The interest in an AEC and regional FTAs stems, in part, from the fear of diversion of FDI to the economic blocs of NAFTA and the EU. FDI played a crucial role in the region’s development, first to newly-industrialised economies in the mid-1980s, then ASEAN in late 1980s, and China in early 1990s. As a result of large inflows of FDI, multinational corporations have spearheaded the globalisation of production networks and the region is more economically interdependent than ever before.

In his often cited article of 1984, Bruce Cumings applied the analogy of ‘flying geese’ to East Asia, implying that East Asian economies follow one another in a developmental trajectory of replication and homogenisation of industrial structures. However, with the exceptions of South Korea and Taiwan, this has not happened in East Asia, where economies remain linked through a supply hierarchy built around innovations and management of Western and Japanese firms.

Asia has not been able to decouple from developed economies. According to the ADB, during 2000-2007, exports as a proportion of Asia’s GDP increased from 35 per cent to 47 per cent, with three-fifths going to Europe and the US. With most intraregional trade in intermediate goods used to manufacture export products. As Stephen Roach, economist and Chairman of Morgan Stanley Asia, pointed out in his latest book, Asia’s explosive growth has been based on a ‘bet’ upon deep integration with the global economy, which proved unsustainable in face of the global recession. Asia needs to focus on promoting more intraregional trade in final goods by encouraging local demand.

East Asia’s stellar growth performance has led to the decline of absolute poverty since the 1990s. However, inequality of income and consumption has increased significantly since then. About three-quarters of inequality in the region is attributed to inequality within countries. The export-led growth has integrated littoral regions, special economic zones and cities with the global supply chains. In the process, many fault lines, such as the urban-rural divide, regional-ethnic divide and skilled-unskilled labour wage gaps developed which may threaten social stability. The phenomenon of migrant workers in China, and the associated debate of hukou reform, is an example. The Bangkok-rural divide in Thailand, which has paralysed Thailand’s political system, is another.

Emerging Asia has successfully participated in the globalised production network, yet there is a limit. Economic integration and FTAs can only enable East Asia to participate in, but not move up, the global value chain. For East Asia to truly become an engine of growth, countries must develop domestic markets and upgrade industrial capabilities. The prescriptions are less glamorous than high-profile FTA negotiations, but are by no means unimportant – investing in human capital, promoting internal migration, bring lagging regions closer by developing land and credit markets, strengthening social protection systems, and implementing industrial policies to upgrade from original equipment manufacture (OEM) to own design and manufacture (ODM).

Regional economic cooperation is a necessary, but not sufficient, condition for East Asia to join the ranks of developed economies. The future for Asia lies in successfully combining international integration with domestic integration.

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