Karen Lane: Good day to you all and welcome to ADB’s online chat with Iwan Azis, Head of ADB’s Office of Regional Economic Integration and Lei Lei Song, Principal Economist in the same department. Our chat comes after the publication on Thursday, 19 July 2012 of our inaugural Asian Economic Integration Monitor. I’m Karen Lane with ADB’s Department of External Relations and will be moderating this session.

Lei Lei Song: Good day to everyone. And this is Lei Lei Song from the Office of Regional Economic Integration at ADB.

Iwan Azis: Hi, I am Iwan Azis and I am ready to respond as well.

Karen Lane: We had a question earlier from Jens Anker Jorgensen asking: Would ‪Europe‬'s ongoing crisis not discourage any idea of a common ‪currency‬ for Asia that even lacks EU-style governance?

Iwan Azis: A common currency has never been a concrete plan in Asia. Discussions among scholars and analysts, yes. But among policy makers, never. Realistically, a basket currency can be anticipated but in a very long run.

Lei Lei Song: This is a hard lesson from the eurozone crisis. There are many more pre-conditions for a common currency than we previously thought. And Asia is far from satisfying those pre-conditions. A common currency is not feasible for Asia for the moment. In the very, very long run, there might be a common currency. But it would be a very very long run.

Karen Lane: @ Carmina Angelica Valeroso - We did not receive your question - Can you please repost it through this chat?

Lei Lei Song: Even if Asia does not have a common currency in the foreseeable future, Asia needs to discuss exchange rate policy in order to facilitate intra-regional trade. This is where a basket currency comes into the picture. A basket currency could be a benchmark for countries to discuss their exchange rate policies. The purpose is to maintain some sort of intra-regional exchange rate stability, while keeping exchange rate flexibility against the major currencies outside of the region.

Karen Lane: Esfandiar Adena says: While Asia is going to integrate its economies more and more, there are potential conflicts in this continent, like the one between Tajikistan and Uzbekistan over the use of water and energy resources. Tajikistan wants to build Raghun hydro power station, with which Uzbekistan opposes.

How can ADB help resolve this conflict so that people of both countries can get benefit from such projects and also they export energy to South Asia to integrate South and Central Asian economies?

Lei Lei Song: @ Esfandiar Adena - Cooperation is critical. Countries need to talk to each other and ADB can be an honest broker. Cooperation can benefit all the parties involved. Were there no cooperation, there would be no utilization of natural resources, which would be not good for everybody. As an independent multilateral development bank, ADB can demonstrate the benefits of cooperation, and try to find a mutually beneficial way to develop natural resources.

Cheryl Arcibal: I'm Cheryl Arcibal from PhilStar.com, may I ask if you think the present tensions over South China Sea territories will affect Asian integration? How important is regional peace in forging Asian economies closer?

Iwan Azis: Asian integration will continue despite geopolitical tensions. On the ground, in the last few years, especially after the Lehman collapse in the fall of 2008, the business sector in Asia has continued working on its business with other Asian countries and emerging markets outside Asia. The integration process in the region is more market-driven than in Europe.

JC: Among countries in the ASEAN, which ones are most likely going to withstand the effects of a possible contagion?

Iwan Azis: @ On the trade side, in the first round effect, those countries not very dependent on exports will be able to withstand the effect of contagion, but given the increased trade integration in ASEAN, eventually these countries will eventually also feel the impact. Through the financial channel, those countries where the exposure to foreign claims, especially from Europe, is smallest will withstand the contagion effect best.

Aristotle Piad: Does ADB consider the agricultural aspect as an integral part of the Asian economy?

Iwan Azis: ADB has been very active in helping member countries to develop their agricultural sector, where the bulk of the population in Asia is working. So, we definitely consider the agricultural sector (production, prices, employment, and the environmental aspects of it) as an important part of the Asian economy.

Lei Lei Song: Responding to JC's question, the global financial crisis and the eurozone debt crisis showed that ASEAN is quite resilient, as all the members are not affected much. And they are most likely going to withstand a possible contagion. Having said that, the region does have some vulnerabilities, such as fast credit growth in some economies and elevated inflation in others.

