Hello ASEAN+3, good-bye Europe

Fithra Faisal Hastiadi, Tokyo Tue, 12/13/2011 9:28 PM

A Distinguished Speakers Seminar (DSS) held by the Asian Development Bank Institute (ADBI) in Tokyo in November came to the powerful conclusion that the European mess was getting messier.

As stated by Wyplosz (2011), since late 2009 the European debt crisis has not shown any sign of recovery.

For several reasons, apparently, the policy responses have been wrong. Wyplosz argues that the mother of all mistakes may lie in the policy options to provide ¤110 billion to save Greece through its tough austerity program.

There were two major flaws in this policy. First, it violates the no-bailout clause in the European Central Bank (ECB) system; and second, austerity in the midst of recession cannot act as a remedy.

These factors eventually led to a liquidity crisis that has overwhelmed the European banking system (Collignon, 2011).

Colloquially speaking, the liquidity shock caused a sudden deterioration in specific classes of assets that has spilled over into banks, which are in dire need of liquidity.

The liquidity shortage then put banks in distress as the deteriorating asset prices affected their balance sheets and thus reduced bank capital. These difficulties then spilled over into the real economy in the form of a recession. This recession will most likely see Europe sinking into irrelevance.

Meanwhile, ASEAN is fueled by a youthful spirit that could bring new hope during the current global imbalances. ASEAN members are becoming increasingly connected. The ASEAN region has experienced sustainable growth of intra-regional trade share. In 1990, the intra-regional trade share was only 17 percent but in 2010 the figure swelled to 25.2 percent.

If we expand the coverage to include ASEAN’s plus three countries (China, Japan and Korea), the intra-regional trade figure is becoming more robust.

In 1990, it already reached 47.2 percent and developed over a decade as it leapt to 58.4 percent.

The FTAs and EPAs that have been emerging since mid-2000 have had made a significant contribution to warming of relations among ASEAN+3 countries.

An important factor explaining the success of the ASEAN+3 economies has been their participation in a dynamic, regionally integrated economic structure beyond just ASEAN+3. Strong and dynamic production networks have progressively linked East Asian and ASEAN+3 countries.

The fragmentation of manufacturing production and “fragmented trade” linked to rising intra-industry trade has enabled ASEAN+3 countries to maintain their competitiveness and successfully pursue an export-led development strategy. ASEAN+3 countries have also developed robust, flexible and vibrant small and medium size enterprise (SME) sectors.

While this region has experienced two periods of economic crisis (late 1997 and late 2008), it did well in bouncing back afterward.

During the first crisis, the total ASEAN+3 intra-regional exports fell from US$179,732.1 million in 1997 to $146,166.3 million in 1998. Imports also declined from $186,630.5 million in 1997 to $141,979.3 million in 1998. This number contributed to an almost 3 percent decline of ASEAN+3’s intra-regional trade from 49.9 percent in 1997 to 47.2 percent in 1998. But in 1999 this bounced back well to 49 percent, followed by 51.4 percent in 2000. This figure gave a big boost to East Asian countries at that time to recover from the crisis.

The second crisis in late 2008 also caused regional trade imbalances in ASEAN+3 countries as the total exports and imports fell from $547,427.5 million and $518,966.8 million in 2008 to $450,665.6 million and $411,663.3 million in 2009.

But, again, the regional economy bounced back in 2010 to $630,089.6 million for exports and $609,465.3 million for imports. This bounce was also seen in the intra-regional trade share figure that experienced a hike from 55.8 percent in 2008 to 58.4 percent in 2010.

Comparing these two crisis periods, we can draw the general conclusion that East Asia has learned well in coping with crises. This is reflected by the speed of recovery in 2010 which was better than that of 1999. Also, the closer integration among the countries has created a vaccine-like treatment in the region.

Looking into the future, based on ADB projections, in 2030, per capita GDP in 2007 constant US dollars, will reach 9,012 for ASEAN, 12,361 for China, 40,415 for Japan and 41,674 for Korea.

These figures surely indicate a very optimistic path for the region in taking a powerful role globally, but in order to play that role the region, especially the ASEAN countries, must pay more attention to several crucial factors.

The first of these is infrastructure. The simulation result confirms the importance of infrastructure to create greater room for the region to evolve. The second is industrialization. A one point rise in the industrial index will most likely increase the tendency of economic growth by 0.04 percent. The third is population.

Population is regarded as the most important variable that serves as a foundation for strong growth. A 1 percent increase in the total population will increase the likelihood of regional growth by 0.86 percent.

The sheer size of the East Asian population creates not only the potential demand for the goods traded in the region but also the supply of labor and low absolute level of wages.

This trend is very important since homogeneity in industrialization among countries in the region will assist the progress of economic integration, and thus economic growth.

To wrap up, ASEAN+3 countries should ensure countries within this region that are lagging behind to eventually catch up with the rest.

Sound policy measures that incorporate the expansion of production networks should be set as a common goal for the future of this region. Whether ASEAN+3 moves forward or ends the story like the Europeans is a matter of political will.

The writer is research associate at the Asian Development Bank Institute (ADBI), Tokyo. The opinions expressed are his own.