Broader or pan-Asian economic co-operation is crucial not only for sustaining pre-crisis growth rates, but also for managing the spillover effects resulting from increasing integration and over dependence on outside markets.

The Asian region has grown faster than any other region in the recent past and has now become equivalent to the economic size of Europe or North America, and this growth has been largely trade driven.

The trade to GDP ratio has increased phenomenally over the last two decades for most economies in the region. India’s trade to GDP ratio has increased from 17.2 per cent in 1991 to 54.3 per cent in 2008. The increasing size of the economies and the volume of trade between countries has led to a substantial increase in integration with the global economy. Moreover, the intra-regional economic inter-dependence has increased faster than with the rest of the world in terms of increased intra-regional trade and FDI.

Intra-regional trade in Asia increased from less than 50 per cent in 1991 to more than 56 per cent in 2008; more than the North America Free Trade Agreement but less than that of the European Union. Intra-regional levels of FDI have also increased rapidly, from around 16 per cent in 1991 to more than 79 per cent in 2005. Similar trade increases can be observed at various sub-regional levels, especially in Southeast Asia.

The increase in intra-regional trade and investment has led to the notion that the Asian region, particularly East Asia, has become a self-contained economic entity that can maintain its economic dynamism independent of North America and Europe—this phenomenon has been described as ‘decoupling’.

The onset of global financial and economic crisis has exposed the fragility of the ‘decoupling thesis’, as most of the East Asian economies have experienced precipitous trade contraction throughout the crisis.

One of the key reasons for this decrease in exports by many Asian countries is that although overall intra-regional trade has increased, the region is still largely dependent on other regions for its final exports. Also, there exists a notable asymmetry in the degree of regional trade integration. The increase in intra-regional trade has largely been emanated from intra-regional imports, rather than intra-regional exports. This further highlights that the dependence of Asian countries on extra-regional markets are much larger than generally revealed by the intra-regional trade ratio. This calls for a new thinking on Asian growth strategy and greater co-operation among the major players.

In short, Asian countries have overly relied on exports as the primary engine of economic growth.

With growing contraction of demand in North America and Europe it is pertinent for Asian economies to reorient their growth towards domestic and regional consumption levels. Moreover, given the substantial deficit in the hard and soft infrastructure of many countries,  investment in these sectors is necessary to achieve the pre-crisis growth momentum. Notably, Asia is very diverse and there exists significant complementarity between economies. Regional economic co-operation can play a pivotal role in boosting the growth by providing both resources and markets to each other.

Even though regional economic co-operation in Asia, in terms of both bilateral and regional trade or economic agreements, has increased rapidly in recent years; the majority of these agreements are shallow and very sub-regional. The shallowness and sub-regional nature of these agreements have prevented the region from becoming a self-contained economic entity which can maintain its own economic dynamism.

There are proposals, such as the East Asia Summit (EAS), which aim to broaden the ongoing regional co-operation between the most dynamic economies of the region, but political differences have led to slow progress. The countries in the region need not only to work in making the EAS a free market entity, but also to deepen the co-operation through investing in transnational public goods.

Durgesh K. Rai is Research Associate at the Indian Council for Research on International Economic Research, New Dehli.

This article was an entry in the recent EAF Emerging Scholars competition.