As the sun sinks on Europe, the future is bright for Asean

Such was the  powerful conclusion of the Distinguished Speakers Seminar held by the Asian Development Bank Institute in Tokyo in November.

Since late 2009 the European debt crisis has not shown any sign of recovery.

For several reasons, the policy responses have been wrong. The mother of all mistakes may lie in the policy options to provide ¤110 billion to bailout Greece under a new austerity plan.

There were two major flaws in this policy. First, it violates the no-bailout clause in the European Central Bank 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.

Roughly 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 in terms of global growth.

Meanwhile, Asean is fuelled 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 per cent, but in 2010 the figure swelled to 25.2 per cent.

If we expand the coverage to include Asean plus three neighbours (China, Japan and South Korea), the intra-regional trade figure is becoming more robust.

In 1990, it had already reached 47.2 per cent, and leapt to 58.4 per cent over the next decade.

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.

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-per-cent decline of Asean+3’s intra-regional trade, from 49.9 per cent in 1997 to 47.2 per cent in 1998. But in 1999 this bounced back well to 49 per cent, followed by 51.4 per cent in 2000. This figure gave a big boost to East Asian countries’ recovery from the first crisis.

The second crisis, in late 2008, also caused regional trade imbalances in Asean+3 countries with total exports and imports falling 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, which experienced a hike from 55.8 per cent in 2008 to 58.4 per cent 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 across the region.

Looking into the future, based on Asian Development Bank projections, in 2030, per-capita GDP will reach US$9,012 for Asean, US$12,361 for China, US$40,415 for Japan and US$41,674 for South Korea.

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

The first of these is infrastructure. Studies on economic growth confirm the importance of infrastructure in creating greater room for the region to evolve. 

The second is industrialisation. A one-point rise in the industrial index will most likely increase the tendency of economic growth by 0.04 per cent. 

The third is population. Population is regarded as the most important variable that serves as a foundation for strong growth. 

A 1-per-cent increase in the total population will increase the likelihood of regional growth by 0.86 per cent.

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 labour and low absolute level of wages.

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

To wrap up, Asean+3 needs to work to ensure that countries lagging behind within its region 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.