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"An Inquiry on the Future of Asia"

May 26, 2005

Dr. Thanong Bidaya
Minister of Commerce, Thailand

Excellencies,
Distinguished guests,
Ladies and gentlemen,

It is a great pleasure for me to address this gathering. This is in fact my second appearance after more than 5 years. In my first presentation, I talked about the crisis hit economies of Asia and how Thailand was preparing her economic recovery plans. At that time, I also listed some problems and issues associated with Asian integration. So today, I will discuss with you my inquiry on the future of Asia. Given the available time, I will attempt to arouse your awareness of the future globalization process and in the later part discuss the future of our continent.

The way we were.

Things are much different nowadays than it was in the 60's. The US economy was in a much better shape then than it is today. Japan's economic power was gaining in strength, recording the highest growth rates in the world. European economies were pushing hard for future integration, while ASEAN was still at an early stage of development and was not much relevant in setting a regional economic agenda. During the period, Thailand had just started its development process under the First National Economic and Social Development Plan, primarily focused on investments in infrastructure of its mainly agriculture-based production.
China was a centralized economy while India was interested more in looking inward rather than outward. Few people, if any, could have imagined the effects of "globalization" on our economies today. The information technology revolution was rather a fiction. Those were the years long before the "Star Wars" saga came on the Hollywood screens.
It seems such a long time ago.

Globalization and Asian's discontents.

Effects of globalization in the last two decades were the results of interactive forces of three geopolitical camps namely, the US, Euro and Asia. While Asia maintained a subordinated role, the European Community strengthened itself to rival the US economic supremacy.
Successful integration of European economies and the creation of the Euro currency in the nineties had in fact significantly caused a new global financial trade and investment structure. During that period, Asia was struggling to recover from the financial crisis and had quietly transformed itself to become the largest production base in the world with China emerging as the highest growth economy. Asean and Japan also recovered from the financial crises well enough to regain their economic strength.

It is particularly interesting to observe that the entrance of China into the WTO and China's rapid trade expansion has induced large flows of investments from all over the world. China's entrepreneurial capability developed over the past three thousand years, together with its low wages and technological competence, have lead the way in its economic restructuring. As a new, open market economy, China has quickly become an economic leader in the region. Together with this phenomenon, two more socialist economies, India and Russia have also joined the race for high economic growth as new emerging economies. In the next decade, I believe that the new global economic structure can be divided into two big groups; the advanced economies namely the US, EURO and Japan and the big three emerging economies namely China, India and Russia. Asean and other economies will probably be squeezed in between and their economic faiths will very much depend on future interactions between these two groups. Asean inevitably will have to adjust their economic and trade policies to cope with the new economic scenario.

The Present Status of Asian Economy.

Let's look at some facts at what really have become Asia's interesting possessions:

• Asian population is 36.2 Billion or equivalent to 60.6 percent of the world population.

• Asian countries' foreign currency reserve is 2.5 trillion US$ or equivalent to two-thirds of the world foreign reserves (in 2004).

• Asia accounts for 26.9 percent of world export, and 24.1 percent of world import.

• Last November, there were 78 ongoing trade negotiations, 30 within Asia and a further 22 involving Asia.

• Asian countries destination account for 20.6 percent of world FDI.

• Over half of the growth in the production of motor vehicles in the next decade will come from Asia.

• India is a major player in business process outsourcing (BPO).

• Motorola, Boeing (such as 787 Dream liner Jet) and Palm PDA (such as Palm One model) have engaged in some outsourcing of innovation to Asia, utilizing Japan's advanced technology, Taiwanese engineers, Indian system designers and Chinese factory for part production.

• Japanese "Manga" comics, Thai food and Korean Movies have proliferated to all corners of major cities on the globe.

These are just a few examples but I think they all point to the future of Asia, whereby Asia will definitely have a more prominent role to play in the global production, services, consumption, investment, innovation, arts and culture, and even in world politics.

A rocky road to the Future.