Guest: Just to share a perspective on the issue of natural resources. In most cases, sharing of such resources is very complex even within countries, and even more so between countries. In looking at options for efficient use of such resources, the long term benefits and costs need to be looked at very carefully. Equally important is the long-term sustainability of any investments, particularly those involving large scale infrastructure projects. ADB can help countries assess the costs and benefits in the short as well as long-terms.

Karen Lane: Natasha Brereton-Fukui asks: Poor weather in certain countries is driving up food prices across the whole of Asia. How much will that impact inflation in Asia and which countries will be worst affected. Will this complicate monetary policy in the region? Are you concerned about possible budgetary implications if policymakers raise subsidies to protect their citizens?

Ramesh Subramaniam, ADB: Responding the query on agriculture, ADB considers it to be a very important sector. Our Water (Sector) Operations Plan, for instance, stresses the water-food-energy nexus. We have key lending and technical assistance operations to strengthen irrigation systems in many countries. Food security, inflation management, investment climate improvement all continue to be important dimensions of ADB operations in many countries.

Aristotle Piad: Thank you very much Sir Iwan. Hope Philippines shall look into developing their produce to be competitive with our neighboring nations with the help of ADB.

Iwan Azis: Food price increases will obviously affect inflation, especially in Asia where the food component constitutes a large portion of total inflation. The most affected will be large food-importing countries. But whether the monetary policy will be much affected by this depends on the specific condition in each country. When the source of inflation is supply-side (e.g weather related), monetary policy will not be effective to counter the resulting inflationary pressure. It is the same thing for the budgetary issue. Each country's situation is different. Providing subsidies is often problematic not because of the subsidy itself but because of the design of the subsidy and the lack of preparation. When subsidies are extended for political reasons, it is usually not sustainable and can be damaging. Not so with well designed subsidies that can raise the real purchasing power of most citizens.

Iwan Azis: You are welcome Aristotle

Karen Lane: Frank Fu earlier asked: Besides contagion, what other risks could we expect from regional integration? What counter measures can be taken to prevent or minimize the risks?

The trend of integration is not only regional but also globally. In that sense, the instability in one region can also be felt in another one, just as the EU crisis has been affecting the whole world economy in the past year and months. So is it right to say that contagion is not only regional but the world? What is the difference between regional contagion and globally contagion? How unique is the contagion in the Asia economy?

Lei Lei Song: Frank, thanks for the questions. Trade diversion is one potential risk from regional integration that can damage people’s welfare. In Asia, the South Asian Free Trade Area (SAFTA) is a notable example. Given relatively high levels of protection in the region, many predicted that the risk of trade-diversion is rather high. If not well managed, integration can increase inequality within countries. This is based on the idea that market competition and the labor/capital balance of power is a key determinant of income inequality. With workers exposed to competition beyond national boundaries, their bargaining power weakens—either through unions losing influence or by other means. In this case, further integration is expected to increase inequality internally. Frank, you are right that contagion can be both regional and global. Those big and systemic important economies will have a global impact, while some smaller but well-connected economies may have a regional impact. The Asian Financial Crisis in 1997/98 is a good example of regional contagion, which didn’t affect the countries outside of the region.

Daniel Hinge: I'm Daniel Hinge, from CentralBanking.com - Is the currency basket idea something that countries are considering at the moment? Would it likely to be just within the smaller, ASEAN countries or do you think the +3 countries and even India would be interested as well?

