Since the fourth quarter of 2010, the global economy has faced serious uncertainty and a turbulent outlook.

Both the US and Europe have gloomy growth prospects due to a lack of credible medium-term plans for debt reduction in the US and the sovereign debt crisis in southern Europe.

Against the downside risk to growth in the West, Asia’s recovery and growth in the past three years has been exceptional. China and India recorded the highest growth rates in the world with 10.3 and 10.1 per cent in 2010, respectively, while Indonesia, Thailand, Malaysia, the Philippines and Vietnam (ASEAN-5) grew 6.9 per cent. Asia, with a solid global market and a large pool of foreign exchange reserves, has proven to be the shining light of the world economy.

Asia’s future prospects are likely to be affected by the West, yet ‘rising Asia’ also appears able to help save the sinking world economy. Even with weaker demand from the West, Asian growth in 2012 is expected to remain strong on the back of solid domestic demand. But for robust, sustainable and balanced world growth, Asia needs to shift from its conventional extra-regional export orientation to intra-regional demand as a way to help advanced economies recover and to ensure its growth sustainability.

How can Asian governments accomplish these twin objectives amid the current global turbulence? First, they must continue to shift to more domestic demand-based growth in the short and medium term and accelerate ongoing regional economic integration to allow freer intra-regional trade and more cross-border investment. This policy shift will result in two things: greater self-propelled growth and more imports from Western economies, especially the US, which would help correct chronic trade imbalances and raise the growth potential of America and Europe.

Second, Asian governments must minimise external financial contagion and expand intra-regional FTAs to spur sustainable economic growth.

How can they do this? One effective means would be to create a cross-border free trade regime in East Asia. At present, there is a relatively low degree of intra-regional trade share in East Asia. Intra-regional trade among ASEAN+3 countries has increased steadily since 1998, when the Asian financial crisis was subsiding, but slowed a little after 2005. In 2008, the East Asian intra-regional trade ratio, at about 37 per cent, was lower than that of the North American Free Trade Agreement (NAFTA), and far lower than the euro zone’s ratio, with 60 per cent. Considering that the euro zone and NAFTA are free trade blocs, it seems plausible that East Asia could find significant growth sources from its own regional domestic demand if it established an East Asia-wide FTA.

Given the ongoing hub-and-spoke issues around intra-regional FTAs, East Asia should adopt a strategy of ‘doing easy things first’. A good example of such an approach is the Chiang Mai Initiative, which is already under way. The Asian Bond Market Initiative could also be accelerated to provide a viable cross-border financing scheme to small and medium enterprises. In this regard, a cross-border regional cooperation mechanism among sub-regions and mega-cities such as the Pan-Yellow Sea Circle and Greater Mekong Sub-Region could be a starting point.

Northeast Asian integration has great potential to build a robust regional community of peace and prosperity. It is encouraging that China, Japan and Korea in May 2010 agreed to establish a secretariat office in Seoul to address trilateral regional issues. Apart from FTA talks in Northeast Asia, Asian governments in ASEAN+6 need to pay attention to many proposals in cultivating diverse ‘public goods’ such as cross-border oil and gas pipelines and railways to enhance connectivity. Dynamic benefits resulting from a cross-border, bottom-up approach could also be derived from establishing common standards for production technology, product regulations, distribution and after-sales services.

By accumulating success stories for open Asian regionalism, major Asia Pacific economies can work together toward an Asia Pacific Economic Community, which the APEC forum has long addressed. Though it may take time to nurture mutual trust and confidence, Asia should be eager to establish open regionalism which a variety of external stakeholders, including the US, India, Canada, Australia and New Zealand, can join. Asian open regionalism needs to be translated into an Asia Pacific Economic Community to ensure it will be a building block toward viable multilateralism, not a stumbling block.

At this critical juncture of the world economy, East Asian integration must be pursued to increase its own growth momentum internally. Asia must move aggressively to shift its focus to the region’s 3.5 billion consumers so that its intra-regional demand-led growth can contribute to balanced and sustainable global growth. The Greek debt crisis clearly showed that no country can overcome the emerging economic malaise without a strong manufacturing base. Consequently, Asian economies need to strengthen the already existing global ‘manufacturing house’ through intra-regional trading. But Asia is diverse and still not free from historical rivalries. For both its own growth and the good of the global economy, Asia needs visionary political leadership to put historical legacies behind and look toward a long-term vision for an Asia Pacific Economic Community.

Choong Yong Ahn is Distinguished Professor at the Graduate School of International Studies, Chung-Ang University, Seoul.

This is an abridged version of an article that originally appeared here in Global Asia.

1. The DPJ: Sacrificing the economy to ‘save’ agriculture
2. World economy not quite out of the woods yet
3. Economic integration: Will Asia go regional?

How does a Cold War organisation like the OECD respond to the end of the Cold War? Does it try to hang on to its former identity? Or does it embrace the new ‘age of globalisation’?

The end of the Cold War in 1989 represented a victory of values and ideology — the triumph of pluralistic democracy, respect for human rights and the market economy — for the OECD and its member countries. At the time, Asian economies were also emerging rapidly, based on a complex cocktail of export promotion, strong state intervention and non-democratic politics.

