Asia needs to adopt a much more aggressive approach towards economic integration if growth and prosperity is to continue, the ADB suggests in a flagship study launched yesterday.
It calls upon Asian governments to launch a new Asian Secretariat for Economic Cooperation (ASEC) within the ASEAN+3 group, to coordinate such integration efforts.
The study provides a “set of directions or road map” for policymakers, Masahiro Kawai, head of the team of experts that wrote the report, told Emerging Markets. It envisages taking what has so far been mainly market-led economic integration in Asia to a higher and officially-supported level.
The ASEC would monitor and coordinate macroeconomic and exchange rate policies and could work together with a new body similar to the Financial Stability Forum, the global supervisory body, Kawai said. There would be a “variable geometry of cooperation”: the new organization would not compete with existing bodies that promote regional cooperation.
Asian countries have prospered recently in a benign external environment. But this favourable situation may already be coming to an end, as the economic aftershocks of the sub-prime mortgage crisis continue to reverberate, Kawai, a former head of the ADB’s office of regional integration and now dean of the ADB Institute in Tokyo, said.
Market turmoil may be only the first of the challenges Asia faces after the crisis, the study warns. “In the event of a US recession or global slowdown, Asia will need to refocus its growth away from slow-growing or contracting markets to faster growing ones, including from exports to outside [countries] to demand within Asia,” it says.
While macroeconomic interdependence among Asian countries has grown rapidly, “macroeconomic policies so far show little evidence of convergence” across the region. If Asian governments do not move to coordinate exchange rate and other policies more closely, they may face big shocks as global financial imbalances unwind, the ADB says.
Asia has been lucky to enjoy exceptionally stable exchange rates in the decade since the 1997 regional currency crisis, the study says. But “no formal regime exists to ensure that stability will continue. Indeed, it appears to have already ended, starting with the more tumultuous market conditions that set in as the US dollar began to depreciate in early 2006.”
Asian economies are most integrated in the area of trade but “it would be far better to stitch together the [existing] tangled web of bilateral and sub-regional free trade agreements into a broad, comprehensive framework consistent with the WTO,” the study says. Asia would gain much more from such a broad arrangement than from “uncoordinated bilateral agreements.”