Iwan Azis: The currency basket issue is definitely among those discussed privately by analysts and some officials in Asean+3, albeit not at the official level. But more relevant to this issue is the rising role of the renminbi in trade transactions and increasingly also financial transactions. If the basket system materializes, the renminbi will surely be part of the basket. Whether India is also included depends on whether Indian and Asean+3 policy makers see the benefits of it. For sure, India has shown increasing interest in being part of the growing trade production network in East Asia. The concept of Asean+6 (including India, Australia and New Zealand) could be one of the fora to discuss the matter

Ramesh Subramaniam, ADB: Just to add a different perspective on the food price query of Natasha. Clearly, policy makers in the region (in those countries with continuing high food prices) face a dilemma. The normal response on the monetary side will be to keep interest rates high. Yet, most countries around the world are now lowering interest rates. Further, with growth slowing down in many countries, the need for priming growth is high & (low) interest rate is one tool. In turn, this poses two issues. One, how to effectively address supply side structural weaknesses, say in food distribution. Many countries have problems in wholesale and retail segments of distributing agricultural produce, be it major crops or minor crops. Those constraints need to be dismantled. A related issue is also the system of support prices that is still pursued in many countries. Such systems need to be reviewed in ensuring that the public are protected against sudden price hikes. Second is a broader macro-prudential issue. Lower interest rates need to be accompanied by tighter prudential controls. In this sense, Asia could look at what happened in previous episodes of inflation elsewhere or closely monitor the outcomes of policies being adopted by other countries now (e.g. Turkey).

Frank Fu: Thanks for the detailed answer, Mr Song. Now I understand why in the recent published ADB monitor, it said "greater integration may increase the income inequalities within countries even as it reduces the inequalities between countries".

Lei Lei Song: Just to add a comment on the currency basket, many economies in the region use explicit (such as Singapore) or implicit (some others) ones to determine their currencies. If the weights of different currencies in those implicit or explicit baskets are similar, the region essentially follows a common basket. This might be the case at the moment. ASEAN+3 officials do discuss exchange rates often in their official meetings.

Lei Lei Song: Frank, you are welcome.

Bart: Thank you for taking the time to share your insights into regional integration in Asia. In discussions on this topic, issues that tend to receive the greatest attention are related to the economic benefits of lowering barriers to trade and investment, including energy trade; enhancing connectivity (roads, electricity grids); and cross-border cooperation on monetary and financial market matters. Yet some have observed that there is much less attention given to the potential downsides of integration, such as increased opportunities for trafficking of humans and endangered wildlife; deforestation; heightened risks of spreading disease (HIV and the current outbreak of foot and mouth disease); inequitable distribution of economic gains across countries and sectors of society (and among men and women) in an integrated region; involuntary resettlement; impacts on culture and traditional ways; etc. Do you think more attention should be given to this side of the "balance sheet" when addressing the benefits of regional integration? What should countries and subregions of Asia do to mitigate such negative impacts, and what role should ADB play in this regard?

Iwan Azis: The risks of integration are always there. This is one of the important messages we are conveying through the AEIM report. The fact that attention seems inadequately given to the risks you mentioned (they have received attention but maybe not sufficient) is probably due to the fact that the process of integration itself is relatively new for some countries involved in those examples you gave, and hence the level of integration is still small. But as the integration grows, I am pretty sure these risks will get more attention. Like in all ADB-funded activities, we always look at the "safeguards" and any risk that might involved in the activity.

Cheryl Arcibal: During the Asian Financial Crisis there was a proposal to put up something like an 'Asian' IMF, do you think that there's a need for that given that the IMF has traditionally been led by a European?

Carmina Angelica Valeroso: Hi, I'm Carmi from bworldonline.com. What are the risks the Philippines is facing with ASEAN 2015? How can we avoid or mitigate their impact?

Lei Lei Song: Cheryl, Yes, there was such a proposal in the late 1990s. Since then, ASEAN+3 has developed the Chiang Mai Initiative Multilateralization (CMIM), which is a self-managed regional reserve pool. In May 2012, ASEAN+3 finance ministers and central bank governors decided to double its size to $240 billion and also increased the de-linked (to IMF) portion to 30%. CMIM has also got a new facility on crisis prevention, called CMIM Precautionary Line (CMIM PL). Associated with CMIM, ASEAN+3 has also set up the ASEAN+3 Macroeconomic Research Office (AMRO) in Singapore. While IMF provides a global safety net, CMIM is a regional one that complements the global safety net. CMIM still needs to be strengthened further and AMRO has to improve its surveillance capacity.