Before the fall of the Berlin Wall, a number of these Asian economies were ‘economically qualified’ for OECD membership in terms of GDP per capita. But politically, there was never any suggestion that they might join.

Politics has always trumped economics at the OECD, even though economics is its core business. In the 1990s, for example, four central European countries were rushed in as members (following Mexico’s 1994 membership), while they were still fledgling market economies and democracies. They were the lost sheep of the North Atlantic community, having been occupied by the Soviets, and Western Europe and the US strongly supported their membership ambitions.

But Korea’s membership was very much a different case in point. It was economically better qualified, with a GDP per capita more than 60 per cent higher than the other five new members. It was perhaps even more qualified politically. Nevertheless, it is widely recognised that the OECD went soft on Mexico and the central European countries during the membership process, and went much tougher on Korea.

By 2007 when it came to inviting other countries to join the OECD, none of the most interesting possible members — Brazil, China, India, Indonesia and South Africa — had expressed interest in joining. They were offered and accepted a program of ‘Enhanced Engagement’, which was designed to prepare them for possible future membership.

Today the OECD finds itself with 34 members, with some 24 from Europe and only two from Asia. In contrast, the WTO’s list of the world’s 34 leading exporters includes 10 Asian economies. Many of these Asian countries are also internationally significant in areas such as investment, finance and carbon emissions — and school students from Shanghai now outperform all OECD countries in the organisation’s Programme for International Student Assessment, which measures literacy, numeracy and scientific ability. But while the Enhanced Engagement countries participate in a wide array of OECD activities, none of them are interested in membership. A very senior OECD official once described this program as a ‘one-way love affair’.

So the OECD, which has sometimes called itself a ‘hub of globalisation’, seems destined to have a membership which accounts for an ever-declining share of the world economy. It stands at a crossroads, bypassed by Asian-led globalisation at a time when the G20 has more member countries from Asia than Europe.

What are the main problems and solutions?

Even though it is essentially an economic organisation, the OECD has retained a strong North Atlantic political identity. This is partly because it is governed by foreign ministries and also because of the US’ dominant role. And as the recent UN vote on Libya showed, there are still vast political gulfs between the Enhanced Engagement and OECD countries.

New members are also forced to accept and align their policies with a now vast array of instruments and conditions they had no role in creating. From an OECD point of view, this means becoming a ‘responsible stakeholder’. From an emerging country point of view, it means being a ‘rule-taker’, that is, swallowing an OECD agenda now increasingly questioned in light of recent financial crises.  The OECD also has too many European members.  Something must be done about this ‘eurocentricity’, such as establishing constituencies, to improve the organisation’s effectiveness.

Overall, the OECD must adapt much more radically to the changed world and offer a more flexible and pragmatic approach to the application of its values and instruments through its membership. It must then launch a major campaign to recruit the Enhanced Engagement countries as members. The OECD Secretariat and its membership have not yet managed to convince emerging Asian economies of the organisation’s manifest benefits. But the OECD is still in many ways the best idea in town, with its excellent analysis and opportunities for policy dialogue. And emerging Asia has much to learn from the OECD experience in many areas, like developing social safety nets, economic upgrading, dealing with ageing populations, and public-sector reform.

As well as revitalising the OECD, this strategy could contribute to improving relations between the two major blocs which divide the world today — the OECD countries and the Enhanced Engagement countries.

John West is Editor-in-Chief at MrGlobalization.  This article is based on his paper ‘The OECD and Asia: Worlds Apart in Today’s Globalization’, published in Revista de Economia Mundial No. 28 (2011), 67–92.

1. OECD policy brief on emerging economic giants
2. Engaging Central Asia: the EU-Shanghai Cooperation Organisation (SCO) axis
3. The South Asia Cold War ‘quadrilateral’ redux?

Russia’s bid to join the WTO was approved on 16 December at long last. This event marked the end of some of the longest negotiations in WTO history, with Russia making its initial decision to join the General Agreement on Tariffs and Trade — the precursor to the WTO — in 1993.

But despite the decision to join, domestic debate about the appropriateness of Russia’s membership continues unabated.

On the one hand, sceptics about Russia’s involvement believe the decline in tariff protection will considerably worsen the plight of many Russian industries and be particularly detrimental to Russia’s light industry and agriculture.

Russia’s forestry and car industries are likely to be especially impacted. As WTO membership requires maximum duties on unprocessed timber to be reduced from the current 25 per cent to 15 per cent, the forestry industry will find it increasingly hard to compete. Products such as paper, for example, will be cheaper to import than to produce until the industry becomes more efficient. And from 2012, Russia’s car industry will no longer be able to depend on state subsidies or the protection it receives from duties imposed on imported cars. Similarly, foreign investors will have less incentive to relocate production facilities to Russia in exchange for customs exemptions.

The WTO’s emphasis on trade liberalisation will have a large impact on Russia’s insurance and banking industries as well. In four years, foreign insurance companies will be allowed to sell compulsory insurance and life insurance products to the Russian public, and in nine years these companies will be allowed to establish branches in Russia. This will help diminish the monopoly that Russia’s banks and insurance companies currently enjoy.

