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Exactly a decade after the financial crisis, the Asian economy is enjoying rapid growth. Over the past decade, Asia has maintained an annual average growth rate of 6.5%. Underpinning this performance has been the strength of the emerging PRC, adding more than two full percentage points to Asian growth during the period. This remarkable economic performance has elicited much enthusiasm for rising regionalization and related optimism for the region's independent business cycle dynamics.
The findings of this chapter may surprise those who believe that stronger intraregional trade integration is evidence of uncoupling. There is no evidence pointing to Asia's uncoupling-structurally or cyclically. A renewed process of rapid economic growth and development has been accompanied by increasing economic integration, both within Asia and between G3 and Asia.
Regionalization of economic activities has gained strong momentum through progress in sharing of production processes across the region. Increased vertical specialization and the rise in intra-industry trade have led to strong ties among Asian economies, but this regional integration remains structurally linked to final demand from major industrial countries.
However, regionalization that is tied to globalization is potentially a transmission channel for a global shock. Increased trade openness and economic integration with the global economy could induce greater business cycle synchronization among the regional economies by exposing them all to a common global shock. Further, strong regional economic integration could propagate a shock rapidly across regional economies.
To the extent that Asian business cycles are sensitive to the vagaries of external demand, it is important for Asian economies to maintain sound macroeconomic conditions and ensure coherent policy management. A stable macroeconomic environment-of low inflation and prudent fiscal balances with modest levels of debt-provides an important backdrop for sustaining high growth. It also allows room for policy makers to take measures of macroeconomic stabilization when necessary.
Greater economic interdependence and tighter trade linkages between Asian economies also require greater cooperation in trade, finance, and exchange rate policies at the regional level. As economic and financial shocks travel rapidly from a country to its trading partners through increased trade and financial linkages, it is to all Asian economies' benefit that, nationally, they maintain sound macroeconomic conditions with prudent economic management. Synchronization of real growth and inflation in the region should also generate regional common interests to ensure close cooperation in macroeconomic and exchange rate policies.
Globalization, including the rapid relocation of production networks across borders, underscores the region's need for greater economic flexibility. Along with increasing openness to trade, globalization has allowed greater factor mobility, particularly MNCs that can choose the most cost-efficient locations, facilitating both vertical specialization and a tightly webbed regional production network across borders. The rise in intra-industry trade and trade integration has a positive impact on economic growth by promoting efficiency and productivity growth.
But easier relocation of production and greater factor mobility imply that Asian economies should ensure a high degree of flexibility in both product and factor markets to maintain their regional and global competitiveness. Further structural reforms will have to move forward to improve overall economic flexibility and competitiveness.
Such reforms should include the successful completion of corporate and financial sector restructuring by deepening the reforms on governance and legal infrastructure, creating an investment-friendly environment through minimizing unnecessary regulatory barriers in business activities, encouraging private incentives toward more dynamic market economies, opening domestic markets to international competition, and creating a level playing field across all sectors. This will also help attract FDI.
Continued rapid growth of the PRC, and its deeper integration with the regional and global economies, will continue to shape opportunities and challenges for other countries. For those competing head to head with the PRC, and who are now seeing their market shares (and/or terms of trade) eroded, sustaining growth will depend on their success in promoting economic agility and carving out new areas of competitive advantage (see Part 3, Growth amid change). For primary commodity producers that sell to the PRC, or for those countries that can profitably manufacture the consumer durables demanded by the PRC's quickly expanding middle class or the equipment needed to support its industrialization, the PRC's growth is likely to prove directly beneficial. Likewise, further fragmentation and refinement of supply chain activities should ultimately strengthen complementarities among the economies of East and Southeast Asia, though the gains are unlikely to be automatic and will depend on the capacity to adjust and to develop new capabilities. Finally, the logic of fast growth in a country as vast as the PRC, as well as a rebalancing of spending towards domestic consumption, foreshadows not just a more prominent role for regional incomes in forging closer regional integration but also the emergence of developing Asia as an additional engine of global demand.
Endnotes
- "Asia" generally refers to nine economies in East and Southeast Asia, namely: People's Republic of China (PRC); Hong Kong, China; Indonesia; Republic of Korea; Malaysia; Philippines; Singapore; Taipei,China; and Thailand.
- The latest Global Trade Analysis Project database (version 6.2) corresponds to the world economy in 2001. The database provides "detailed bilateral trade characterizing economic linkages among regions, together with individual country input-output databases which account for inter-sectoral linkages within regions" (Hertel 1998, p. 2). The latest version disaggregates the world economy into 87 regions (including all the nine economies in East and Southeast Asia in this chapter) and 57 sectors.
- The role of PRC's final demand in Asia's exports would likely be bigger if more recent data were used.
- The intra-industry trade index is based on the Grubel-Lloyd methodology, using SITC 2-digit data from the United Nations Commodity Trade Statistics database. Using the share of industry i in terms of total industry trade as a weight, the intra-industry trade between countries A and B is calculated as (see OECD 2002):
While the ratio takes a value between 0 and 100, with a higher number associated with greater intra-industry trade in theory, this ratio tends to increase with the level of aggregation in terms of both the number of countries and product classes in the sample.
- The Granger causality test is simply to see if lagged values of one variable (X) have any statistically significant information on future values of the other variable (Y) given the lagged values of Y. If it does, X is said to "Granger-cause" Y.
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