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Alphabet Soup, Asian Style: The Prospects for East Asian Economic Cooperation

By Jean-Marc F. Blanchard, Ph.D

In August 1997, Japan astounded the international policy community when it announced a proposal to create a $100 billion Asian Monetary Fund (AMF) to stabilize exchange rates in the region. Although the AMF proposal died as a result of pressure from the United States, China, and the IMF, the idea of Asian monetary cooperation persists. For example, in May 2000, at the Asian Development Bank (ADB) meeting in Chiang Mai, Thailand, Finance Ministers from the Association for Southeast Asian Nations (ASEAN) and China, Japan, and South Korea (ASEAN+3) decided to create a network of regional currency swap arrangements and associated surveillance and monitoring mechanisms. These agreements began to take concrete form last year when multiple countries signed swap arrangements, some with ceilings as high as $3 billion. These eye-catching initiatives parallel plans by China and Southeast Asian countries to form a Free Trade Area, ongoing subregional economic development projects such as the Tumen River Area Development Programme (TRADP), and ASEAN+3 efforts to regularize meetings among finance and trade officials, improve cooperation in investment, and so on.

The success or failure of these initiatives is of great relevance to investors, currency traders, lenders, and other economic stakeholders in the region. First, if these arrangements reduce trade barriers and promote growth, then they can create new opportunities for companies exporting to the region and for foreign direct investment. Second, any effort to further standardize procedures, improve transparency, and eliminate red tape will be welcomed by those hoping to reduce the costs and risks of investing, holding local currencies, and lending to parties in the area. Third, if these ventures help to stabilize the political situation in the region, then they foster an overall climate more positive to business. Despite this, it needs to be recognized that successful East Asian regional economic integration may be sour as well as sweet for outsiders if such arrangements protect any lingering discriminatory structures, sustain bad governmental policies, or give East Asian states the political wherewithal to oppose new global economic cooperation initiatives.

What are the prospects for the aforementioned economic cooperation ventures as well as other initiatives like the Asia-Pacific Economic Cooperation (APEC) Forum, the ASEAN Free Trade Area (AFTA), and Northeast Asia Development Bank? In the near-term, it is difficult to conclude that they are anything but dismal. The record of East Asian regional economic cooperation–littered with failures like Japan’s 1967 Pacific Free Trade proposal and the 1997 APEC’s Early Voluntary Sector Liberalization initiative–certainly does not give cause for optimism. Nevertheless, the past need not be prologue. Indeed, in the longer run, absent a conflict in the region or the collapse of a state like North Korea, the prospects for growth and deepening of regional economic arrangements in the region are positive.

In the near-term, the prospects for meaningful progress in regional economic cooperation are low for five reasons, some relating to "demand" factors and others pertaining to "supply" factors. First, there is an absence of a pressing threat, either political or economic, that might create an imperative for cooperation in the realm of economic affairs and/or generate the political will to make concessions. Second, global economic institutions such as the WTO, IMF, and World Bank have attempted to reform themselves so they are more responsive to East Asian needs. Third, the economic situation of many East Asian actors (e.g., Hong Kong, Japan, and South Korea) limits the amount they can contribute to multilateral cooperative projects. Fourth, certain national elites and politically powerful domestic actors continue to oppose deeper regional economic cooperation because it might prove intrusive (e.g., to government officials in China and Malaysia) or impose economic costs (e.g., on agricultural groups in Japan). Fifth, contemporary domestic political instabilities continue to consume the attention of policymakers in countries such as Indonesia and the Philippines.

In contrast to other analysts, I do not view an absence of a dominant state or dominant leading coalition of states as a central cause of East Asia’s inauspicious regional integration prospects. Historically, dominant states have harmed as well as hurt regional economic cooperation ventures. In addition, there is no definitive evidence to support the claim that they play an irreplaceable role in the process of regional economic integration–i.e., problem identification, the rejection of old methods of dealing with problems, the specification of policy options, and the ratification of agreements. I also do not accept the view that political, economic, cultural, religious, ethnic, and other regional divergences present insurmountable hurdles to East Asian regional integration. After all, putative "differences" often disappear in the face of international and domestic politico-economic exigencies. Moreover, a variety of factors–e.g., a general, albeit in varying degrees, acceptance of Western liberal economic policies–suggest the number of potential cleavages in the region is diminishing, etc.

Over the longer term, the prospects for deeper regional economic cooperation are brighter, although successful integration is hardly preordained. For example, the continuing need for new sources of economic growth and increasing East Asian economic interdependence should generate support for deeper regional economic arrangements. Furthermore, the ongoing development of civil society and regional non-governmental organizations in the area should create new sources of pressure for regional economic integration as well as entities that can highlight the need for and value of regional economic arrangements. Finally, although the value of particular East Asian institutions (e.g., ASEAN) obviously ebbs and flows, East Asian foreign policy elites appear to have learned that multilateral institutions are an essential part of statecraft in the region, which limit the potential for backtracking.

Undoubtedly, the Korean peninsula tinderbox, uncertainties in East Asia’s maritime scene, and frictions among China, Japan, and the US inter alia all have the potential to obstruct the development of East Asian regional economic integration. Nevertheless, these strategic concerns remain in the background at present. Hence, it behooves us to pay greater attention to the aforementioned factors and the ways in which they may heat or cool the alphabet soup of economic institutions in this important area of the world.