In addition to the sceptics, there are also optimists who believe that joining the WTO will benefit Russian consumers. Prices of industrial consumer goods, such as electronics and furniture, will drop and pharmaceutical drug prices are estimated to decrease by 5-10 per cent. Russian consumers can also look forward to cheaper mobile phone services as foreign telecommunication companies enter the Russian market from 2015. At the same time, joining the WTO will boost key segments of Russia’s economy as foreign markets are opened to Russian products like grain, transport, tourism, construction and engineering

The impact of Russia’s accession to the WTO will be softened by a phased approach to trade liberalisation. In particular, the average import duty in Russia will fall from 10.3 to 7.1 per cent, including for agricultural products — from 15.6 to 11.2 per cent, and industrial — from 9.4 to 6.4 per cent. The Government will continue to regulate domestic prices for gas Russia has three years to reduce tariffs by a quarter, but longer periods are allowed for specific goods. Also, if tariff reductions result in substantial losses for a particular industry, the WTO rules allow the use of special protective measures to limit such imports for a period of between five and seven years.

 It should also be emphasised that Russia’s membership greatly benefits the WTO. Although Russia accounts for just over 2 per cent of world trade, it is the sixth-largest economy in terms of GDP, and foreign trade turnover in Russia increased seven-fold in nominal dollar terms between 1999 and 2011.

Overall, WTO membership should encourage Russian companies to produce more competitive products, and the growth in international trade will create thousands of new jobs. But how quickly and effectively Russia will implement reforms in accordance with the WTO’s required standards is unknown. This is because the WTO rules are vastly different to the ‘manual’ methods of economic management currently used in Russia. Still, it is clear that WTO membership will foster institutional change, helping Russia contribute more directly to the development of rules in the global markets. In turn, this will spur Russia’s integration with Belarus, Kazakhstan and Kyrgyzstan through the Eurasian Customs Union and Common Economic Space. This should also accelerate Kazakhstan and Belarus’ accession to the WTO.

The benefits of Russia’s WTO membership will only become fully apparent in the long run. In the short to medium term, it is likely that Russia’s entry into the WTO will disappoint some sectors of Russian society, as its effects are slow to take off. But, until recently, Russia was the only country in the G20 that was not a WTO member and such a step is necessary if Russia wants to maintain a strong position in the global economy. And without active participation in international trade, it will be impossible for Russia to achieve the radical modernisation it so desperately needs.

Boris Kheyfets is Professor, Chief Research Fellow at the Institute of Economics, Russian Academy of Sciences.

1. Russia in the Asia Pacific: a bleak outlook
2. Russia’s accession to the WTO
3. Russia-North Korea trade

The G20 Summit in Cannes probably made its most important contribution to global financial stability and economic growth before it even commenced.

The summit, held 3–4 November, became a deadline for European leaders to deal decisively with the economic and financial crises in the euro zone.

Europe is experiencing at least four deep, structural, overlapping and mutually reinforcing crises: a crisis of institutional design; a fiscal crisis; a crisis of competitiveness and a banking crisis. None of the four crises can be solved in isolation, and there does not currently seem to be any single comprehensive solution that will end the crisis promptly.

At the Cannes summit, euro zone leaders agreed on a new set of measures to try and tackle these problems. Though inadequate in scope to bring the crisis to an end and calm financial-market volatility, these measures will help prevent further economic deterioration in Europe. Consequently, the risk of catastrophic spillovers from Europe to the rest of the G20 was reduced.

Ahead of the G20 Summit, euro zone leaders agreed on three principal strategies to contain the crisis: reduction of Greece’s debt; a bank recapitalisation target and new options to leverage the European Financial Stability Facility (EFSF).

First, the planned debt reduction takes the form of a voluntary bond swap with private holders of Greek government debt, resulting in a 50 per cent reduction in the nominal value of their debt. While urgently needed, this will not independently restore Greek fiscal solvency, and additional financial support for the country will be needed. As future support will undoubtedly involve the IMF, G20 members will also have the opportunity to discuss potential approaches to restoring Greece’s fiscal solvency. This voluntary debt swap is unlikely to trigger sovereign default swaps, and it removes a potential short-term source of dislocation in the financial markets. But the lack of payout after a 50 per cent reduction in debt may ultimately lead to the demise of sovereign credit default swaps — at least for industrialised nations — which may lead to increased financial-market volatility.

Second, euro zone leaders agreed to raise capital requirements in banks to 9 per cent Tier 1 equity, and adjust for the effects of market prices of sovereign debt. Although superficially helpful, the imposition of a capital ratio target runs the risk that banks will shrink their lending to businesses (due to denominator effects), rather than raising new capital. Regulators must be vigilant to avoid aggravating a building credit crunch.

Third, two options were agreed on to boost the financial firepower of the EFSF. Both are almost certain to fail. Option one, providing credit enhancement to new state-issued debt, is meaningless; the significant overlap between the insurer and the insured in the euro zone means any stability the measure achieves will be minimal. Option two foresees attracting investments from private and public financial institutions and investors. But few, if any, such investors exist — and possess the willingness and ability to make a material difference for European financial stability.

