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Channels of Convergence: Importance of Regional Economic Integration in the Asian Region

There are various dimensions that need to be understood clearly to put forth a strong rationale for development cooperation and regional economic integration in the Asian region. This section considers possible channels that could bring about convergence in development profiles of the countries in Asia. For additional discussion on this topic of means of bringing about convergence of economic differences in Asia, please see Das (2006).

Firstly, regional cooperation versus multilateralism has been a much-debated aspect in the present era of economic policy making. It has been contended that while absolute protectionism is reduced as a result of economic integration, relative protectionism against the rest of the world increases, thus the processes of regionalism and multilateralism should not be considered complementary (Elena Jose Antonio, and Jose 1999). In our view, this requires a different explanation. As absolute protectionism is reduced in a regional framework, ceteris paribus the overall protectionism in the entire world (including the region under consideration) would be reduced. Therefore, reduction in protection in a particular region would contribute to globalization and multilateral liberalization. To argue about the effects of regional liberalization on multilateral liberalization by excluding the region and comparing it with the rest of the world could be misleading.

Hence it is untrue that regional economic integration is not complementary to globalization. This realization provides a basis for strengthening development cooperation in Asia.

Second, a better understanding of concepts like trade creation and diversion also provide a rationale for regional trade cooperation in Asia. One of the arguments against regional groupings has been that regional trade cooperation may not necessarily bring about welfare gains, especially in the short run, due to their trade diverting effects. Trade diversion occurs when participating countries in a regional grouping are not low cost producers. In this sense, the grouping may be an efficiency-reducing arrangement. Due to regional trade liberalization the member countries acquire an advantage over the extra-regional countries in terms of lower product prices. A member country thus switches its imports from the more efficient rest of the world producers to less efficient and higher cost co-member countries. This results in resource misallocation and amounts to trade diversion.

However, it is often left out of the analytical debate on the subject that trade diversion in some products could lead to trade creation in other products over time. For example, if an intermediate product is cheaper in a member country and it is imported by a partner member country on preferential terms, it becomes even cheaper in the importing country, making the final product highly competitive in the country where the product is ultimately sold. The possibilities of trade creation in the final product increase, generating a forward linkage effect. Similarly, there could also be a backward linkage effect in the country producing the intermediate product. Thus, through these backward and forward linkage effects, trade diversion could lead to trade creation (Das 2006). This could be an important channel through which development convergence could be brought about.

Third, if properly formulated and implemented, rules of origin also provide a rationale for regional trade cooperation in Asia. Whether or not a product has originated in a particular country is decided if the product has undergone substantial transformation. It is rather well known that there are three prime ways of determining this. The three modalities of determining origin of a product aim at substantial transformation in inputs. They together facilitate value-addition in the country of manufacturing and play a developmental role. Such requirements, checking the import content of value addition, have the potential for generating backward and forward linkages in a country adhering to the rules. Thus, a member country is prevented from becoming a mere trading country as these requirements act as a deterrent to assembly production activities. This is yet another channel through which convergence could be envisaged.

Fourth, placing regional development and trade cooperation in a dynamic setting as opposed to a static framework also builds a case in its favor. In the literature on regional trading arrangements, the effects of removal of trade barriers in terms of export growth are analyzed in the context of static and dynamic gains. For instance, reduction in tariffs means greater market access to member countries, which manifests itself in export growth in a static setting. The scenario of a dynamic framework is different because, due to economies of scale which arise through enhanced market access, ultimately manufacturing gains cost reductions and improved product competitiveness. Short term static trade diversion effects, if present, are likely to be outweighed by the long term positive dynamic effects of regional integration in terms of increased competition, economies of scale, and benefits from intraindustry trade. The positive influence of regional associations on trade becomes even more pronounced if trade-investment linkages are also brought into the analysis (Das 2009). Thus considering a dynamic model of manufacturing gains from increased regionalism provides another avenue through which development and growth convergence could be sought.

Fifth, the relevance of cooperation among developing countries also arises from the replicability of the development experiences of one country in other co-developing countries. Cooperation among developing countries is part of a solidarity building partnership for development rather than development assistance or aid. In the process of development, developing countries accumulate valuable lessons, skills, and expertise that can be valuable for other developing countries. These skills and capabilities, including technologies, are often more appropriate than those available from industrialized countries due to the shared developmental challenges similar among developing countries. Kumar (2008a) offers a discussion of how skills and technologies used in one developing country are also appropriate for other developing countries.

Finally, a rationale for cooperation specific to Asia also needs to be highlighted at this stage. A more important stimulus for regionalism in Asia seems to have come from the emergence of Asia as a source of final demand. India and the PRC with their large populations have become powerful drivers of world economic growth, enabling Japan, the second largest economy in the world, to recover from a decade-long recession. Asia is quickly becoming the center of gravity of the world economy and India and the PRC are projected to become the two largest economies in the world. For many products, from jet planes to motor cars to mobile telephones, the biggest markets are in Asia. More than 55% of Asia's trade is now intraregional, thus making regional economic integration an increasingly viable trade strategy (Kumar 2007). Furthermore, regional economic integration could also help Asia exploit the profound synergies that have developed between the economic structures of Asian economies. For instance, the growing scarcity of labor in Japan and the Republic of Korea is complemented by labor abundance in Southeast and South Asian countries. Similarly, some Asian economies are focused predominantly on manufacturing and hardware capabilities while others have complementary capabilities in software and services. Already regional production networks have begun to be developed across Asia to take advantage of these synergies through vertical specialization. Regional economic integration could help in exploiting the potential for such rationalization or restructuring more fully and in expediting its development for the benefit of all. These are also reflected in other studies like Kesavapany (2005) and some of the CGE estimates by Kawai and Wignaraja (2007) and Das, Edisuriya, and Swarup (forthcoming).

The reasons outlined above set the context in which some policy suggestions aiming at narrowing the development gaps in Asia are put forth in the following section.

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