Growing trade and investment linkages in Asia and the Pacific help improve the region’s economic resilience to uncertainties in the global economic and trade policy environment, according to a new Asian Development Bank (ADB) report.
In the Asian Economic Integration Report 2017 (AEIR) study, ADB examines recent regional integration trends and introduces a new regional integration index. The report also includes a special chapter on how Asia can strengthen financial resilience in an era of financial interconnectedness.
Strong intraregional trade and investment are acting as a buffer for the region against uncertainties in global trade and economic growth, according to the report. In 2016, Asia’s intraregional trade share―measured by value―rose to 57.3% in 2016, a record high, up from an average of 55.9% from 2010 to 2015.
Foreign direct investment (FDI) within Asia rose in absolute value to reach $272 billion in 2016, despite a 6% decline in global FDI flows into the region. This intraregional FDI increased as a share of total FDI to the region from 48% in 2015 to 55% in 2016.
Given the role intra-Asian FDI plays in enhancing global and regional value chain development, this is expected to help strengthen the region’s trade growth globally.
Asian economies have continued expanding their global presence, with FDI originating from Asia rising 11% in 2016 to $482 billion, primarily through investment in renewable energy, natural resources, semiconductors, and information technology.
“Asia and the Pacific is leading a recovery in world trade that is helping the region to maintain strong growth momentum amid global economic and trade policy uncertainty,” said Yasuyuki Sawada, ADB’s Chief Economist. “Asia’s continued integration and cooperation will underpin regional economic growth and financial resilience.”
New composite index
The 2017 AEIR introduces a new composite index, the Asia-Pacific Regional Cooperation and Integration Index. The index measures regional integration across six components, including trade and investment, money and finance, regional value chains, infrastructure and connectivity, movement of people, and institutional and social integration.
The index is aimed at helping policymakers better understand and measure the levers for greater regional integration and cooperation.
The report also features a special chapter on how Asia can strengthen financial resilience in an era of financial interconnectedness. It highlights that 20 years after the Asian financial crisis, Asia stands strong, with healthier financial systems, stronger regulations, and better regional financial cooperation mechanisms.
Significant challenges remain, however, with unresolved financial market and system weaknesses. Remaining regulatory policy gaps could also increase the region’s risk exposure and financial vulnerability through excessive leverage and risk-taking.
The report offers several recommendations for countries in the region to strengthen their resilience to future crises, including maintaining sound macroeconomic fundamentals; further strengthening national regulatory and supervisory frameworks and institutional capacities; further developing local currency bond markets; strengthening regional regulatory cooperation, including resolution mechanisms for interconnected regional banks; and reviewing and strengthening existing financial safety nets against potential contagion and spillover effects.