Fifty years ago, when European integration was gathering steam, most of Asia remained mired in poverty. As countries in the region gained independence, national rather than regional identity was paramount. So was getting food on the table.
Today, Europe is well-integrated, its eurozone trying to reinvigorate economies post crisis and reinstate financial stability. Asia, on the other hand, continues its decades-long re-emergence as a global economic powerhouse, sporting stronger growth even after the global financial crisis. In Asia, too, regional integration is expanding and deepening, particularly in trade and investment.
East Asia has set some examples in regional cooperation. The 10-member Asean will reach its 2015 milestone of an Asean Economic Community—although it is still far from a seamless economic group. In addition, with Asean as a core, the response to the 1997 to 1998 Asian financial crisis helped create the Asean+3 (Asean plus China, Japan and South Korea) dialogue process, a $240-billion swap-based financial safety net known as the Chiang Mai Initiative Multilateralization, and an Asean+3 Macroeconomic Research Office for economic monitoring. The Asean+3 also has worked for the Asia Bond Markets Initiative to deepen and broaden the region’s debt markets as an alternative to bank-dominated credit. The ADB has been active in supporting these initiatives.
The ADB has also been promoting the idea of regional cooperation in the Greater Mekong subregion, South Asia, Central Asia and Pacific island countries.
It may be useful to highlight the differences between Asian regionalism and Europe. Asia’s integration has been largely market-driven, outward-oriented and institution-light. In contrast, European integration, whether it is about the euro or the European Union, continues to evolve by political choice as much as markets. It is institution-heavy. Asia’s integration is less legalistic and more collegial than Europe’s. Yet it works effectively for several reasons.
First, under Asia’s regional cooperation frameworks, physical connectivity between countries has been strengthened via cross-border highways, railways and power. Big hydropower projects in Laos providing power to neighbor countries became possible thanks to the trust between countries, cemented by the Greater Mekong Subregion Initiative. If energy-surplus Central Asian countries can be better connected with energy deficit South Asian countries through transmission and gas pipeline projects assisted by the ADB, the development impact will be enormous. Highways connecting East Asia through Central Asia through South Asia will bring about enhanced trade opportunities not just within the regions, but also with other regions of the world, enabling countries to become a part of global production networks. These pragmatic, sector and project driven connectivity initiatives give birth to bottom up institutions such as subregional railway associations and power coordination centers.
Second, opening trade and investment regimes through regional frameworks like the Asean Economic Community has had clear benefits. Tariffs have been cut in Asean. Investment laws have been streamlined. Engagement with the world economy—and with neighboring countries—is central to achieving high and sustained growth. Intra-Asian trade was around 40 percent in 1990. Today, it is well over 50 percent. Intra-Asian foreign direct investment has also increased and is now close to 60 percent. And this is happening while Asia continues to open further and integrate with the rest of the world—not only in production and trade, but also in finance. In fact, the biggest investors in Asia’s emerging bond markets are European, while the biggest investors in equity markets are U.S. investors.
Third, regional cooperation, through peer pressure or certain regional frameworks, facilitates adoption of best practices in such areas as international standards for financial sectors, safeguard policies to address environmental and social impacts, protection of property rights and enhanced governance and transparency. These are all essential for sustaining growth. Without good governance, for example, people may divert energy from innovation to less productive activities. Many Asian countries are stepping up anti-corruption efforts. But more must be done.
Finally, regional cooperation helps discipline policymakers and provides them a venue for discussing macroeconomic policies. It even urges them through peer pressure to make politically difficult decisions on fiscal consolidation and reforms of state-owned enterprises. No economy prospers amid macroeconomic volatility. After the Asian financial crisis, policymakers across the region set out to strengthen fiscal, monetary and financial policies. The result was smaller fiscal deficits, better managed inflation, and realigned and reformed banks—better capitalized and regulated.
As Asia continues to integrate—and cooperation deepens—leaders and other policymakers will continue to shy away from more ideologically set institutions. Yet their pragmatism will not deter them from boosting cooperation in support of economic integration, growth and people’s welfare.
Takehiko Nakao is the president of the Asian Development Bank.