Speech by Mrs Lim Hwee Hua at the Symposium on Asian Economic Integration on 4 September 2008, 9.10am at Orchard Hotel04 Sep 2008
(A) Objectives of Asian Economic Integration
Today, I would like to talk about some key success factors for Asian economic integration and ASEAN's role in this process. I would also touch on some challenges for integration. But before I do that, it may be useful to consider what we are trying to achieve through Asian economic integration. If we are not clear about this, we may well end up pursuing sub-optimal strategies.
To me, Asian economic integration should lead to an environment where companies could operate across Asian countries and beyond in a borderless manner, where goods, funds and information flow freely and at minimal cost.
To realize this ideal, Asian countries would have to deepen regional trade and investment linkages, streamline domestic and cross-border customs procedures, facilitate financial mobility and generally operate like a single market.
But because supply chains now span the globe, our outlook and reach also have to be global in nature, rather than inward-looking. This means that our linkages have to be extended to partners way beyond the shores of Asia, and we would always need to be fully plugged in to what is happening in the international scene.
(B) Benefits of Economic IntegrationAn economically integrated Asia yields many benefits such as greater market access for businesses within the region as technical and physical barriers diminish, greater economic stability and resilience and wider choice and opportunities for all.
For Asia, enhanced regional cooperation buttressed by market-driven economic integration has been instrumental in the region's strong economic recovery from the Asian Financial Crisis in 1997:
- Between 1996-2006, Asia's average GDP growth rate was at an impressive 6.6%.
- According to the IMF, Asia as a whole is expected to grow at 6.2% in 2008 and 6.4% in 2009.
- The ADB growth forecasts for ASEAN stands at 5.5% in 2008 and 5.8% in 2009.
However, the recent global economic slowdown (IMF projects a moderation of global economic growth from 5% in 2007 to 4.1% in 2008 and 3.9% in 2009), sub-prime mortgage woes afflicting America and rising global commodity prices are some of the attendant risks that could pose a threat to Asia's economic progress.
Nevertheless, increased economic integration in Asia has helped to mitigate the negative spillovers arising from the recent global economic slowdown. The increasing share of intra-regional trade (intra-Asian trade has increased significantly to over 50% of the share of Asia's total trade between 1996-2006), strong domestic demand within Asia and strong growth of exports to `non-traditional' markets such as Latin America and the Middle East has served as a short-term buffer against the global economic and financial downturn.
Hence, Asian economic integration must continue to accelerate so as to provide countries with the ability to collectively respond to external challenges with greater resilience and unity.
(C) Key Success Factors for Asian Economic Integration
(i) Committing to Open Regionalism
Asian economic integration should not lead to a closed and exclusive regional trading bloc which would be detrimental to Asia's economic growth. The recent failure of the WTO Doha Round has lent greater impetus towards regional integration - not to encourage protectionism, but to sustain the momentum for liberalization so that all will derive maximum benefits from economic globalization.
Therefore, any economic integration architecture should be based on an open and inclusive framework. An open framework in which Asia is plugged into a wider international network involving key stakeholders such as the US, EU and Australia would bring further benefits for the region in terms of increased trade and investment.
US: The US will remain a key partner in the region. Its presence has and will continue to provide stability in Asia. More importantly, it is also a major trading partner and investor for many Asian countries.
- For example, total trade between Asia and the US was almost US$290 billion in 2007. Outside the EU, the top 5 US export destinations are in Asia.
- According to the US Department of Commerce, US investments in Asia grew by 12% in 2007 to US$453.9 billion with substantial increases in investment flows to India (up by 48%) and China (up by 21%).
EU: The EU's experience with regional economic integration and its extensive trade linkages with Asia make it an important partner for Asia's economic integration process.
- According to the ADB, total trade between Asia and Europe nearly doubled between 2000-2006 to almost US$1 trillion with Asian exports to Europe growing at nearly the same pace as European exports to Asia.
- European investments in Asia have more than tripled over the same period to more than US$1 trillion.
International Organizations: We must continue to engage key global organizations like the IMF and World Bank to tap on their expertise and experience. Where these organizations lack a complete understanding of Asia, our response should be to forge even close linkages with them to improve their appreciation of the region's needs.
Asia should therefore continue to practice open regionalism and avoid establishing competing and exclusive regional blocs within Asia itself, or perpetuate isolationist self-help schemes that weaken linkages with the wider international community.
(ii) Managing Asian Diversity
While Asia could learn from other regions such as the EU's economic integration model, Asian economic integration will likely follow a distinctive blue-print that takes into account the diversity of Asia's political, economic, historical and cultural landscape.
Therefore, the path towards successful Asian economic integration should adopt a pragmatic approach that recognizes and accommodates the diverse interests and developmental levels of its members. This is indeed being done in Asia, where regional interdependence is more advanced in some areas such as trade, where benefits accrue to countries of every developmental stage, but more measured in other areas such as finance and monetary policy.