Mike: For financial sector in Asia, have there have been evidence of credit and capital flight as a result of the eurozone crisis? Does low foreign ownership and thin exposure to eurozone bonds suggest Asia is well-shielded? What could possibly go wrong?

Iwan Azis: Yes. Capital flight has happened post Eurozone crisis. That's why in some countries the exchange rate has been depreciating and the monetary authority has been intervening to defend the currency but more to prevent fluctuation, not the level, of the rate. Fluctuation in financial indicators is indeed a source of concern after the Eurozone crisis. Foreign ownership in the bond market varies across countries; in some, it is quite high (more than 30%), so it is not true that this market is fully well shielded. The awareness about the importance of more local/domestic players in the market is there, and most governments are trying to strengthen the role of domestic players. This should prevent what you refer to as "what could possibly go wrong."

Pat: Re Bart's question and Iwan's response - big issue for aid organisations who are caught between the important of economic integration for long term well being, and the costs to the poor if the process isn’t well managed. Who is doing the strongest analysis on these risks of economic integration in Asia? (doesn’t have to be ADB!, but perhaps there is a recent good analysis?)

André Dagum: Do you think the idea of economic integration will be less desirable to ASEAN member countries, especially after seeing what it has done to Eurozone countries? As you said earlier, ASEAN integration is primarily market-driven, but this could eventually result to higher political integration, especially today when the lines that define the dichotomy of politics and economics are blurring. What steps do you think ASEAN countries need to take to make sure increasing economic integration (and presumably political integration, at least in the future) will be a smooth process? What mechanisms do you think need to be in place to safeguard member countries from issues that might come up?

Lei Lei Song: ASEAN agreed to hasten the establishment of the ASEAN Economic Community by 2015 and to transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital. There might be risks that ASEAN may not be able to achieve the ambitious goal, and every member country has to work hard to get there. Carmina Angelica Valeroso, do you also mean that ASEAN 2015 Economic Community may bring about risks to the Philippines? As we indicated in our report and the above responses, integration could increase the risk of financial contagion, trade diversion and income inequality within countries. Domestic policies are key to mitigate these risks, yet regional cooperation can also help address these risks from integration.

Lei Lei Song: Pat, risks of economic integration in Asia is an emerging literature. Robert Barro and Jong-Wha Lee edited a book on costs and benefits of economic integration in Asia, published by Oxford University Press in 2011, which could be a good starting point.

Iwan Azis: Andre, So far ASEAN policy makers have shown their determination to strengthen integration which does not necessarily mean to expand but more to improve the "quality" of integration. The step-by-step process of integration and cooperation that has been taking place in ASEAN since its formation is the right formula and hence needs to be pursued to ensure what you refer to as a "smooth process." One should not look at ASEAN in terms of economic cooperation alone. After all, the history of the association is non-economic in nature. The multiple sector approach (trade, financial, security, tourism, people-to-people, cultural, etc) has been the "winning strategy" so far. I don't see the reason why the region should change such a strategy in the coming years.

Daniel Hinge: Renminbi internationalisation is clearly a major issue for emerging Asia. Do you think greater openness of the renminbi market will create stability - through, perhaps, greater regional integration and co-operation - or instability, through greater capital flows?

Lei Lei Song: I believe RMB internationalization will provide an opportunity for the region to integrate the region’s financial markets further. As the RMB is used more and more in regional trade settlement and financial transactions, and RMB assets are held by investors in other countries, the region’s financial markets will become deeper, more liquid and more integrated, which might promote stability. However, financial markets have a tendency to be unstable, and policymakers are doing a very difficult task to stabilize an unstable financial market (in Minsky’s words). Therefore to ensure financial stability, countries need to not only strengthen their financial supervision and regulation domestically, but also to cooperate with each other regionally and even globally to regulate cross-board capital flows and financial activities.