Fortunately, this does not matter, as both options are a smokescreen to provide cover for the European Central Bank (ECB) to remain directly involved in stabilisation measures. This is critical, as ultimately it is only the ECB, as a central bank with the ability to create new money, that commands the financial resources to stabilise Europe. By creating a distraction in the form of a ‘leveraged EFSF’, the ECB can continue intervening directly in the European debt markets to avoid a catastrophic rise of Italian and Spanish interest. Ironically, by supporting this ruse, G20 leaders will reduce the need to offer money themselves by helping the ECB keep the spread between, on the one hand, Italian and Spanish interest rates, and on the other hand German interest rates.

Usually, international gatherings like the G20 Summit in London in April 2009 deal with large crises by restoring confidence through the credible commitment of large sums of government money. Europe cannot do this. As was evident ahead of Cannes, Europe and the ECB rely on the economic pressure exerted by financial markets to push reform-reluctant leaders into ‘doing the right thing’.

Indeed, were the ECB to publicly declare its intention to act as a ‘lender of last resort’ for Europe, or the G20 to cobble together €2 trillion for the EFSF, the financial market pressure on such leaders to implement reforms would abate. Paradoxically, with Europe’s fundamental economic problems requiring years of tough reforms, Europe can only ultimately solve its economic crisis by prolonging it.

This logic will easily trump anything in the G20 Communiqué calling for enhanced global financial stability and strong balanced global growth. Instead, we can expect high levels of uncertainty and volatility.

Jacob Kirkegaard is a Research Fellow at the Peterson Institute for International Economics, and a Senior Associate at the Rhodium Group.

1. European debt crisis: European fragmentation?
2. China into the European breach, but not just yet
3. The Greek tragedy: Global debt crisis and balance sheets

Financial integration can be defined in several ways. But the only relevant definition, in the context of ongoing policy debate in Asia, is in terms of bilateral financial links analogous to the way trade integration is typically defined.

No other definition would highlight the asymmetry between trade and finance in Asia. Indeed, some economies are very open financially, and interest rates and equity prices may be highly correlated across some national borders. Despite this, bilateral financial links in the region are much more limited than bilateral trade links.

In 2009, Asia’s intraregional trade amounted to more than 50 per cent of global trade, compared to less than 35 per cent for foreign direct investment (FDI) and around 6 per cent for portfolio investment. Asia’s so-called market-driven economic integration, therefore, yielded a lopsided outcome. In one sense, this outcome is not surprising. Finance is little affected by distance, whereas for trade distance matters critically. Money should flow to a financial centre that offers the smallest intermediation costs and to a country that offers the highest risk-adjusted returns, regardless of the location.

Even so, regional financial integration remains an important unfinished agenda for Asia. Despite there being no theoretical case for preferring regional to global financial integration, promoting regional financial transactions will have its benefits. As the region integrates in trade and production, information is created through face-to-face contacts and the specifics of economic activities. Given the nature of asymmetric information that characterises financial transactions, such local information is more conducive to making regional financing deals than global ones. If markets and institutions are sufficiently developed, then there should be some ‘home bias’ within Asia favouring regional financial transactions. This should be the case even in situations where global transactions offer absolute advantage. The clear lack of home bias in Asia suggests that there are imperfections to be addressed as well as unmet financing needs.

In this respect there are insights to be gained from taking a close look at the cross-border financial links of Japan, the region’s largest creditor country. In 2009 Japan’s intraregional trade with Asia was more than 40 per cent of its total global trade. In contrast, Asia’s share in Japan’s financial transactions was only 24 per cent for FDI assets, and was even smaller, at less than 9 per cent, for FDI liabilities. The importance of Asia was almost negligible for portfolio investments: 8 per cent for equity assets, 1 per cent for debt assets and l.7 per cent for equity liabilities. The exception is Japan’s debt liabilities, where Asia accounted for 18 per cent at the end of 2009. This indicates that Asian investors are active participants in Japan’s large bond market. In terms of cross-border banking flows, Asia’s share was only 7 per cent, broadly similar to the share in total global cross-border bank claims. This suggests that Japanese banks differ little from other international banks in their lending behaviour towards Asia. In short, Japan’s financial links with Asia are much weaker than the links with North America and Europe, though Asia is by far the most important trading partner.

The pattern of investment activity points to a few possible factors to explain Asia’s lopsidedly small share in Japan’s financial transactions, and hence the lack of regional financial integration within Asia. First are the underdeveloped and small domestic capital markets. Second are the capital account restrictions that limit the scope for two-way capital flows. Third are the licensing and other regulatory practices that discriminate ex post against the cross-border activity of Asia-based banks.

Accordingly, in order to promote regional financial integration, the authorities of many of the region’s economies must develop their domestic capital markets further, and make them deep, liquid and efficient. They should also ease or remove controls on the ability of residents to invest abroad. And finally, they should relax the regulatory barriers on the entry of foreign banks, especially those from within the region. Because Asian financial systems remain largely bank-based, promoting this cross-border activity would be especially important.

Undoubtedly part of the limited financial integration we now observe in Asia is related to the stages of development of many of the economies. Regional financial integration is bound to deepen to a level more commensurate with trade integration as Asian economies grow, per capita incomes rise, and financial wealth is accumulated.

Even so, some of the identified gaps require remedial action by governments. This is likely to be a long process because it involves institution and capacity building. Regional cooperative efforts may be needed to safeguard the process of capital account liberalisation and to relax the licensing standards for Asia-based foreign banks. Similarly, regional cooperation may be useful in setting common standards for domestic capital markets and cross-border issues of financial products. In the long run, a region-wide consolidation of domestic capital markets may help create a market with the size, depth and liquidity that is sufficiently attractive to large international and regional investors.