Holding regular and frequent dialogues, whether on multilateral or bilateral bases, is also an important aspect of managing diversity within Asia, as it would help us to better understand the needs and concerns of other Asian countries.
(iii) Fostering Regional Financial Integration
Increased regional financial integration could lead to an enhancement of economic integration and growth for Asia. Deeper financial integration could help to channel Asia's large pool of savings towards financing investments within the region. Also, the pooling of liquidity could reduce financing costs for Asian businesses hence promoting greater investments and the further expansion and integration of regional production networks. This would lead to increased economic integration in Asia.
Since the Asian Financial Crisis, Asian countries have recognized the importance of regional financial integration as a bulwark against global financial turbulence and also as a platform for regional economic integration. Regional initiatives to harmonize regional markets and boost liquidity include:
- The creation of a regional financial support mechanism via the Chiang Mai initiative (CMI) and the Asian Bond Market Initiative (ABMI) established by ASEAN+3. This is aimed at promoting confidence in Asia's financial stability which would attract investors to invest in the region.
- Promotion of ASEAN and Asia as an asset class and attractive invest ment destination: FTSE-ASEAN index in 2005, CIMB-ASEAN ETF in 2006.
However, more can and should be done to bolster regional financial cooperation. While we embark on such regional collaboration, we should also design our initiatives in ways that that stand up to the scrutiny of international markets. Otherwise, our regional initiatives, however well-intentioned, would weaken rather than promote market confidence.
Well-integrated and smoothly functioning regional financial markets will in turn help to facilitate greater trade and investment flows, thereby contributing to the success of economic integration efforts in Asia.
(iv) Building Regional Institutions
As Asia embarks on the path towards regional economic integration, regional institutions will play an increasingly important role in establishing mechanisms for enhanced interaction between countries and providing knowledge and expertise on regional cooperation initiatives.
As a start, existing regional institutions, such as the ASEAN Secretariat, could be further strengthened.
For financial integration, a key priority for Asia is to build a stronger 'home-grown' institutional surveillance capability to produce in-depth and holistic assessments of Asian economies, highlighting potential areas of weaknesses or risks requiring remedial action.
(D) ASEAN's Role
ASEAN is well-positioned to be the regional hub for closer economic integration in Asia.
- ASEAN is itself a significant market. In 2007, it has a total population of 576 million, a combined GDP of almost US$1.3 trillion, total merchandise trade of about US$1.8 trillion and US$50 billion in inflows from foreign direct investment (FDI). ASEAN is also an important part of the value chain, supplying raw materials and components as well as finished goods to Asian and other international markets.
- ASEAN is well-connected to many larger and more powerful economies and groupings. It has been instrumental in anchoring the launch of APEC, ASEM, ASEAN+3 and serves as the coordinating point for the EAS.
- ASEAN has paved the way for the wider regional economic integration process through the FTAs that we have negotiated or are currently negotiating with China, Japan, South Korea, India, Australia, New Zealand and the EU.
ASEAN has remained committed to achieving deeper economic integration.
- ASEAN Leaders have demonstrated their resolve to accelerate the pace of economic integration by bringing forward the target date for creating the ASEAN Economic Community (AEC) by 5 years to 2015.
- There is already good progress towards the achievement of the AEC. Intra-ASEAN trade now stands at almost US$190 billion, doubling the intra-regional trade value of US$93 billion in 2000.
- With the realization of the AEC, ASEAN will become a single market and production base. In addition to the elimination of tariffs and the lifting of barriers to investment, customs clearance procedures will be streamlined and harmonized with the ASEAN Single Window.
(E) Challenges Ahead
Asian economic integration should not be regarded as an end in itself but a means towards achieving collective economic growth and raising the standard of living for all Asians.
While Asian economic integration has quickened the pace of globalization and yielded economic benefits for Asia, negative side effects such as economic restructuring and labor market disruptions should also be addressed.
At the domestic level, individual governments should work to ensure that robust social policies are in place to help workers and needy families who are feeling the pressures of globalization. These include effective training to help workers cope with the demands of a changing economy and targeted social assistance to lower income families.
At the regional level, Asian countries should work together to ensure that the gains from economic integration are spread across a wide base and seek innovative solutions to accommodate diverse interests.
There is still a long way to go before we reach the final destination for Asian economic integration, and the main challenge will revolve around sustaining the political will to keep the process moving and ensuring the establishment of a regional framework that could benefit the whole region. Only when partnering countries and their people see the need and the shared benefits of the region coming closer together can the pace of economic integration be sustained.
Greater economic integration in Asia has the potential to deliver prosperity and stability to the region. I have outlined what I think are some key components for success for the integration process. Although challenges remain, Asia must commit to work together to pursue the goal of Asian economic integration for a better future for all.
This symposium is therefore timely as we ponder over key questions of how integration should best proceed. I trust that you will have stimulating discussions that will contribute to better understanding of this important issue.