Asia is set to become increasingly integrated as governments bolster trade and transport connections and build regional institutions, such as free trade agreements, regional bond market arrangements, and financial safety nets.
In its latest Asian Economic Integration Monitor, the Asian Development Bank says the region’s economic resilience, based on solid domestic and regional demand and despite tepid global economic growth, will also continue to support stronger regional 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.
Azis explains that 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.
The report says that integration that overlooks economic and financial risks and embedded dangers that governments subsequently need to resolve, should be avoided. This can lead to crises such as that in the eurozone, which means Europe will now have to build stronger formal institutions.
In Asia, a growth in cross-border trade and investment after the 1997-1998 Asian Financial Crisis led to greater integration on the ground.
To cope with a slower global economy, the region continues to harmonize financial rules and regulations and further liberalize trade and investments unilaterally or through multi-country free trade agreements.
These pragmatic and market-friendly institutions should help Asia grow strongly as a region even as individual countries must continue with reforms to overcome structural weaknesses, the report says.
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 trade actively 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 subregions. The Pacific has substantial trade with Asia. Of concern though, is the growing economic disparity between the Pacific and Asia.
Most Pacific economies import far more from Asia than they export and thus suffer high trade deficits. Foreign direct investment to Pacific countries averaged 4.6% of gross domestic product during 2003-2012 but flows 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.