Shinji Takagi is Professor of Economics at the Graduate School of Economics, Osaka University, Japan.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s global impact‘.

1. North-East Asian economic integration: APEC or FTA games?
2. Asian economic integration and cooperation- Challenges and way forward
3. Will Euro problems hurt Asian monetary integration?

The upcoming G20 Summit in Cannes will undoubtedly attract the world’s attention, as many look to see whether the G20 can play a positive role in the global economic recovery.

And while searching for an effective solution to the crisis, the world will also focus on China, asking whether it might become a responsible ‘leadership state’ in an emerging global governance structure like the G20. The answer, it seems, is that based on its own interests, China is choosing to become a responsible contributor to global governance and wants to become part of the solution to the current global crisis.

China has maintained a rapid growth rate and played a major role in stabilising the global economy since the 2008 global financial crisis — and it wants to remain the biggest engine of growth and the ‘stabiliser’ to the global economy into the future. This could be China’s most important commitment to the world at such a critical time, but Beijing must also be careful not to risk the stability of its own domestic economy. And while becoming a stabiliser for the global economy would clearly increase China’s weight in the G20, the world cannot expect China to assume a particularly substantial leadership role in the G20.

In the eyes of Chinese leaders and the public, China is not ready to take on such a role, as the country is limited in its strength and knowledge, and by its status as a developing nation. China’s economy is in high-speed growth, but it still faces internal social problems and difficulties with efficiency and fair distribution in its economy. Consequently, it is hard to imagine that Chinese leaders would have the legitimacy and support to help finance foreign economies.

China also believes that the global economy is a fundamentally unbalanced system, characterised by the disproportionate and unchecked role of the US dollar as the main reserve currency and the worsening of European sovereign debt. It also views reforms aimed at strengthening the international monetary system and the EU’s internal reform efforts as imperative to establishing conditions for stable, strong and balanced growth. And as for China itself, Beijing must work hard to transition from an export-driven model to one based on domestic demand.

In the meantime, the world should be paying more attention to the development interests of developing countries, in order to increase their representation in international economic institutions and to reduce the risks arising from the global market — especially the volatility of commodity prices. Achieving this goal will benefit China as well, as it is the world’s largest trading nation and needs a stable international market.

Still, China supports the objectives France has set for the upcoming G20 Summit and welcomes the leading role Europe will play. China identifies itself with Europe’s long-term goals of stabilising and reforming the international financial system. China also hopes to stabilise the European economy, which would not only help its own exports to the region, but would also help balance US power and influence in international affairs. Equally, both China and Europe support reforms to the international currency system, stabilising commodity prices and resisting protectionism. But China wants Europe to carry out a more thorough reform to protect the safety of relief funds and to further open its markets — it would be unrealistic to expect China and Europe to be fully consistent on all objectives.

The global economy would undoubtedly benefit from greater consensus building through effective global governance, and the G20 is lagging behind in effectively dealing with these challenges. Consensus is absent among key players, which only further highlights the difficulties of coordination and cooperation within the G20. In the end, China will likely play a ‘balancer’ role between the US and the EU, something which could ensure the protection of China’s own interests. But as its cooperation with France and Europe is strengthening, China does not want to overly complicate its relationship with the US either.

There is little doubt that China hopes to develop a greater platform for contributing to international governance, through which it can safeguard its interests. China would like to see reforms to the current system of global governance, including a reduced dependence on the US dollar as a reserve currency and reforming the IMF to make it more representative. Beijing’s policy is clear: it does not want to overthrow the current system of global governance; it wants to reform it. In this way, China will ultimately play the role of ‘responsible contributor’ — and this role is only set to strengthen as China grows into the future.

Wang Yong is Director at the Centre for International Political Economy, Peking University.

1. Hu visit ends any dream of a US-China duopoly
2. The values dimension of Southeast Asian development and the rise of China
3. Bush, the G20 and China

Asian institutions for regional integration have proliferated since the 1998 financial crisis. They range from highly formal to very informal.

Most were not based on a grand design or mission but were responses to key issues. Some institutions evolved according to the needs of the market, and their final form owes much to pragmatism and flexibility. Others were established following formal agreements: the top-down approach. These institutions have served well to date, but more needs to done to effect region-wide integration.

Thanks to the many initiatives undertaken by ASEAN, the pace of sub-regional integration is fastest in Southeast Asia. By contrast, Northeast Asia is hardly active, and South Asia has a number of slow-moving initiatives.

ASEAN is moving towards more integration through its community initiatives — in economic, political and security, and social and cultural fields. The grouping is also the central force in East Asian integration, which is driven by its initiatives — ASEAN+1 free trade agreements (FTAs), ASEAN+3, the East Asia Summit (ASEAN+6) and the expanded East Asia Summit (ASEAN+6 plus the US and Russia).

Asian countries have also signed many bilateral FTAs. Trans-regional cooperation promoted by APEC is important but its proposal for an Asia-Pacific FTA is a long-term target. On the other hand, trans-regional integration, albeit selectively, is moving faster through the Trans‑Pacific Partnership (TPP), partly because the US indicated this initiative is its preferred route for integration.

