News and Events

printer friendly version

"Toward an Asian Economic Community"

Speech by
Haruhiko Kuroda
President
Asian Development Bank

At the Jeju Summer Forum - International Management Institute, The Federation of Korean Industries

Jeju Island, Republic of Korea
28 July 2006

I.  Introduction

Dr. Shin-Ho Kang, Chairman of the International Management Institute of The Federation of Korean Industries (FKI); Executive Director Chol-Hwi Lee; distinguished guests; ladies and gentlemen:

It is indeed a great honor to join Chairman Kang in opening this forum on "Challenges, Opportunities, and Innovation in the Golden Era of Asia."

The International Management Institute is to be commended for their initiative to bring together the top entrepreneurial and economic minds in Asia and the world. And let me be the first to congratulate IMI on the 20th anniversary of its successful Jeju Summer Forum.

I would also like to take this opportunity to applaud the Federation of Korean Industries for its tireless advocacy of economic reform and cooperation, strategic industrial development, and many other measures to promote Korea's national competitiveness. Quite clearly, those efforts have paid off. In just a few short decades, the Korean people have transformed their economy from one of the poorest to one of the most successful, modern, high-tech economies in the world.

As I will argue today, I believe an Asian economic community is not only desirable and feasible - it is already emerging, with great potential for consolidating the gains the region has achieved in recent decades. But as we all know, the region still faces many large development challenges. Much remains to be done by Asian countries - individually as well as collectively - to bring such a vision to fruition.

Before moving into these regional and national issues, I would like to set the stage with a few words about Asia's rise and its implications for the global economy.

II.  Asian Economy - an Era of Change and Growth

If we look at the recent economic history, the term "golden era of Asia" certainly seems to apply. Increased economic and political stability, outward-oriented development strategies, and the creation of international production networks have transformed the region as a whole. Today, Asia hosts four of the ten largest world economies - Japan, the People's Republic of China (or PRC), India, and Korea - and accounts for almost 30% of total world GDP.

Despite numerous and large challenges, ranging from the 1997-98 financial crisis to the more recent spikes in oil prices, most developing Asian economies have achieved decades of steady, and often surprisingly vigorous growth. ADB's most recent estimates suggest that developing Asia grew at an aggregate rate of 7.4% last year - well above the average rate of growth since 2000.¹ While more mature economies like Korea, Malaysia and Thailand experienced moderate expansion, many countries at earlier stages of development - countries as diverse as Afghanistan, Myanmar and several of the Central Asian Republics - achieved healthy, double-digit growth.

Of course, the biggest story coming out of Asia these days is the rapid rise of PRC and India. Over the past 25 years, PRC has averaged real GDP growth of more than 9% a year, and external trade growth of over 14%. If PRC is able to overcome certain structural weaknesses, we believe its economy could continue to grow at about 9% annually in the medium term.

India, too, has unlocked its growth potential with the reforms that began in the early 1990s. Long-term growth trends have averaged around 7% to 8% in recent years. With carefully managed policy reforms and public budgeting, India has the potential to sustain an average growth rate of 8% to 8.5% up to 2010.

Addressing the Global Payments Imbalance

So it seems that the world's economic epicenter is shifting increasingly toward Asia. This shift presents both challenges and opportunities for other players in the global economy. It also points to a need for greater participation by these countries in international economic policy dialogue. Let me take the examples of global payments imbalances and world trade liberalization, which are now very much on the radar.

Most authorities now recognize that global payments imbalances can only be addressed through a shared approach. The US current account deficit, which has now further widened from last year's 6.5% of GDP, is associated with current account surpluses elsewhere - especially in the Middle East, but also in East Asia. Any sudden unraveling of this imbalance could have severe repercussions around the world.

To guard against such a disastrous prospect, all countries must contribute to the solution. An effective response would include measures to raise national savings in the US; structural reforms in Europe and Japan to strengthen growth potential; efforts to sustainably increase domestic demand in oil-exporting countries; and greater domestic demand and increased exchange rate flexibility in the surplus economies of emerging East Asia, particularly PRC. In short, this is a shared global problem and a shared responsibility.