Natasha Brereton-Fukui: Please could you clarify how exactly you would see such a currency-basket system working in practice? Thanks

Bart: Another question if I may: Discussions on regional integration typically focus on ways of liberalizing trade in goods, services and capital. But what of labor? Studies show that migration can generate massive gains and assist countries in filling shortages in the labor market. Migration does take place in, e.g., SE Asia, but many migrants move through illegal channels, given policy and legal constraints. This leaves them in highly vulnerable circumstances with inadequate social protection. Shouldn't countries and development agencies expend more energy on finding win-win solutions generated by greater labor mobility? Visa-free travel among ASEAN members; visa-free travel *and* work between India and Nepal; and a large, well-regulated migrant labor market in Singapore provide examples from which to build further cooperation. Countries could also step up efforts to grant mutual recognition of academic credentials and skills qualification. What do you think - does the debate on regional integration do justice to the critical issue of labor?

Iwan Azis: You are absolutely right; almost all studies point to the huge benefits of the free flow of labor. But like in other forms of integration, there are also risks of it. And unlike in the case of the flows of goods, labor movement is often seen by policy makers to have more non-economic risks. So, what prevents the liberalization of labor movement is not so much the economic rationale but more the non-economic arguments. Having said that, the degree of ease of labor movement has been increasing (although data show that more Asian workers work outside Asia) and I am pretty sure it will continue to increase, especially as the current level is still relatively low.

Lei Lei Song: Natasha, I would like to point you to our special section on "Exchange Rate Cooperation: Is East Asia Ready?" in Asia Economic Monitor (the predecessor of Asian Economic Integration Monitor) December 2010.

Karen Lane: Zakir Machmud asked earlier: Does the idea of regional currency arrangement for trade settlement (e.g common regional currency like euro, regional anchor currency (RMB-WON-YEN), bilateral currency swap agreement - BCSA) feasible for Asian countries ? What is the likely impact of such idea to the Indonesian economy in particular? Thank you.

Philip Heijmans: Hello. I'm Phil Heijmans, business editor at The Cambodia Daily. Economists here have repeatedly said Cambodia's resilience from economic woes in the West will keep the economy where it is. With the situation worsening in Europe and US, is it possible that with less orders coming in to hold up Cambodia's garment sector, that other sectors will also be affected? How about FDIs? Is it possible that growth could fall below 7% this year as a direct result of the economies to the west?

Iwan Azis: In any economy, there are always sectoral linkages (forward and backward linkages). Thus, if Cambodia's garment export is affected by falling demand from the US and Europe, other sectors will surely be affected as well. This is precisely the reason why regional demand (intra-Asian trade) has been rising significantly, especially after the US crisis in 2008/09. The same can be said of FDI, except that FDI can be a "substitute". Given the relatively low return in industrial countries, investors are looking for higher return countries. Combined with relatively low labor costs, this can attract investors, including FDI, to these countries. The rising labor costs in the PRC may also increase the chance of Cambodia attracting FDI, including from within Asia. Whether this will happen, hence the 7% growth can be achieved, or not, depends on whether the policy environment (infrastructure, regulation, etc) is favorable enough for investors to come. Because Cambodia has to compete also with other low labor cost countries to attract FDI.

Lei Lei Song: Responding to Zakir Machmud, as we said earlier, the common regional currency is not feasible in the foreseeable future, yet regional anchor currencies (RMB, Won and Yen) are emerging, as countries in the region use those increasingly in trade settlements and financial transactions, and therefore they become more important in determining the value of other currencies. Asian countries are using bilateral currency swaps, and even a multilateral one—the Chiang Mai Initiative Multilateralization (CMIM, that is a self-managed reserve pool in ASEAN+3, and essentially a single contract governing all bilateral swaps involved). These new developments will facilitative financial integration in the region, which will improve resource allocation and accelerate economic growth, yet will also bring risks, such as financial contagion, trade diversion and rising income inequality within countries. The CMIM is a regional financial safety net, which can help the region prevent financial contagion.

Lei Lei Song: I would like to add one comment on Cambodia's growth. Our Asian Development Outlook published in April projected its GDP growth to be 6.5% in 2012 and 7.0% in 2013. Because of the worsening outlook in Europe and US, these numbers might be lower than we expected in April. Cambodia also needs to tackle the skills shortage, which is hindering Cambodia's development.

