SINGAPORE - Greater integration brings benefits but also potentially huge risks, meaning Asian governments must work together to put in place policies and structures to ensure the region minimizes those risks and reaps the benefits, the Asian Development Bank (ADB) said in its new Asian Economic Integration Monitor.
"Developing Asia's strong economic growth is in large part due to increased economic and financial ties within the region but greater integration can bring contagion and other risks and we must address those threats through closer cooperation," said Iwan J. Azis, Head of ADB's Office of Regional Economic Integration. "Ultimately, integration should improve everyone's standard of living in the region."
Close integration speeds up the transmission of a crisis in one country to another as has been seen recently in Europe. In addition, greater integration may increase the income inequalities within countries even as it reduces the inequalities between countries.
With integration rising and set to continue in Asia, the region's governments need to cooperate more to offset these risks, the report says.
To counter the threat of economic or financial contagion, Asia must strengthen safety nets like the swap arrangements set up in the ASEAN+3 and South Asia. These safety nets need to be big and flexible enough to deal with future crises that may be transmitted in different ways to previous crises, and they need to be backed by an effective surveillance mechanism.
To ensure that all those within countries benefit from closer integration, the region needs to build more transport links to increase access to cross-border markets since the region's infrastructure is now woefully inadequate. Allowing workers to move more freely would also help reduce income disparities. Asia also needs to improve its policy, regulatory and institutional frameworks - such as complicated trade procedures or cumbersome customs clearance - to boost intra-regional activity.
The region has particularly strong trade links - in some parts stronger than in Europe - that are set to grow as regional products are increasingly made and sold in regional markets rather than the shrinking markets in Europe and the US.
The People's Republic of China's renminbi is being increasingly used to settle trade transactions. Over time, it could become an anchor currency, helping the region to integrate their economies, cooperate on monetary and finance issues as well as gradually open up the PRC financial market.
Financial integration, while rising, is still low. Although closer integration raises the risk of contagion, better developed markets would allow local savings to be invested locally rather than sent outside the region. This could help to finance the much-needed infrastructure in the region.