The Asian region will grow increasingly integrated as economies build more intra-regional connections and intensify cross-border trade, but integration must be handled differently from Europe’s, says the Asian Development Bank’s (ADB) latest Asian Economic Integration Monitor.
The integration of Asia will be spurred by government efforts to bolster trade and transport connections and build regional institutions, such as free trade agreements, regional bond market arrangements, and financial safety nets. These measures will help avoid the kinds of dangers that have beset integration in other parts of the world, said the report.
The region’s economic resilience based on solid domestic and regional demand and despite tepid global economic growth will also continue to support integration.
“Asian integration is and will continue to differ from Europe’s,” said Iwan J. Azis, head of ADB’s Office of Regional Economic Integration. “Asian integration—and the institutions supporting it—will focus on strengthening national economies by harmonizing rules and regulations in finance and trade, while managing the risks from a very diverse region.”
Azis said Asia should avoid integration “that overlooks economic and financial risks and embedded dangers,” as this could lead to crises such as those seen in the euro zone.
Instead, to cope with a slower global economy, the region should continue to harmonize financial rules and regulations and further liberalize trade and investments unilaterally or through multi-country free trade agreements, said the report.
Moreover, “individual countries must continue with reforms to overcome structural weaknesses,” the report says.
Uneven integration
It also pointed out that Asia is highly integrated but “integration remains uneven.” East Asia and Southeast Asia have close links with each other. Both the Pacific and Central Asia do active trade with many other Asian nations. Meanwhile, countries in South Asia are not closely connected with each other yet, but are increasingly keen to build links, particularly with East Asia.
There is also huge divergence within and between sub-regions. The Pacific has substantial trade with Asia, but most Pacific economies import far more from Asia than they export and thus suffer high trade deficits. Foreign direct investment flows to the Pacific also fluctuate sharply.
To address this disparity, the report urges Pacific countries to remove constraints on private businesses, particularly small- and mid-sized companies, and improve air transport and telecommunications infrastructure. Improving customs procedures and investing in better logistics networks would also boost trade.
Developing Asia’s productivity slackens
As this developed, ADB has noted the slowing productivity of Developing Asia and urged the region to arrest this thrust to continue to enjoy strong economic growth, reduce poverty and inequality, and avoid getting mired in the middle-income trap.
“It is critical that the region tackles the structural issues underlying slowing productivity,” said Azis, who spoke during a recent conference on Asian regional cooperation and integration.
“Deeper regional cooperation and integration can help to do that through better infrastructure, energy, trade, and finance as well as labor mobility,” he added.
Developing Asia has seen strong growth in recent decades on the back of high investment, a young and eager workforce, economic liberalization, and greater cross-border integration in trade and finance. But the slowing global growth, inadequate infrastructure, and other supply-side constraints have slowed its productivity growth.
“With the external environment likely to be less benign in coming years, a key challenge for Asia is to reverse that trend and sustain high productivity growth,” he said.
Landlocked, fragile, and conflict-affected states must improve their fundamentals such as human resources and basic infrastructure, as well as promote greater use of information and communication technologies to allow development of niche markets.
For middle and higher-income countries, higher-quality infrastructure and skills can help make trade more efficient and ensure economies move up the value chain. IT-related technologies and new ways of managing could also boost productivity.
For Asia’s high-income countries, however, new high-productivity activities may be necessary to sustain their high level of productivity.
Photo: Ngo Trung