Resolving Global Trade Issues

Similarly, all parties must work hard to reach a resolution on a global trade framework. The Doha development agenda of the World Trade Organization is extremely important to developed and developing countries alike - not least to developing Asia. Success in Doha would facilitate domestic reform and restructuring, open markets further, and set the stage for deeper liberalization in the future. It can prevent a surge of protectionism in countries and regions where Asian products are exported. This "development agenda" round of negotiations is therefore critical to our region, where poverty remains a huge problem and inequality a growing one.

ADB estimates that under a comprehensive or "deep Doha scenario,"² world income would rise by over $155 billion in 2025. Because of Asia's openness and relatively large initial trade shares, the gains to developing Asia would be substantial, but clearly much is at stake for the entire world. The current impasse must be broken so that all developing countries, in particular, can benefit from globalization.

III.  An Emerging Asian Economic Community: Prospects and Challenges

It's important to note, however, that developing Asia is not standing still while these international negotiations continue. Quite the opposite is true. In fact, one of the ways that developing Asian economies have responded to globalization is by strengthening efforts toward regional cooperation and economic integration. And this brings me back to my main topic today - the prospects and challenges for an Asian economic community.

Intraregional Trade and Investment Increasing

As noted earlier, there is ample evidence that, on some levels, a larger Asian economic community is already emerging. One of the best indicators of this trend is the growth of intra-regional trade. While still at a modest level in Central Asia and South Asia, intra-regional trade in East Asia has risen from 43% of total trade in the early 1990s to 55% in 2005. This is higher than the 46% figure for NAFTA and only modestly lower than the 62% figure for the 15 European Union countries. Moreover, PRC has now overtaken the US as the single largest export market for Korea, absorbing a quarter of its exports in 2004. PRC is also an important and growing market for Japan, Malaysia, Philippines, Singapore and Thailand, as well as an important market in its own right for global exporters and foreign services providers.

Intraregional investment is also substantial. Since 1980, FDI inflows into East Asia (including Japan) have more than quadrupled, reaching 21% as a share of world FDI inflows in 2004. Over the same period, the share of East Asian FDI outflows increased from 5% to 14% of the world total. Intraregional FDI flows accounted for much of this increase.

These integration processes have been largely market-driven through the establishment of global and regional supply chains and production networks. However, in recent years, Asian governments have begun to make real efforts to work together to deepen the process of economic integration.

For example, bilateral and regional trade agreements (FTAs) are spreading in Asia, with some 175 such agreements in existence or under negotiation, compared to just a handful a decade ago.³ This trend highlights the importance of efforts to manage the process of economic integration. Such free trade arrangements can be beneficial, as long as they induce domestic structural reforms and create open, competitive market environments. But problems arise when they are not of similar scope, coverage or participation. Proliferating and overlapping trade agreements could create the Asian "noodle bowl effect" due to differential rules of origin and treatment of sensitive products in different agreements, and present greater challenges for harmonization and broader regional and global integration. ADB is currently studying this issue to understand how such overlapping trade agreements affect business in Asia and how beneficial it is to consolidate them into an East Asia-wide FTA in a manner compatible with global free trade under the WTO.

Institutions Need to Manage Process

To effectively manage regional integration, Asia will need new and stronger regional institutions to exploit opportunities and meet a variety of challenges. The Association of Southeast Asian Nations, or ASEAN, is today the most advanced of such institutions. Through ASEAN and ASEAN-related activities, such as ASEAN+3, ASEAN+6 and ASEM, Asian policymakers are engaging in policy dialogue, coordination, and cooperation to further liberalize trade and investment, strengthen monetary and financial integration, improve cross-border infrastructure and reduce transport costs, and manage shared risks. Similar discussions are beginning in other subregions, such as South Asia (through SAARC) and Central Asia (through CAREC).

These efforts at regional cooperation and regional community building are not easy, especially given the region's socioeconomic and political diversity. But it is noteworthy that Asian policymakers are now engaged in frank, open, honest discussions on many complex issues. They want to find solutions that will strengthen efforts at institutionalizing a regional economic community and address their growing collective global responsibilities.