Karen Lane: Emmanuel Concina asks: Can the Asian integration be derailed by rising geopolitical tensions in the South China Sea/West Philippine Sea? With China and other ASEAN nations asserting their own claims on the waters, can the governments and businesses from these nations really work together?

Carmina Angelica Valeroso: Trade liberalization can have negative impacts on the domestic manufacturing sectors. In the Philippines, for instance, study shows that trade liberalization increases the probability of exit of a given firm, especially the small domestic firms. What can countries like the Philippines do to erode the negative impacts of the ASEAN free trade agreement? Can the losses in the manufacturing sector be wiped out by integration in other areas?

Philip Heijmans: Thank you.

Iwan Azis: To respond to an earlier question from Professor John Wong asking: "Has China replaced Japan as the region's main economic integrating force?" I can say that Integration involves several countries and each has its own role in affecting the integrating force. In the 80s, for example, Japan was the main destination of ASEAN exports of intermediate inputs. So, at that time these two were the drivers of integration. But beginning in late 1990s, the PRC became the primary destination. In the same period, exports of intermediate inputs from Japan (and Korea) to the PRC has increased significantly, part of it through their FDI operating the PRC. All these form the powerful and growing production network in Asia. So, ASEAN, Japan and the PRC are all the important drivers of the production network.

Lei Lei Song: To Emmanuel, Economic integration in Asia will continue, despite difficulties in the short term. Our report clearly shows Asian economies will integrate further. Integration in Asia is market-driven, institution light and multi-track. And economic agents will have the incentives to integrate further, as integration will expand markets and input resources, and therefore will facilitate more efficient resource allocation. This will accelerate productivity and thus economic growth.

Daniel Hinge: You said earlier that the Chiang Mai Initiative should be strengthened - what form do you think this strengthening should take? In particular, do you think current members should expand the size of the fund, or do you think it should (e.g.) be extended to ASEAN +6? Or both?

Lei Lei Song: Carmina, freer trade will lead some people to gain and some to lose. What the government can do is to compensate the losers, or to re-train them to be more competitive. In addition, the government can also improve the business environment, by investing in infrastructure and human resources. Then the losers can also benefit from freer trade.

Lei Lei Song: Daniel, some gaps remain in a few areas before the CMIM can be considered a truly effective regional financial safety net. The committed resources might not be adequate during a global or regional crunch. It is still tightly linked to the IMF, which might discourage countries to use it at a crisis or near-crisis situations. Its surveillance mechanism needs to be strengthened significantly and its surveillance arm, AMRO, adequately supported in terms of financial resources and technical expertise; and there must be coordination between the IMF and the CMIM.

Iwan Azis: Back to the FTA and trade liberalization issue - this is a "common" story about the effect of liberalization. The "common" response to that "common" story is: one should look at it in a dynamic context. The exit of some industries can be compensated by the entry of new industries. In addition (as are currently also very popular arguments in the US) improving productivity through enhancing skills and technology is also often suggested. In practice, however, all these take time. So, the "intermediate" response is usually favoring a scheme where policy makers feel they still have control over what, how, with which countries, and at what speed to liberalize. This is one of the driving forces of FTAs that has been proliferating in the region.

Karen Lane: A question from Cai Kede: Should Asia look beyond its own region and engage South America and/or Africa for more trade interaction instead?

Cheryl Arcibal: Some say ASEAN is just a talk shop, but do you see any role that the group could play in Asian integration?