Besides these established institutions Asia is also seeing the emergence of a cooperation mechanism, and institutions that could be a major influence on the direction and structure of regional integration. A trilateral FTA between China, Japan and South Korea may be possible because these three countries have a very close economic and business relationship. The Greater Mekong Sub-region Economic Cooperation Program is focused on building connectivity, competitiveness and a sense of community among its member states. East Asia has tested a number of mechanisms such as the Asian Bond Markets Initiative and ASEAN Infrastructure Fund to recycle its massive savings for the benefit of the region, but success is still elusive. Another effort is the establishment of mechanisms to help the region avoid and respond better to the next crisis, namely the ASEAN+3 Macroeconomic Research Office (AMRO) and the Chiang Mai Initiative Multilateralism (CMIM).

The various integration efforts continue to serve the region well. Growth is robust and there is a reasonable degree of integration among regional economies, with increased intra-regional trade and investment. The East Asian manufacturing sector is also tightly linked by the regional production network, and East Asian countries kept their economies open during the recent crisis. Growth was able to take place because there is peace and stability.

Yet region-wide integration remains elusive because growth is still dependent on demand from outside the region and the outcome of bilateral FTAs is unclear.

More than ever, comprehensive regional integration is crucial. Without it, Asia will not be able to become the third global node of growth because it will not be able to ensure existing liberalisation commitments are implemented uniformly across the region. Comprehensive integration would also ensure the region is compatible with the global economic system.

Existing and new regional mechanisms must help Asia manage future economic and financial crises, especially if they are caused by massive capital flows that can destabilise markets and exports. Regional integration will also have to narrow the development gaps between Asian member countries.

Achieving economic integration alone is not sufficient — in the future the region needs to build an Asian community. Even the economic challenge of responding to the shifting of the centre of economic gravity to Asia has become more daunting because growth now has to come from domestic demand. A strong response from Asia requires physical connectivity. The biggest challenge is to persuade member countries to give up some of their sovereignty so that decisions can be made at the regional level for faster implementation.

Can Asian institutions produce the desired regional integration, and can they deal with the new issues facing the region? In the past, issues have determined the type and structure of integration institutions. But the recent proliferation of institutions and regional architecture for integration, and the increased complexity of emerging transnational challenges, may require different kinds of institutions and players.

But what is the best way to proceed? With so many institutions already active or planned, should Asia create new ones, strengthen existing ones or even consider consolidating some? How can Asia strike a balance between structure, flexibility and dynamism? Now is an opportune time for Asia to answer these questions and establish the best way to approach regional integration.

The ‘looseness’ of the Asian integration process has been touted as the most suitable ideology for institutions, as it can take into account the wide variety of developmental, social and political systems. But there is a growing call for structured and institutionalised integration that will accelerate progress.

Nonetheless, Asian integration is likely to continue as an agglomeration of many frameworks and agreements and not follow a ‘grand design’. In all these configurations, the most pressing question is whether Asian countries are prepared to give up some of their sovereign powers that will be vested instead in a region-wide institution.

Mahani Zainal Abidin is the Chief Executive of the Institute of Strategic and International Studies (ISIS), Malaysia.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s global impact‘.

1. Osaka’s grand political design
2. Where is the East Asian Community going?
3. Realizing the Asia Pacific Community: geographic, institutional and leadership challenges

Prior to joining the World Trade Organization (WTO), the common perception in China was that the WTO belonged to ‘the Club of the Rich’, where wealthy countries imposed rules on poor and weak developing ones.

Now, the WTO is one of the most widely recognised and respected international organisations within China.

Since China’s accession in 2001, the belief that the WTO is a ‘public good’ has taken hold in China, and membership in the WTO is a driving force for market reforms. WTO entry transformed how the global multilateral trading system is viewed, not only by skeptics in the government but, more importantly, in the public mindset. China undertook a major public engagement program to increase the society’s understanding of the multilateral trading regime. And several thousand books were published in the past decade to raise awareness of the norms and rules of the WTO, in addition to modifying laws and administrative practices to align them with WTO commitments.

But the most important factor in reshaping public sentiment toward the WTO in China is the actual gains the country has achieved since joining. Throughout the past decade, China’s GDP grew at an average of 9 per cent per year and is now the second-largest trading nation in both exports and imports. China emerged as a source of outbound investment, as well as one of the hottest destinations for FDI. And beyond trade and investment, China has become a major creditor nation. These achievements show that WTO accession and integration into the global economy have been pivotal to the country’s progress. For China, the gains from WTO membership have exceeded the risks — so far.

China’s support of the WTO will continue to be steady and strong because of China’s rapidly growing interests in an open global trading system; and China’s association with developing countries and emerging economies will strongly shape its role in the global regime. China encourages more consideration of development concerns in multilateral trade talks (including effective implementation of the Doha Development Agenda) and believes that a new consensus should be reached between developed and developing countries — especially on issues such as barriers to agricultural trade.

But some are now concerned about China moving toward protectionist measures and insist it should restructure its growth model. China is facing growing external pressure to increase its domestic consumption as a way of contributing to rebalancing the global economy.

