The Hindu Business Line : Asian Economic Community — Potential to unleash regional growth

While bilateral FTAs tap mutual advantages, greater gains can be had from pan-Asian RTAs. But best of all, as Dr Manmohan Singh suggests, is the creation of an Asian Economic Community, which would unleash the region's full growth potential.

AFTER India refashioned its famous Look-East Policy, attention is now being increasingly focused on translating this into the early launch of a pan-Asian regional co-operation group. Considering that New Delhi is not part of the principal regional trading arrangements (RTAs), other than the inconsequential South Asian Association for Regional Cooperation (SAARC), where its position is often viewed with suspicion by the junior members, it is time for India to pursue seriously the broader Asian integration plan.

No doubt, there is the Association of South-East Asian Nations (Asean) and the transcontinental Asia Pacific Economic Cooperation (APEC), which aim to contain such trade majors as the US and China. But the former group has lost interest in being part of the APEC because of the nonchalant attitude of the US.

While New Delhi still does not belong to any major RTA, it has entered into a couple of free trade agreements — comprehensive economic cooperation pacts with individual countries in the Asian region — to cash in on trade preferences and investment opportunities. But any sub-regional or bilateral attempts at regional cooperation, such as those under the framework of Asean and SAARC or the dialogue partners, though desirable, may not help in exploiting the entire potential of regional economic integration in Asia.

This is because, as Dr Nagesh Kumar, Director-General, Research and Information System (RIS) for the Non-Aligned and Other Developing Countries, explains, in a monograph, the extent of complement- arities is limited at the sub-regional levels because of analogous factor endowments and economic structures within a neighbourhood.

This is clear from the fact that trade patterns of Asean or SAARC countries with the East Asian countries is much larger than their subregional trade. This point was tellingly made by the Prime Minister, Dr Manmohan Singh, at the SAARC Business Leaders Conclave in Delhi on November 17, when he said that even after two decades, SAARC has not exploited the economic potential of this region as intra-SAARC exports are a mere 5 per cent of the region's exports.

By comparison, intra-EU exports are 55 per cent, intra-Nafta exports are 52 per cent and intra-Asean exports are 20 per cent. There may be limited trade expansion within SAARC, but it must be realised that this is entirely reversible if the SAARC FTA (SAFTA) comes into force from January 1, 2006, provided there is political will.

It is precisely for this reason that, of late, there has been a chorus voices from different parts of the region drumming up support for pan-Asian cooperation and integration. At the initiative of Thailand's Prime Minister, Dr Thaksin Shinawatra, the Asian Cooperation Dialogue (ACD) was launched in June 2002 at Cha-Am, Thailand. The Chinese President, Mr Jiang Zemin, launched the Boao Forum for Asia in 2001 at Boao, in Hainan province, as a pan-Asian economic forum. And the Prime Minister, Dr Manmohan Singh, too joined in by pitching for an Asian Economic Community, similar to the erstwhile European Economic Community (EEC) that has morphed into the EU.

Dr Singh contends that an Asian Economic Community combining Japan, the Asean countries, China, India and South Korea would prove to be an arc of advantage, across which there would be large-scale movement of people, capital, ideas and creativity. This seems an eminently sensible proposition because Asean and the other dialogue partners — Japan, Asean, China, India and Korea (the JACIK countries) — are all working to evolve FTAs among themselves, which is likely to lead to a pan-East Asian FTA.

Trade policy analysts, however, rightly contend that these bilateral or sub-regional FTAs do not exploit fully the potential of regional economic integration that stems from the considerable complementarities in factor endowments and levels of development. Thus, the vision of Asian economic integration by coalescing the FTAs among JACIK countries into an East Asian RTA.

RIS studies have found conclusive evidence of complementarities in the JACIK countries' production and trade structures. The trade policy liberalisation must be accompanied by additional measures such as freer capital mobility, harmonisation of Customs procedures and product standards and mechanisms to ensure a fair distribution of gains.

Trade liberalisation in the RTA framework can achieve efficiency gains worth $147 billion. When the RTA is combined with investment liberalisation and mobility of skilled manpower, the gains from integration add up to $210 billion, representing more than 3 per cent of the combined GDP of JACIK countries.

Experts also suggest that the trade and investment cooperation could be complemented by monetary and financial partnership for energy security and in core technologies. With some Asian giants sitting on foreign exchange reserves of billions of dollars, a part of this could be used to improve the infrastructure in countries where such facilities are inadequate, rendering the economies high-cost in terms of lost output.

RIS senior consultant Mr Ramgopal Agarwala and Associate Fellow Mr Pabir De, at a recent seminar on regional cooperation in Asia, pointed out that developing countries in Asia would need to spend an estimated $377 billion per year between 2006 and 2010 on roads, railways, airports, ports and electricity.

For India, they estimate an investment in infrastructure of $367 billion during 2006-10, against the estimated $215 billion during 2001-06. Malaysia has proposed the setting up of an Asian Infrastructure Development Fund to finance projects in the region and in next month's meeting this proposal might be included in the deliberations of the East Asia Summit being hosted by that country so that the grand concept of regional projects such as Asian Railway, Asian Highway, Asian satellites and Asian information infrastructure could become a reality.

When the Asian Energy Ministers met in January 2005 in India, they agreed to step up cooperation in this crucial area, as India, China, Japan and Korea are highly dependent on imports. There was a suggestion to build an Asian Strategic Petroleum Reserve and to foster an Asian Emergency Response System. The time is ripe for initial steps in this direction.

As Dr Manmohan Singh heads for the East Asia Summit in Kula Lumpur next month, he has reason to feel proud because through East Asian solidarity, his visions of an Asian Economic Community could be accomplished, even as the nitty-gritty of its structure, leadership and members remain to be worked out.

The emerging Asian Economic Community, as a distinctive bloc, would be a counterweight to the proliferation of RTAs and other regional powers holding sway in the world today. India's proven potential in software and information technology could be welded to the manufacturing prowess of the East Asian countries to energise the economies of the region and unleash growth that has been hobbled far too long.

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