Asian integration: large hurdles still remain

Updated: Jun 30 2006, 05:30am hrs
The Asian Development Banks (ADB) recent meet in Hyderabad raised the pertinent issue of agglomarisation of Asian economies finally culminating in an Asian Free Trade Area. Another important issue which came up was the formation of the Asian Monetary Union with a common currency, on the pattern of the European Union (EU). Both the proposals converge into one tall objectivean Asian Economic Union (AEU). AEU would like to achieve a uniform trade policy and substantial reduction in tariff rates, free movement of goods, services and fina-ncial resources, common exchange rate polices, alignment in monetary policies and interest rate structure and full capital account convertibility.

When the EU was formed, targets were fixed for reduction in the government fiscal deficit-GDP ratio, inflation rate and debt to GDP ratio. These had to be achieved by each member. Can Asian countries, with their diverse levels of economic development, varying per capita incomes, competitive exports, complex political and border disputes and deep cultural differences constitute a viable economic union

The EU consists of countries with homogeneous characteristics and the same social and religious fabric. On the basis of a few bilateral trade agreements, we cannot dream of an AEU. We need economic assessment of these agreements. Asia, for long, has had Asean, Asian Clearing Union (ACU), the Bangkok Agreement and Saarc, but nothing concrete has been achieved. Of course, Asean intra-trade has increased rapidly because of their domestic policies and efforts to improve their economies. ACU was designed to promote a facility to settle, on a multilateral basis payment, international current transactions among members, help economise the use of participants foreign exchange reserves and, thereby, contribute to expansion of trade and economic activity among countries of the region.

ACU could not achieve even one of these objectives, owing to regional rigidities and domestic interests, forex reserve bottlenecks, non-existence of monetary alignment and weak harmonisation of social and cultural characteristics.

An Asian Economic Union will mean a uniform trade policy, reduction in tariffs
But can Asian countries with diverse economic indicators come together
They will need to overcome many hurdles in order to integrate successfully
Asia can think of an Asian Monetary Fund on the lines of the International Monetary Fund to finance the current account deficit within the Asian region. This is possible as Asia has accumulated over 40% of the worlds foreign exchange. Another point to consider is the effort made by Asian nations to maintain balance in trade by encouraging exports of countries that are facing current account deficit within the proposed Asian Union members. Unfortunately, there are many ifs and buts in agreements on free trade.

Take the proposed Indo-Asean FTA, with a negative list of 800 items presented by India. These are the items in which some Asean members are competitive and would also prepare their negative list.

As for the AMU, this type of integration will have to subordinate the goals of monetary policy to the goals of the AMU. But Asian countries, with divergent domestic monetary polices, would like to maintain the freedom of monetary management to avoid shocks to domestic economies, resulting volatility in exchange rates and instability of other real economic variables. Asset portfolio allocations and financial markets integration will impose harmonisation of legal amendments and uniform accounting standards also.

Asian nations will have to introduce institutional reforms in financial as well as real sectors. For instance, industrial controls, control on movement of goods and services within the country, price controls in the areas of infrastructure and other services will have to be removed. Governments of member-countries should withdraw from economic activities. Moreover, the labour market should not be subjected to any control and imperfection. There should be free movement of labour across borders.

Asian countries will have to cross innumerable hurdles to achieve successful integration. The task of having an Asian Union seems Herculean. However, given the fulfillment of commitments to integration, major gains would occur not only from changes in the level of imports, but also from higher investment, increased competition, better use of economic resources, and economies of scale due to an enlarged market.

The writer is former economic advisor, Sebi