Asia’s Increasing Regionalism

Two of Asia’s problems are now reduced FDI inflows and too much trade export dependency on the US and Europe.

In 2008, FDI inflows to Asia and Oceania decreased by 2.2 percent to US$313.5 billion. For South, East and South-East Asia, there was a marginal increase of 3.3% to US$256.1 billion. This region is the largest recipient of FDI among developing economies, accounting for almost half of all flows to developing countries and 17.7% of world FDI inflows.

The capability of firms to invest in Asia has been reduced by a fall in access to financial resources (corporate profits as well as lower availability and higher financing cost). Second, the propensity to invest has been affected negatively by economic prospects. Developing Asian economies with open but weak financial systems are vulnerable to external shocks. They face the possible drying up of financial flows from both official and private sources. FDI inflows to countries like Indonesia, the Republic of Korea, Pakistan, and Singapore may experienced further decline due to fallout from the financial crisis. Hutchison Whampoa (Hong Kong, China), the largest TNC from the developing world and a leading conglomerate in infrastructure industries globally has announced that it will suspend all new investments in its global operations. ArcelorMittal, the world’s largest steelmaker, is reviewing its global expansion programme released in 2007 due to bleak sales prospects.

Despite a decline in FDI flows, there is no sign that the crisis has negatively impacted Asia’s relative size of FDI stocks.

As for Asia’s excessive trade export dependency, the current crisis shows how vulnerable Asia is to a global demand slump. This explains why IMF has said that intra-regional trade is the key to Asia’s export boom. Emerging Asian exports now account for more than one-third of world trade flows. This Asian export boom is supported by intra-regional trade, with China as a hub. Still, this one-third exports of world trade flows shows how vulnerable Asia is to world demand for Asia produced goods and services.

What are some solutions?

Here are 4 possible ones. One is the effective implementation of economic and industrial policy reform. Because Asian governments work hard to maintain sound and attractive business environments, internationalisation means TNCs will continue to find selective Asian investment opportunities. Public policies will play a major role in the implementation of favourable Asian conditions for a quick recovery in FDI flows. Asian governments have already implemented monetary and fiscal stimulus packages. South Korea has pent US$3.5 billion in job creation while Japan is contemplating of spending US$15 billion in a jobs plan. India has moved to cut excise duty and reduce its service tax rate in its latest third stimulus package. These are a good short term economic boost.

Production is also being integrated in Asia. ADB reports that the regional integration of production has become central to Asia’s leadership in global manufacturing. Asia offers key production advantages like large and diverse labour forces, adequate investment resources, advanced technological capabilities, low trade barriers and well developed transport and communications links. These factors have helped Asia’s intraregional trade, which has increased sharply with parts and components trade playing a significant role.

Asia is also working on its financial market integration through innovations such as the Asian Bond Markets Initiative (ABMI) and the Asian Bond Funds (ABF). One immediate priority area is to strengthen supervision, surveillance, and dialogue on financial markets. Other priorities include steps toward the harmonization of financial regulations and the adoption of minimum standards.

Asia is also working on the management of macroeconomic interdependence. This will mean reorienting output from exports outside Asia to consumption and investment within Asia. There are benefits to potentially coordinating macroeconomic and exchange rate policies. ADB suggests creating a new central structure such as an “Asian Secretariat for Economic Cooperation”. Governments might also explore early initiatives in policy coordination.

Finally, Asia can coordinate its social and environmental policy to ensure fair treatment of migrant workers, trevent or manage spread of diseases and other public threats and share environmental technology.
Once the current crisis has abated, what’s a worthy goal to aim for? The Asia Economic Union? In this uncertain yet constantly changing world, anything is possible. It will be Asia Reloaded (after the hiccup).