The global financial crisis also changed the perception within China that the external demand-driven development model can continue indefinitely. To deal with declining external demand, the Chinese government implemented a three-year national stimulus package amounting to RMB4 trillion (US$626 billion). But the present situation continues to be fragile and uncertain, due in part to world economic conditions — especially the extended downturn in the US economy and parts of the EU.

What lessons did China learn from the global financial crisis? First, China learnt to manage the risks of integration into the global economy, while also remembering the benefits of global integration. Second, China needs to move away from the existing economic growth model — which is too reliant on exports — to one that is more internally demand-driven. And finally, China learnt to rectify the asymmetrical influence of some countries in the system of international economic governance.

Adjusting the Chinese development model is a painful process. But China is looking toward strengthening internal demand, improving the domestic social security system, moving toward more value-added production by encouraging innovation, and promoting environmental sustainability.

And while China is increasingly committed to multilateralism, it is also seeking regional cooperation in East Asia. Chinese academics view regionalism as providing China with a self-insurance option to absorb the risks of economic globalisation and economic uncertainties; a tool to enhance security relations with neighbouring countries; and a means to increase China’s voice and influence in the international community by cultivating mutual trust and shared interests. In contrast, Chinese authorities emphasise that regional cooperation is not necessarily or inevitably in conflict with global multilateralism, as long as regional trade arrangements facilitate gains in trade and investment liberalisation.

Chinese authorities have overcome their previous skepticism and sovereignty concerns related to regional multilateralism after the 1997 Asian financial crisis. They are now taking a more proactive approach to regionalism. This approach highlights China’s growing support for regional cooperation as a response to competitive liberalisation in other regions of the world.

Striking the appropriate relationship between regional and global cooperation is now one of the crucial challenges in global governance — trying to balance what is desirable with what is realistic in the emerging global order. China’s leaders realise that the country’s economic rise over the past 30 years is not an isolated development or an accident of history.

China will continue to be a positive and driving force in the global multilateral trading system and its track record since joining the WTO sets a good example for other countries, including those currently plagued by an extended economic downturn. China will help demonstrate how the objectives of development and maintaining an open trading system can work together.

Wang Yong is Professor in the School of International Studies, and director of the Center for International Political Economy at Peking University in Beijing, China.

A version of this article was first published here by the Centre for International Governance Innovation (CIGI).

1. Russia’s accession to the WTO
2. China lifts Africa’s development prospects
3. The values dimension of Southeast Asian development and the rise of China

Europe’s woes and another week of volatility in world financial markets saw confidence in global recovery tumble.

The IMF meetings in Washington and the political follow up that is now playing out across Europe have done something to staunch the financial bleeding, but the global economy is still in emergency triage.

The G20 summit next month in Cannes has a great deal riding on it as the world lurches backwards into the recession.

Europe is still in a mess. The European experiment is at risk. Deep down the worry is that the writing is on the wall for the Euro itself. There’s no doubt at all that, despite all the emergency measures to prop up Greece and keep it in the fold, the Euro zone’s collapse is a serious risk. Greece is not the only Euro zone member trapped in the Euro straightjacket. The core problem for southern Europe is its chronic inability to match German productivity growth.

When two countries — Germany and Greece, for example — engage in free trade, the country with the slower rate of productivity growth normally experiences depreciation of its currency. But currency depreciation need not occur. There are other possibilities: its workers’ wage rates could grow at a commensurately slower rate; it could experience ever-increasing unemployment; its workers could emigrate; or it could find some means of ‘validating’ its increasingly over-valued real exchange rate. Greece chose the last of these options. And the means it chose was to increase government spending, financed by borrowing. Over the last decade, unit labour costs in Greece grew by about 30 per cent more than in Germany. This implies a 30 per cent effective appreciation of Greece’s real exchange rate. The validation of a real appreciation of that magnitude required a lot of government spending. Ultimately, that fiscal stance was going to prove unsustainable. Greece is not the only European country in this pickle. Whether the Greek and European body politic can now wear the fiscal burdens of an adjustment without breaking the Euro currency system remains to be seen.

As Elek says in this week’s lead, ’the self-imposed crises in the US and the EU have destroyed the capacity of industrial countries to contribute to global growth in the short term’. The danger now is that G20 leaders, consumed by the anxieties in Europe and North America, will miss the global main chance when they meet in Paris next month.

With Europe and the United States in the mire, the global main chance for medium term growth is investment and growth in developing economies. That’s not just another big fiscal stimulus in China — there are risks with that which the Chinese authorities are justifiably cautious about assuming. As Elek points out, the potential for productive investment in economic infrastructure is enormous. The OECD estimates global infrastructure requirements to 2030 to be in the order of US$50 trillion. Much of this demand is in Asia, also the primary source of the savings that are currently sloshing around the global economy. There are almost a trillion dollars of infrastructural investments there that have been given the once-over by the Asian Development Bank. China may be facing a temporary problem of over-heating, but its stock of capital relative to population and income is low. India and Indonesia offer vast scope for investment infrastructure. The US also needs to make large investments to rehabilitate or extend its economic infrastructure. More generally, global investment is a historically-low share of global output.

