M. Tang and H. Kakazu, eds, Oxford University Press, Hong Kong, 1994.
POLI 307
FINAL PAPER
ASIAN REGIONAL and ECONOMIC
CO-OPERATION