Despite these trends and prospects, there are still many weaknesses and missing pieces of jigsaw which we have to correct and reconcile in order for Asia to progress to our promising future.

I would name a few important ones.

Firstly, Asian market is not yet fully integrated. Despite the aggregate figures which show the significance of Asia in terms of market for products and production base, Asia is not truly a single market. The level of integration is increasing through intra-regional trade and investments which links each country to a value chain of products, but they are still more or less separated markets. Since differences in rules, regulations and other non-tariff barriers still separated countries into individual markets, products could not easily be sold across the region, while production is unable to realize economies of scale.

Secondly, the level of development is uneven across the region. Massive pockets of severe poverty still exist in various member countries. The gap in per capita income, standard of living, and digital divide within the region, are also significant.

Thirdly, financial strength of the region is not as robust as its production strength. Financial markets in the region are less integrated than trade markets. Asian foreign reserves are invested in the western countries while development funds have to be raised from outside the region. In addition, despite a substantial combined foreign reserve, Asian countries are still vulnerable to changes in a few major currencies, which will affect the value of their currencies and economies.

Fourthly, there are still macroeconomic management issues which need to be well-managed such as a potential overheating of the Chinese economy, the flexibility of Chinese Yuen and the large public debt in Japan. Subsequently, the negative consequence of macroeconomic mismanagement will disrupt the short-to-medium growth potential of the region and could be a major hindrance to our future.

Lastly, the region still lacks a will to integrate. The US had gone through a civil war to achieve integration. The European took 50 years of determination to realize a single market. Although a vision has begun to emerge for economic integration, I think there is not yet enough consensus or political will to create momentum for such a Herculean task as regional economic integration.

Some constructive thoughts to be digested.

Let me suggest 3 important pillars:

First pillar, moving forward to economic integration. The region is now moving toward greater integration. Following on from AFTA, we are now working towards more integration through the current trend of bi-lateral FTAs and regional trade arrangements such as ASEAN+3, ASEAN-EU, BIMSTEC and other arrangements. However, these are just the first steps. Our goal should be to achieve a free flow of goods and services, capital and labor within the region. Some of the economic partnership agreements such as the Japan-Thailand Economic Partnership Agreement (JTEPA) and New Zealand-Thailand Economic Partnership Agreement involves the movement of certain professional personnel but these are still considered very limited efforts compared to our regional vision.

Thus, I think the vision of our Asian leaders to set a goal to achieve an Asian Economic Community (AEC) is in the right direction. In addition, the decision by the ASEAN+3 Economic Ministers to set up an experts group to conduct a feasibility study on the East Asian FTA (EAFTA) should be congratulated.

I think that the EAFTA is a good place to start considering that the global economic trend clearly indicates that Asia will become a high growth area, relative to other parts of the world. Furthermore, Asia, through the growth potential of China will continue to expand at a relatively fast pace and remain as the future growth engine of the world economy. In addition, ASEAN has successfully implemented the free trade zone namely AFTA where the scope of cooperation will continue to expand into new areas such as services trade and investment. Trade integration between members of AFTA, and between AFTA and the three East Asian countries namely China, Japan and Korea have substantially deepened. Thus, considering that we need to have a stronger and deeper economic, social, and political cooperation, trade is a natural starting point. The integration process had already existed to a certain degree and further integration could be developed and managed into a win-win situation. As a result, it is the least sensitive and most promising area.

In order to develop the EAFTA, I suggest that we consider the following approach:

• Select a limited group of commodities or industries for fast track implementation in order to create a learning process and consensus building within individual member countries.

• Allow preferential treatment such as a longer liberalization time frame for less developed members.

• Narrow the development gap. More advanced member economies should help less advanced member countries to develop faster through technical and financial assistances in the areas of human resources, infrastructures, and institutional building so that they can gain more capability to adopt free trade; similar to the GMS cooperation or Initiatives for ASEAN Integration (IAI).