Deepening Monetary and Financial Cooperation

Given this political will, progress is being made. For example, with ADB support, ASEAN+3 Finance Ministers (ASEAN plus PRC, Japan, and Korea) have been working together to develop and deepen regional bond markets and ensure financial stability through regional economic surveillance and regional reserve pooling. At their meeting in Hyderabad last May, ASEAN+3 finance ministers agreed to explore further options for multilateralizing the Chiang Mai Initiative - the network of bilateral currency swap and repurchase arrangements - and for strengthening regional economic surveillance. These decisions will help move financial cooperation to the next phase.

The Asian Bond Markets Initiative, under the aegis of ASEAN+3, focuses on developing the financial market infrastructure conducive to efficient local currency bond markets. ADB supports this initiative through extensive research and technical assistance on multi-currency bonds, regional guarantee and investment mechanisms, regional clearing and settlement systems, support for local credit rating agencies, and helping to publicize Asia's bond markets to the rest of the world. Developing efficient domestic bond markets will help ensure that more of Asia's savings be invested in the region, providing the resources developing Asian economies need in order to meet the massive private investment needs, particularly in physical infrastructure and human capital.

Improving Subregional Connectivity

ADB is also supporting a number of subregional economic cooperation initiatives aimed at improving connectivity among countries in the region and with the global economy. One of the best illustrations of what can be achieved lies in the Greater Mekong Subregion (or GMS). Since 1992, the GMS countries, which include Cambodia, PRC, Lao People's Democratic Republic, Myanmar, Thailand and Viet Nam, have embarked on ambitious cross-border infrastructure projects, and significantly reduced policy and regulatory impediments to cross-border transport and trade. As a result of their efforts, foreign direct investment has tripled in size, and total exports grown six-fold. Intra-regional exports, a key indicator of economic self-reliance, have grown more than 10-fold since the GMS program began.

Importance of Regional Public Goods

Building on their initial success, GMS countries have expanded their cooperation efforts in the provision of regional public goods. Because of rising interconnectivity, whether regional or global, new cross-border risks are constantly emerging - threats like Avian flu, natural disasters, trafficking and environmental degradation. Thus, the GMS countries are undertaking new initiatives to, among others, prevent and control infectious diseases, provide preventive education for HIV/AIDS in border areas, and effectively manage their shared natural resources.

The cumulative benefits of the GMS program have been significant, with a dramatic drop in poverty. In 1990, the proportion of people living on less than $1-a-day ranged from about 10% (Thailand) to nearly 53% (Lao PDR). By 2003, the range was much lower, from less than 1% (Thailand) to less than 34% (Cambodia). Most importantly, the GMS countries have come to enjoy a new level of economic and political stability - the so-called "peace dividend" that results from working together for the common good of all.

As countries become well integrated within each of the subregions, subsequent economic links will surely be formed to join Asia together in a network of mutual economic and social progress. Such a process is likely to be gradual, but with commitment and steady action, the vision of an Asian economic community - prosperous, peaceful and poverty-free - is well within reach in a foreseeable future.

IV.  National Responses

As the region moves toward this vision, it will be crucial for each country to ensure its ability to participate in and benefit from regional integration. And we should not underestimate the challenges this will entail.

Continuing Economic Reforms

Most countries need to pursue various types of economic reforms to expand opportunities and help them cope with any future economic shocks or turbulence. These include: continuously fine tuning macroeconomic policy regimes; undertaking major structural reforms to increase productivity and competitiveness; and providing incentives to help certain economic sectors adapt to increased economic integration. In Southeast Asia, for example, policies that once served well to develop large, unskilled labor-intensive manufacturing sectors are being adjusted to support more technology- and knowledge-intensive manufacturing and service activities. The need to improve investment climates, invest in research and development, and upgrade industrial skills and human capital is now well recognized. And, there is renewed debate about re-training workers, and encouraging small enterprises and social safety nets to deal with the social consequences of adjustment.

Learning from Korea's Experience

In this respect, Korea's experience in quickly moving from developing to developed status - its success in improving corporate governance, modernizing the financial sector, building deep domestic industries, and opening corporate and capital markets to foreign participation - can serve as a model for other emerging Asian economies.

