The Key To Asia’s Future

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The Key To Asia’s Future

With Western economies facing serious challenges, regional cooperation, greater intra-Asia trade and development will define the region’s future.

Over the last several decades, Asia has become increasingly integrated with the rest of the world, its rapid development driven largely by exports to the United States and European Union (EU). Yet, as the world’s main economic arteries shift eastward, intra-regional integration within Asia still lags behind. The recent global financial crisis and economic fall-out is quickly changing that dynamic, however. Indeed, as strong, stable economic growth in the West, particularly in the U.S. and EU, remains elusive, regional markets are becoming more attractive among Asian countries, highlighting the importance for enhanced integration. Despite challenges, this trend toward regional integration should continue in 2013.

Currently, over half of world trade takes place between members of regional trade agreements, and Asia is no exception. However, in Asia, as in other parts of the world, regional integration is uneven. While Southeast Asia is shoring up its economic integration efforts through the Association of Southeast Asian Nations  (ASEAN) Economic Community Blueprint for 2015, with plans to continue attracting foreign direct investment, capitalize on the growth of its neighbors (mainly China and India), and accelerate the pace of its trade facilitation measures through a single market strategy, South Asia remains weakly integrated through the South Asian Association for Regional Cooperation (SAARC) both economically and politically.

Regionalism, not Protectionism, Can Help Mitigate Global Uncertainty

In fact, Asia has reason for optimism about the capacity of regional trade to compensate for weak markets in the U.S. and the EU and to reduce vulnerability to external shocks. In 2012, opinion leaders in Southeast Asia said that they were most positive about the ASEAN Economic Community compared to all other regional trade agreements in Asia. Indeed, while East Asian economic cooperation has mostly been driven by market forces, Southeast Asia has taken significant strides in formalizing its region as a single market and production base through ASEAN. Intra-regional trade and trade with China now accounts for more than 37 percent of ASEAN’s total trade, up from around 26 percent in 2000. At the same time, trade with the U.S. has fallen from 20 percent in 2000 to 10 percent in 2011, and trade with the EU from 15 percent to 11 percent in the same period.

On the other hand, progress on SAARC’s goal of a South Asian Economic Union by 2020 remains relatively slow. Though intra-regional trade in South Asia recently surpassed $2 billion following the full implementation of the South Asia Free Trade Agreement, it represents only 5 percent of the region’s total trade volume, compared to ASEAN’s 22 percent and the EU’s 55 percent. However, South Asia has made strides integrating with the rest of Asia. For example, while only 1.3 percent of South Asia’s parts and components are traded within the sub-region, 56.3 percent go to East Asia. This represents the enormous potential that exists for South Asia’s future trade among its own region.

Such economic integration in the region is becoming increasingly important to help stave off and overcome global economic shocks. Prior to the last-minute resolution that saved the U.S. from falling off the “fiscal cliff,” the UN Social Commission on Asia and the Pacific warned that if the U.S. were to fall, it would have dire consequences for Asia, decreasing growth by as much as 2.2 percent in some countries. To reduce their dependency on developed countries’ economies, Asian countries need to diversify their export markets and take advantage of the efficiencies and growing demand that regional trade offers.

Avoiding the Middle Income Trap

While trade is an important part of regional economic integration, it remains only one piece of the puzzle. To avoid the dreaded “middle-income trap” (where countries attain a certain level of income but remain stuck there), Asian nations must prioritize other aspects of regional integration, including:

 – Investment in infrastructure. Infrastructure development is essential to Asia’s economic and political development. In order to address this issue, ASEAN has recently set up the ASEAN Infrastructure Fund, financed by member nations as well as the Asian Development Bank and private equity, to mobilize resources for critical infrastructure development.

 – Increased cooperation in education and skill development. A recent publication by the Asian Development Bank stated that “a deeper level of economic integration, which is required for sustainable development, calls for regional cooperation in skills development.” Such cooperation could take the form of regional and sub-regional “technical and vocational education and training” (TVET) strategies, such as creating regional and national qualifying frameworks and encouraging national commitments to invest in critical areas like high-skilled manufacturing.

 – Cooperation in technological innovation and research. ASEAN member nations have taken steps toward such cooperation through the Krabi Initiative, which encourages collaboration across the region on a host of science and technology issues, from green technology and food security, to exploiting new technologies such as digital media and social networking for development and innovation.

Addressing Socioeconomic and Environmental Challenges

Regional cooperation in Asia should not be considered solely as a means to accelerate economic growth, but also as an effective way to address broader socioeconomic and environmental issues facing the region. It will, for instance, play a key role in women’s economic empowerment in the region. Women business owners and managers in Asia often do not have the same access to business opportunities as men. However, through groups such as the ASEAN Committee on Women and the South Asia Women’s Entrepreneurship Symposium (SAWES), they are able to form regional networks that provide a platform for them to access information and contacts essential to running a business and advocate for change in areas that are stifling their potential. (Read about The Asia Foundation’s support for these networks.)

Regional cooperation will also be integral to managing the impact of environmental issues, such as water scarcity, energy production and distribution, urbanization, climate change, and disaster recovery and management. Establishing and implementing fair and practical water-sharing and conservation arrangements is critical, with river systems like the Mekong, Indus, and Ganges all crossing national borders and essential to local livelihoods. Over the last couple of years, the Asia-Pacific has experienced 70 percent of the world’s natural disasters. This has led to a stronger push toward regional forums and programs to prepare for and manage disasters through information-sharing, as well as collaborative disaster-management planning efforts. Data management and sharing and the use of innovative ICT tools to provide more timely and accurate predictions, communications, and responses are also being explored regionally to minimize the impact of such disasters.

While greater intra-regional trade and investment represent a logical “next door” opportunity for Asian economies, this shift doesn’t come without challenges. To lessen reliance on U.S. and EU markets, Asia will need to modify the structure of its regional trade from a focus on raw materials or semi-finished products to those higher up the value chain. Another challenge will be to ensure that smaller, poorer Asian countries also benefit from increased regional interaction. Finally, intra-regionalism can only be successful if the regional entities nurture their links and cooperation with other regions.

But, the most important challenge of all remains making regional cooperation work for the people of Asia. The political will and institutional commitments to regional integration relies on the capacity and interest of individuals, civil society, and businesses to take the lead and give life to the concept.

Véronique Salze-Lozac’h is The Asia Foundation’s director for Economic Development Programs based in Bangkok, Nina Merchant-Vega is assistant director, Katherine Loh is a senior program officer, and Sarah Alexander is a program fellow for the Economic Development Programs. This article initially appeared on The Asia Foundation’s “In Asia” Blog.