international analysis and commentary

And the winner is… East Asian integration!

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With the world clawing back from the deepest global economic crisis since the Great Depression, the time is coming to assess whether anyone has gained from the wreckage caused by the bursting of asset bubbles in several countries. And besides the well-known cases of emerging economies such as Brazil and China and some developed countries including Australia and Germany, there has been an unlikely winner: East Asian integration. Derided for most of the last decade due to a shortage of formal institutions, a lack of enforcement mechanisms, and an apparent unwillingness to tackle difficult issues, East Asian integration has been invariably criticised for its shortcomings when compared to European institutionalized relations. However, East Asian integration has gained ground thanks to the current financial crisis. In contrast, European integration seems to have weakened as a result of global and regional economic problems.

Whisper it quietly in Tokyo, Seoul or Singapore, but one of the main reasons behind strengthening East Asian cooperation has been the level-headed behaviour of the Chinese government throughout the crisis. Most notably, China did not devalue the yuan to make its exports more competitive. This would have had a negative effect on other economies in the region by making Chinese products more competitive at a time when demand from the US and the EU was shrinking. Instead, between 2008 and 2010 Beijing introduced a $586 billion stimulus package. Even though the package was primarily designed to increase domestic demand, other East Asian economies benefitted as well. Throughout 2008, manufacturers and suppliers of raw materials in countries such as Indonesia, Japan, Malaysia and South Korea reported that their production rates had returned to pre-crisis levels thanks largely to new demand coming from China.

Beijing’s decision not to devalue the yuan and to introduce a stimulus package indirectly contributed to increasing regional integration. The Chiang Mai Initiative directly did. A currency swap agreement involving the ten members of ASEAN plus China, Japan and South Korea first devised in 2000, the Initiative was institutionalized in March of this year, when a $120 billion multilateral currency swap facility entered into force following the Chiang Mai Initiative Multilateralisation Agreement signed in December 2009. The 1997 Asian financial crisis had spurred a series of bilateral swap arrangements. Under the Chiang Mai Initiative, these arrangements were aimed at helping East Asian countries with liquidity problems to avoid relying on IMF bailouts in the future. The 2008 global financial crisis was the catalyst for the formalization of the Initiative in the form of a swap facility. Designed to assist ASEAN+3 members with short-term liquidity problems, the facility relies heavily on Chinese and Japanese capital, with each country contributing 32% of the total funds. The significance of both countries deciding to join a multilateral facility rather than relying on bilateral agreements cannot be overstated. It means that China and Japan have taken a concerted decision to relinquish influence over the economies of neighbours experimenting financial problems. Many would have thought such a decision impossible only two years ago. Japan in particular has often been accused of seeking to help the expansion of its companies in the region through its aid policy and the work of the Asian Development Bank. The decision by Tokyo to join this swap facility should reduce these criticisms.

A second reason behind growing integration and cooperation in East Asia is the economic dynamism of the region, which has not suffered from the crisis to the extent that other parts of the world have. Regional trade and financial links have been growing exponentially since the end of the Cold War. Today it is a common sight to find a Japanese car factory in Thailand, a South Korean mobile phone company manufacturing handsets in Vietnam, or a Singaporean software producer engaged in a joint venture in China. This last country has become the centre of regional production chains that increasingly generate manufactured goods which stay in the region rather than being exported to the US or the EU. Economic integration has been further reinforced during the crisis. Regional trade as a percentage of total trade has increased for almost all countries in East Asia. Most of them entered the crisis expecting the American consumer to come to the rescue of their companies. Instead, it has been the growing middle classes in the region who have thrown a lifeline to manufacturers faced with declining or stagnant exports to the West. This has increased incentives for governments to increase political cooperation to reduce the risk of any spat that may affect economic links.

In contrast, European cooperation has suffered as a result of the financial crisis. It is true that dissatisfaction with the European integration project preceded current economic troubles, as voters in France and the Netherlands showed in 2005 by rejecting the European Constitution. However, the financial crisis has shown the extent of integration fatigue, which has now reached the elite level as well. Rather than trying to prop up their economies in unison through a coordinated stimulus package, EU members have been left to fend for themselves. Nowhere has this been clearer than in the cases of the Greek, Hungarian and Latvian bailouts. Without the intervention of the IMF, these bailouts would have probably never been implemented. Much like Indonesia, South Korea and Thailand had to tap on the IMF during the 1997 Asian financial crisis, Greece, Hungary and Latvia could not rely on their fellow EU members to solve their liquidity problems. A coordinated response did not come until May of this year, when the European Financial Stability Facility was set up by the sixteen members of the euro area. However, the facility will only offer loans to countries agreeing to introduce previously approved fiscal adjustment measures and structural reforms. Differently, the Chiang Mai Initiative currency swap facility does not impose any conditions on countries making use of its funds.

The economic crisis which the world is starting to leave behind is not going to suddenly make East Asia more integrated and cooperative than the EU. There is little appetite for accelerating political institutionalization among Asian leaders. And the EU still remains the most institutionalized regional grouping in the world. Nevertheless, East Asian integration has gained from the crisis more than most would have expected back in 2008. China and Japan have shown their willingness to delegate to multilateral institutions they do not control. Economic dependence on exports to the West in exchange for inward investment has been weakened, accelerating a pre-crisis trend. After almost two decades of receiving lectures on how East Asian integration should follow European parameters, leaders in the region can now point out that institutionalized cooperation does not necessarily produce better outcomes. Hence, expect East Asian integration to continue once the crisis is truly over. Just do not expect it to take a European form.