Meanwhile the G20 is wrongly focusing on a development agenda that largely misses this main point. As Elek explains, G20 leaders have appointed a High-Level Panel on Infrastructure to advise them on improving the institutional and enabling environment for investment in infrastructure, and ideas for financing infrastructure projects with significant but delayed returns to investors. But the Panel’s brief currently focuses only on much needed infrastructure in the world’s most difficult investment environments, especially sub-Saharan Africa. This is a diversion. The issues of institutional capacity, innovative financing and risk management need attention everywhere. G20 leaders at their next summit need to grab the Panel’s terms of reference and widen them, challenging their officials, financial sector managers, and international financial institutions to use their expertise to find ways to intermediate more savings into commercially-viable investment in infrastructure where it is needed, as Elek argues.

The Asian six in the G20 can take a lead here. Last week, Japanese METI minister Yukio Edano announced on a visit to Jakarta that Japan would support theconstruction of Jakarta’s ramshackle port capacity, including its airport and help to build a long overdue urban subway system. This is the kind of infrastructure investment that will both boost Indonesian productivity and lift Japan’s and other industrial countries’ growth prospects.

Europe has too long dominated the global agenda and it is clinging on to it. It’s time for G20 leaders to look beyond the European funk and focus on the opportunity for sustaining global growth through a development agenda beyond Europe’s messy backyard.

Peter Drysdale

1. How should Asia read the Greek tragedy? – Weekly editorial
2. The Greek tragedy: Global debt crisis and balance sheets
3. Indonesia and global development

If you ask the average punter in most countries around the region, from Canada through Asia to Australia, upwards of three quarters, it would appear, nominate China as the nation that will wield the most power ten years down the track.

The Chinese economy will almost certainly overtake that of the United States to become the world’s biggest economy in aggregate, though not in per capita terms, somewhere in the next 10 to 20 years, although there are few who suggest that it will match America’s military might any time soon. But does that mean that China can use its economic size to dominate the international economic system? What does China, already the world’s second-biggest economy, really want to do with its growing economic power?

The history of the rise of new economic powers, such as when the United States overtook Britain as the world’s largest economy, recommends caution about assuming that China’s size will quickly lead to its dominating the world economic system, let alone the world’s political system. It was half a century or so after the United States became the world’s largest economy that it became the dominant player in the international economic system, following the Second World War.

Yiping Huang, in this week’s lead essay, argues that what China wants is reform, not radical change, of the international economic system. This established system is a system that has delivered the opportunity for China to escape from poverty, and an unprecedented level of prosperity to more than half its 1.3 billion people. Far from wishing to tear down the institutions and rules which underpin the current economic order, China shares many of the economic values of the nations that uphold it, including values that relate to free trade and investment, and China’s interests are in working with the established economic powers in building what it calls a ‘harmonious world’. While some of the rules are in urgent need of reform, as the current economic turmoil underlines, there is every indication that China wants to improve the existing international economic system, not to abandon it. China has been among the biggest beneficiaries of the existing system.

The United States remains at the centre of the current global economic order. It is the leader in designing and enforcing its rules; the dollar is the cornerstone of the international monetary system; and the United States’ supremacy underpins the three institutions (the IMF, the WTO and the World Bank) that help to maintain order in the international economic system. China has made it clear that it has no intention of upsetting that system. But the world is now evolving into a multi-polar system, with a number of large economies having significant influence within the world economy. And China is one of the players that is now shaping reform of the system to deal with that circumstance, preserving United States’ centrality, but beginning to share some of the burden of making it work.

Until the global financial crisis hit in 2008, leadership burden-sharing with the United States was the prerogative of the G7 industrialised economies. The assembly of the G20 group to deal with the crisis marked a watershed in global governance, incorporating as it did China and five other Asian economies including Australia as well as important players from Latin America, the Middle East and Africa.

‘China’, Huang  observes, ‘sees the G20 as the best compromise between representativeness and efficiency for dealing with international economic issues and is interested in making it a permanent institution. The Sino–US partnership will remain a cornerstone for China’s international economic relations, but China is not ready to formalise the institutional arrangement of a Group of Two (G2) for global economic affairs. China promotes collaboration among the BRICs countries (Brazil, Russia, India and China) but regards the association more as a platform for formulating policy positions among key emerging market economies, not as a parallel organisation alongside the G20′.

China does not want to formalise the institutional arrangement of a Group of Two (G2) for global economic affairs. China promotes collaboration among the BRICs countries (Brazil, Russia, India and China) but sees the association more as a platform for formulating policy positions among key emerging market economies, rather a parallel organisation alongside the G20′.

The path towards a new global economic order is not short: it is a tortuous road that will take not years but decades to traverse. Change in the system requires others beyond, like China, to assume burdens that have long been carried by the United States. There is no way, for example, that the Chinese currency (the renminbi) can become part of a multiple international reserve system, smoothing transition from reliance on the US dollar, until China has liberalised its capital markets and capital account. These and other reforms will take time. China will have to work with the US and other G20 members to provide this and the other public goods that the world economy needs. China and the other emerging economies can ask for more rights, but, as Huang says, ‘they will also need to share more of the responsibility in maintaining a stable global economic environment, enforcing the international economic rules and assisting countries temporarily struck by adverse economic shocks’. This is a reality, it appears, that Chinese leaders understand, perhaps too well.

Peter Drysdale

1. China and the world
2. The G-2: no good for China and for world governance
3. Why China could be leading the world on climate change