ASEAN+6 is optimal for Asian integration

India must allocate requisite intellectual and other resources to further the grouping

Mukul G Asher
Professor of Public Policy, National University of Singapore
Rahul Sen
Fellow, Institute of Southeast Asian Studies, Singapore

There is widespread consensus that Asia’s weight in global affairs will increase significantly in the 21st century.

The major contributing factors are India and China’s rapid economic growth; Asia’s favourable demographics, growing technological competence and increasing importance of its outward foreign direct investment and portfolio flows.

These are underpinned by emergence of Asian MNCs and sovereign wealth funds aiming to generate higher returns from globally diversified portfolios.

Asia’s growing weight, however, requires an institutional framework for economic and security cooperation comprising all the major economies. Much of Asia’s economic integration has been market-driven, and this process is likely to continue.

Nevertheless, Asia will increasingly need to depend on its own resources, expertise and economic diplomacy to ensure that competition among major countries does not become excessive and adversely impact the potential for mutually advantageous cooperation.

In spite of significant differences in level of development, growth strategies and in political and business organisations, Asia faces significant environmental, demographic, energy security, governance and other challenges.

An institutional forum where Asia-wide issues can be discussed in a constructive manner can help address the above challenges through mutual learning, knowledge-sharing and minimising free-rider problems.

Europe and the Americas have had considerable experience in developing institutional framework for cooperation in their respective regions.

Asia however will need to develop an institutional structure which is suited to its large population and, considerable heterogeneity.

In the debate on the institutional basis for Asian economic integration, two contending frameworks have emerged. The first is the ASEAN+3 grouping comprising 10 members of the Association of Southeast Asian Nations (ASEAN) plus China, Japan and Korea.

The second grouping is ASEAN+6, comprising all the countries in the first grouping plus India, Australia and New Zealand. The last two countries, along with Japan and Korea are members of the Organisation for Economic Cooperation and Development (OECD), a Paris-based group of 30 industrial countries, which are also reaching out to important developing countries such as China and India.

The ASEAN+3 grouping has had an early start in economic cooperation, largely spurred by the 1997 financial crisis. There is also an erroneous perception that there is a degree of cultural homogeneity among ASEAN+3.

However, a deeper analysis would suggest significant ethnic, religious and other socio-cultural differences and rivalries among them.

Trade and investment integration among the ASEAN+3 grouping has been primarily based on export-oriented division of labour in the electronic sector; and offshoring of selected manufacturing activities to Southeast Asia and China by Japanese, Korean, Hong Kong and Taiwanese firms.

In the current phase of globalisation, however, the dynamics of economic integration have changed both qualitatively and quantitatively.

While manufacturing activities are not unimportant, the value added in each location is relatively low in relation to gross trade flows and output, giving a misleading picture of the impact of trade in manufacturing.

In 2005, total global merchandise trade as a percentage of GDP was 23.3%, while the corresponding share for services was 5.5%. The value added at offshoring locations per unit of output is likely to be higher for services than for goods.

Increasingly, services trade, manpower flows particularly at the upper and lower end of the skills, and financial flows are essential in assessing and expanding economic linkages and integration.

This is being recognised in the bilateral preferential economic agreements which have proliferated in Asia and elsewhere, though the progress on the ground in including these aspects has been slow.

These aspects are particularly relevant for India has studies have shown that if they are included, India is already far more intricately integrated with the rest of Asia than has commonly been perceived or acknowledged.

Such analysis incorporates the overall value chain division defined to include research and development, physical production, distribution, customer servicing and feedback, and contribution of India’s manpower and its diaspora.

Research studies, e.g. by Masahiro Kawai of Asian Development Bank Institute (ADBI) in Tokyo and Nagesh Kumar of RIS in Delhi have found that ASEAN+6 integration yields far higher welfare benefits and efficiency gains while minimising the losses to non-members as compared with the ASEAN+3 grouping.

The ADBI study strongly suggests consolidation of bilateral and regional economic agreements to avoid the noodle-bowl syndrome; and for ASEAN to vigorously pursue greater economic integration.

For India, it rightly suggests that domestic reforms and lowering of transaction costs of doing business should continue if it is to fully benefit from its strategy of calibrated globalisation with social cohesion and inclusion.

It is instructive that Japan’s policies are already reflecting the research findings that ASEAN+3 is sub-optimal grouping.

Thus, a 2007 White Paper on international economy and trade by Japan’s ministry of economy, trade and industry has proposed comprehensive economic partnership in East Asia comprising ASEAN+6 countries.

Japan’s initiative to establish an OECD-type Economic Research Institute for ASEAN and East Asia should therefore focus on high quality analytical studies including sectoral studies and strengthening of the statistical base relating to ASEAN+6 countries.

This can help lay firmer foundations for institutionalising ASEAN+6 economic integration. India must allocate requisite intellectual and other resources to further such integration through strategic public-private cooperation.