The people of Korea are justifiably proud of their accomplishments. Fifty years ago, Korea was as poor as any other developing Asian economy, with few natural resources and an infrastructure shattered by civil war. But with determination, an export-oriented growth strategy, and significant investment in areas like infrastructure, education, and research and development, Korea has become a highly competitive force in the global economy - an achievement accompanied by a dramatic reduction in poverty.⁴

While the Asian financial crisis ushered in a serious economic downturn, it also provided the impetus for Korea to correct the structural weaknesses in its economy, setting the stage for a rapid recovery. In 2004, Korea's economy topped a trillion dollars. Today, its per capita GDP per capita rivals several of the smaller European Union economies.⁵

Even as Korea continues its efforts to implement economic reforms, it has much to offer others in the region. Korea long ago graduated from developing member country status with ADB, and is now its 8th largest shareholder. Since joining ADB in 1966, Korea has contributed more than $2.5 billion in capital subscription and around $300 million to special funds. Its most recent contribution - and a very welcome one - is the $20 million e-Asia and Knowledge Partnership Fund at ADB, aimed at bridging the digital divide and sharing knowledge on development through Information and Communications Technologies (ICT) in the Asia and Pacific region. Korea is also member of the Organisation for Economic Co-operation and Development - one of only two in Asia. Clearly, the opportunities for sharing Korea's own knowledge on economic development, industrialization, outward development strategies, competitiveness and other crucial topics are enormous.

Investment Needed in Developing Asia

Korea can also integrate further with other Asian economies through increased investment in developing Asia. There is a huge unmet demand for such investment - in physical infrastructure, in human capital, in knowledge and technologies, and in institutional capacities - to sustain or accelerate growth. Countries that lag in such investments are likely to be left behind, with limited access to markets, weak private sector development and fewer resources to address poverty, which remains the most pressing problem in the region.

The need for infrastructure investment, in particular, is urgent, with demand in East Asia alone estimated at $200 billion a year. Yet the region's vast domestic savings, which would go far toward meeting these demands, sit idle. Governments must find efficient ways to tap into these domestic and regional savings by further developing domestic and regional capital markets. But they must also find ways to attract private sector investment - and private sector expertise - for developing high quality, modern infrastructure.

One of the largest impediments to investment is the lack of conducive investment climates arising from policy uncertainty, market distortions and legal and regulatory weaknesses. All of these factors raise transaction costs, deter private sector development and reduce business competitiveness.

Improving the Business and Investment Climate

Today, however, commitment to address these issues is growing. ADB, as a regional development partner, is working with both the public and the private sectors to improve the business climate and draw more investment into the region. On the public sector side, this assistance ranges from strengthening accountability institutions such as audit agencies, anticorruption commissions and the judiciary, to improving corporate governance, particularly in the financial and energy sectors. Although Korea has ceased to be a borrowing member of ADB, we provided assistance to Korea after the crisis to strengthen its financial sector.⁶ On the private sector side, we provide loans for projects with a clear development focus, as well as guarantee instruments, such as partial credit guarantees or political risk guarantees, to mitigate risk. This is particularly valuable for infrastructure projects which, due to lengthy time frames and the large amounts of money involved, can carry a high degree of risk.

Going forward, to help meet the large needs in the region, ADB will place an increased emphasis on mobilizing private sector investment. We are confident that private firms who engage with developing Asia will find extensive opportunities for mutually beneficial public private partnerships. As successful industry leaders, your talent and expertise is needed - not only in infrastructure, but in education, ICT, entrepreneurial training, the financial sector, research and development, and numerous other areas to bring all of Asia to a higher level of economic and social development.

V.  Concluding Remarks

Let me close by saying that the private sector has played a tremendously important role in creating this "Golden Era" that Asia has entered into. The challenge now is to build on the success of recent decades, bringing a higher and sustained level of growth to all economies in the region. Your ongoing contributions will ensure that Asia becomes more deeply integrated within itself, and with the global economy - bringing greater stability and an enduring prosperity to Korea, to Asia and to the world.