Introduction: Key Issues

The Asian financial crisis of 1997–98 devastated the economies of Thailand, Indonesia, Malaysia, and the Republic of Korea (hereafter Korea) and adversely affected several neighboring economies such as the Philippines and Hong Kong, China. The crisis was a combination of currency and banking crises. The currency crisis was a capital account crisis, driven by rapid inflows and outflows of short-term capital. The banking sector had played a critical role in intermediating excessively large amounts of domestic savings as well as foreign short-term funds for long-term domestic investment, often with dubious quality in such areas as real estate and property, thereby creating potential for bad loans that later led to a banking crisis. Essentially, the forces of financial globalization together with inadequately supervised domestic banks—and financial systems more broadly—generated the Asian financial crisis.

One of the most significant outcomes of the crisis has been the emergence of economic regionalism in East Asia. The crisis prompted the regional economies to realize the importance of strengthening regional self-help mechanisms in a concerted way. For example, the Association of Southeast Asian Nations (ASEAN)+3 countries—comprising the ten ASEAN member countries, the People’s Republic of China (PRC), Japan, and Korea— have begun to undertake initiatives for regional economic surveillance, a regional liquidity support facility, and Asian bond market development. Regional financial cooperation has stimulated regional trade and investment cooperation in the form of free trade agreements (FTAs): Japan and Singapore implemented an economic partnership agreement (EPA), ASEAN+PRC and ASEAN+Korea each implemented an FTA on trade in goods, the ASEAN+Japan Comprehensive EPA has been agreed upon in principle, and many official negotiations for bilateral and plurilateral FTAs—such as a Japan and Korea EPA, an ASEAN+Closer Economic Relations (CER, i.e., Australia and New Zealand) FTA, and an ASEAN+India FTA—are currently underway.

Several groups have been set up to facilitate East Asian economic regionalism. In the financial and monetary area, the ASEAN+3 finance ministers are active in pursuing financial cooperation while the Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP) governors—comprising nine East Asian economies and two Oceanic countries—have played a critical role. In the trade and investment area, ASEAN has been the de facto hub while ASEAN+3 and the East Asia Summit (or ASEAN+6—including the ASEAN+3 countries, Australia, India, and New Zealand) are emerging as important larger groups. East Asia also works with North America through Asia Pacific Economic Cooperation (APEC) and with Europe through the Asia-Europe Meeting (ASEM) on economic and financial issues. Hence, it is important to explore how East Asian economic regionalism might evolve over time and how it might reshape the region’s relationship with North America and Europe.

This paper first reviews the surprising extent of regional economic integration that has progressed through international trade, foreign direct investment (FDI), and finance and of regional macroeconomic interdependence. Next, it assesses the past and present economic cooperation initiatives in East Asia in the areas of trade and FDI and of money and finance. The paper then analyzes the issues and challenges for closer economic regionalism—or greater institutionalization of regional economic integration—in East Asia that can potentially lead to the creation of an East Asian economic community. It is argued that deeper economic integration in trade, investment, and finance and further institutionalization of such integration are mutually reinforcing. East Asia can use its economic regionalism as an engine of deeper global integration.

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