Jayant Menon: Phillip Hiejmans, allow me to share my thoughts on your important question. I think Cambodia is different from its neighbours in that it is more heavily reliant on garments for its export income and that it is even more exposed to the US and Europe as markets for these exports. We saw the effects of this following the Global Financial Crisis, where Cambodia was more heavily affected than others in the immediate region. To reduce this vulnerability, diversification- of both products and markets- is necessary. This is happening, but slowly. The recent indications of a significant upsurge in FDI from Japan (eg. Minibear) suggest good prospects for diversifying into other light manufacturing and components in the near future. To keep this going, Cambodia, in my view, would be best served by retaining its open and non-discriminatory trade and investment policies, and addressing high energy costs and infrastructure bottlenecks. Further improvement in implementing laws and protection of property rights will further improve prospects in developing an economy that is less reliant on an industry spawned by preferences- garments. There is also agro processing that is increasing, especially rice milling and this too will contribute to over-reliance on garments. I think the end of land price speculation has enabled resources to move into agro-processing, and although perhaps driven by another type of speculation- it is a more productive type.

Lei Lei Song: @Cai Kede Absolutely: The Asian Development Outlook 2011 has a special chapter on South-South Economic Links. We argued that, to fully tap the potential of these developing-country markets as new sources of growth, policy makers must remove barriers to “South–South” trade and investment, which are still higher than those with the industrial world.

James: Thanks for the very informative exchange.

Natasha Brereton-Fukui: Is it desirable to work towards a common currency in the long term, though, given the European experience? Can you envisage Asian countries agreeing to fiscal and monetary union?

Karen Lane: Phillip Day asked: What lessons can be learned for Asian integration in the current troubles in Europe?

cai kede: @lei lei song. Thank you for accommodating my question.

Lei Lei Song: Natasha, time will tell. I believe future generations may have better ideas.

Iwan Azis: Cheryl, The "talk shop" characterization is largely due to a narrow perspective of integration. ASEAN has played a major role in various aspects, not just in the economic arena, and some are even deeper than the economic area. One can always develop counter-factual scenarios about the 10 countries, i.e., what would happen if there were no ASEAN? But even in the economic aspect its role in Asian integration is very critical. For example, in Asean+3. Since Asean+3 is the most quoted example of Asian economic integration, the association will definitely play a strategic role in Asian integration.

Cheryl Arcibal: Thank you!

Karen Lane: Piet IJben says: As result from the crisis, subsidies and donations from Governments and Organisations to NGOs and Development Agencies have reduced. But with the single currency it’s more easy to exchange shortfall in certain budget sectors in case of regionalization in Development Aid structure, whereas the costs for monitoring and control are reduced from the side effects of non currency conversion.

Iwan Azis: Yes, it is possible, and support and donations to NGOs could come more from the private sector.

Lei Lei Song: To Phillip: Three lessons: No common currency. A bottom-up process might be better than the top-down approach. Slow gradualism is better.

Ditas Martin: What are the downside risks of Asian regional integration faced by the smaller less competitive countries - e.g., myanmar, cambodia, laos, etc? . Are there safety nets to address the risks?

Lei Lei Song: These smaller and less competitive countries may not be able to benefit from closer integration and their industries may not be able to compete with other countries either. As my colleague Jay said earlier, these economies need to invest in infrastructure, address higher energy prices, tackle skills shortage and improve the business environment, FDI will then be coming and cheaper labor could be utilized. The international community, ADB included, needs to help these economies to invest in those areas the private sector will not invest, such as infrastructure.

Khoun Bunny Senior: Hi. I got a question on how the integration of economic of ASEAN will impact the trade, financial and bank, and even stock market in Cambodia? Do you see any other risks and if so, then how could we resolve those problems?

Lei Lei Song: Integration will in general benefit smaller economies such as Cambodia by expanding its trade and financial links with the region. By expanding markets and input resources and getting more FDI, Cambodia could utilize more of its cheap labor and realize its comparative advantage. However, integration could also lead firms in Cambodia to face stronger competition. Therefore, some industries in Cambodia may need some protection from other ASEAN members for its industries to grow in their infant stage. The selection of such industries needs to be done carefully however, and chosen on the basis of potential comparative advantage, and a perceived capacity to survive without protection once they mature and achieve minimum efficient scale. In the mean time as my colleague pointed out, Cambodia would be best served by continuing its open and non-discriminatory trade and investment policies, and investing in infrastructure and human resources.

Karen Lane: Many thanks for all your questions. We will post the full conversation on this website.