Second pillar, preparing for financial integration. The Asian financial crisis of 1997-1998 has triggered intense efforts to promote regional monetary and financial cooperation to prevent recurrence of future crises. Recently, developing regional bond markets in East Asia has emerged as one of the key agenda for regional financial cooperation. The Chiang Mai Declaration on the Asian Bond Market Development was announced by Prime Minister Thaksin at the end of the Second ACD Ministerial Meeting in Chiang Mai in 2003.

After the set up of the first Asian Bond Fund (ABF1) worth US$1 billion, in June 2003, to invest in a basket of US dollar denominated bonds issued by Asian sovereign and quasi-sovereign issuers, the second Asian Bond Fund (ABF2) was set up, in December 2004, to invest in sovereign and quasi-sovereign local currency-denominated bonds issued in the member markets.

Developing regional bond markets in East Asia will enhance global financial stability as well as regional financial stability. Developing bond markets at the regional level as well as the domestic level will also reduce over-reliance on bank financing, which has been the main culprit of the Asian financial crisis

In the recent Annual Meeting of ADB in Istanbul earlier this month, the ASEAN+3 finance ministers agreed to double the amount of bilateral SWAP agreement between member countries from the existing US$40 billion. They also increased the amount which can be withdrawn without being under IMF program from 10 percent to 20 percent. This is a welcome sign that countries in this region committed to help itself in time of severe financial volatility.

We should never forget the Asian financial crisis in 1997 which had spread from an individual country crisis to a regional crisis. At that time, the US responded passively to the Asian Crisis, compared to the speed and effort which it had responded to the Mexican Crisis. In addition, the IMF conditionality was not appropriate to the crisis-effected countries because of the lack of true understanding of the situation and underlying economic condition. Other forums of cooperation such as APEC had played no significant role in solving the crisis. These lessons reminded us of the importance and necessity of a stronger regional cooperation.

I believe that, in the future, Asia will play a more prominent role in the world financial community. An Asian common currency would be in the distant future but I think that we should plan and push seriously ahead with the idea of an Asian Monetary Fund (AMF) which will provide surveillance, crisis-lending as well as crisis recovery prescription for Asian countries in crisis, and to work on an equal footing with the IMF.
We must use our foreign reserves for the betterment of Asia. Financial powerhouses in this region such as Japan, China, Korea as well as India should get serious in playing a leading and cooperative role in this regard.

Third pillar, creating political will and trust as well as proper mechanism to drive regional integration. I have noted that the region still lacks a serious will to integrate and that a proper mechanism for managing the transition is also needed. Without these important drivers, the vision of Asia cannot become a reality.

To create a political will and unity, we must work on both formal and informal channels. Thailand has started the informal channel namely the Asia Cooperation Dialogue (ACD) since 2002. The ACD initially started with 18 member countries. Today, its membership has grown to 28 countries representing more than half of the countries in Asia. We plan to host the first ACD Summit in the near future, where leaders will have the opportunity to exchange views and ideas on the ACD and to build confidence in the Asia initiative for our future.

Moreover, our task for building trust and confidence in regional integration must not only be limited to the political circle but must also expand to people in all walk of lives. Thus enhancing mutual understanding by increasing cooperation in non-economic fields such as social and cultural cooperation and people to people contacts such as exchanges of scholars and young people; meetings and field trips by politicians, bureaucrats, farmers etc. should be increased. Event such as this conference is a catalyst which will smooth and expedite the process of regional integration and also Asian's prosperity.

Excellencies,
Distinguished guests,
Ladies and gentlemen,

The future of Asia will be a lot different than today. Ironically, it may have some resemblances to a history long before our time. Before the steam engine was invented; before Columbus discovered the new continent, economic growth and civilization were rooted in Asia.
Economic wealth, intellectual wealth and cultural wealth of the world were driven by Asian countries particularly China and India and to a certain extent by other countries in the periphery.

I truly believe that Asia has a promising future and our decision for Asia's future will have a profound effect on global economy. It will require a lot of hard work and determination to achieve our goal.

I look forward for a new prosperous Asian century.

Thank

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.