Way Forward

Recovering from the 1997–98 financial crisis, East Asia is again the most dynamic growth center of the world economy. This paper has emphasized that the East Asian economies have achieved strong economic interdependence through market-driven integration with the global and regional economies. Expansion of foreign trade, direct investment, and financial flows has created a naturally integrated economic zone in East Asia. Reflecting rising economic interdependence and in response to the traumatic experience caused by the crisis, East Asia has embarked on various initiatives for economic regionalism, including bilateral and plurilateral free trade agreements and regional financial cooperation. These efforts are designed to complement the global frameworks governed by the World Trade Organization (WTO) and the International Monetary Fund (IMF).

The paper has outlined the major challenges for the region. First, regional trade authorities need to consolidate multiple, overlapping FTAs into a single East Asian agreement— particularly among the sixteen East Asia Summit (EAS, or ASEAN+6) countries—with the Association of Southeast Asian Nations (ASEAN) as the regional hub so that negative “noodle bowl” effects are minimized and “deep” integration, with many “WTO-plus” elements, can be achieved. This will be a basis for East Asia’s global integration—i.e., achieving coherence of rules (including ROOs), standards, and procedures across countries in the region, maintaining consistency with the WTO framework, and eventually integrating with North America and Europe. Linkages with North America and Europe can be strengthened through the strategy of setting up ASEAN+1 FTAs with these two blocks and integrating them with the EAS (or ASEAN+6) process. This strategy clearly requires a substantial progress of ASEAN economic integration through ASEAN Economic Community building.

Second, the regional economies must make greater efforts to strengthen regional financial cooperation—the reserve pooling arrangement (Chiang Mai Initiative [CMI]), regional economic surveillance (Economic Review and Policy Dialogue [ERPD]), and Asian Bond Markets Initiative (ABMI) under ASEAN+3. Once the region achieves substantial enhancement of the CMI through further enlargement, full multilateralization, and meaningful reduction in its IMF linkages, and once the region strengthens its capacity to formulate independent adjustment policy—through its own secretariat—in the event of another liquidity crisis, East Asia will have effectively established its own monetary fund that can contribute to regional, as well as global, financial stability without creating fears of moral hazard. For this purpose greater collaboration between the region’s finance ministers and central bank governors will be required. Greater coordination and harmonization will also be necessary among the region’s financial supervisors and capital market regulators.

Third, the regional financial authorities need to strengthen exchange rate policy coordination—starting with the joint monitoring of regional exchange rates based on an Asian Currency Unit (ACU) index and the adoption of a currency basket arrangement based on the G3-plus currencies (US dollar, euro, and ACU). Greater political support for economic policy coordination could eventually lead to further institutional integration capable of supporting intraregional exchange rate stability. For this purpose substantial convergence will have to be achieved across countries in the region in terms of economic, financial, and structural conditions, performance, and policies.

Finally, various economic groups existing in East Asia—ASEAN, ASEAN+3, EAS (or ASEAN+6), Asia Pacific Economic Cooperation (APEC), and the Asia-Europe Meeting (ASEM)—will continue to play their own specific and complementary roles. But whatever regional economic architecture will emerge out of this complexity, the political economy dynamics in East Asia will continue to require an integrated ASEAN as a hub for East Asian economic cooperation. Not only could the East Asian integration process be multi-track and multi-speed, it will also utilize a pragmatic, step-by-step, and bottom-up approach, rather than focus on conceiving and implementing a comprehensive grand design, as was done in Europe. This “variable geometry, flexible borders” approach will eventually shape the form of a future East Asian economic architecture.

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