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Tuesday, Dec. 30, 2008

Making nice in Asia during a global slump


Special to The Japan Times

SINGAPORE — Global financial dislocation and the economic slump are putting Asian regional cooperation to the test. They also appear to be shaping somewhat different responses in Northeast Asia and Southeast Asia. The latter, which formed the Association of Southeast Asian Nations way back in 1967, has a big head start in institutionalizing collaboration and recently signed a charter that makes the group a legal entity for the first time. Northeast Asia has no organization equivalent to ASEAN.

But that may change if relations among China, Japan and South Korea continue to improve and the wider six-nation talks, chaired by China, succeed in persuading North Korea to abandon its nuclear-weapons program and focus instead on economic development and poverty alleviation. These are big "ifs," given the historical and territorial conflicts that bedevil ties among Northeast Asian economies.

Still, China, Japan and South Korea took a significant step forward in improving relations at their first-ever three-way summit in Fukuoka, Japan, on Dec. 13. (They agreed to make it an annual event.) Leaders of the big three have been getting together fairly regularly since 1999, but only on the fringes of other meetings, usually the annual ASEAN summit.

Given the barely veiled rivalry between them, it has suited the Northeast Asian trio to let ASEAN take the initiative in wider community building in the region. ASEAN's scope for leadership in regional initiatives may be constrained if tripartite cooperation in Northeast Asia continues to improve.

The potential clout of China, Japan and South Korea far outweighs that of Southeast Asia. Together the trio accounts for 75 percent of East Asian economic output and nearly 17 percent of global GDP. Pulling together, instead of apart, would give them enormous influence in shaping the region. The initial sinews of such regional cooperation are financial.

When ASEAN was formed, the emphasis was on political dialogue and foreign policy coordination to pacify the region and increase its heft in dealing with outsiders. Perhaps because times are different now, China, Japan and South Korea have decided to use an alternative building block, one that enables them to put underlying tensions to one side and deal with practical problems of common concern — stabilizing currencies and stimulating economic growth in the region.

Shortly before their summit began, Japan and China expanded bilateral currency swap arrangements with South Korea. This gave Seoul, which has been hit by the financial crisis, the equivalent of up to $48 billion in extra funds to draw on, if necessary, to defend its currency. Heads of the three countries central banks are to meet regularly to discuss monetary policy and coordinate where it is in their interest to do so.

At their meeting, the three leaders called for an early agreement to increase the capital available to the Asian Development Bank, so it can offer more loans and technical assistance to developing countries in the region affected by the current turmoil.

They also reiterated their commitment to work with ASEAN members to hasten expansion of the so-called Chiang Mai Initiative — a patchwork of 16 bilateral currency swap arrangements worth around $80 billion that was launched in 2000 but has never been used. The intention is to integrate this network and raise the amount available to at least $120 billion, perhaps leading to the establishment of an Asian version of the International Monetary Fund.

Last May, ASEAN members and their partners China, Japan and South Korea, known as ASEAN Plus 3, agreed to "multilateralize" the enlarged reserve pool. Terms and conditions for using these funds are now being hammered out by officials and an accord is to be finalized next year. Among them, the ASEAN-Plus-3 economies have well over $3 trillion in official foreign currency reserves.

Progress in developing a financial buffer for the region was due to have been discussed at the annual ASEAN summit in Chiang Mai, northern Thailand, in mid-December. But Thailand, the current chair of ASEAN, postponed the meeting because of recent political instability. The summit has been rescheduled for Feb. 24-26.

Although the leaders of China, Japan and South Korea agreed at their summit to work more closely together to cushion the effects of the global financial crisis and tighten ties on a wide range of other challenges, their target for economic integration is less ambitious than ASEAN's, at least for the moment.

ASEAN aims to establish by 2015 a single market and production base that is highly competitive and has a free flow of goods, services and investment, with facilitated movement of labor and a freer flow of capital than now. By contrast, the Northeast Asian trio are only at the stage of making joint studies on the feasibility of trilateral free trade, investment and business facilitation agreements.

Yet, having some competition between Southeast Asia and Northeast Asia as they pursue these goals might hasten progress and prevent backsliding. That would be a plus for Asian integration.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies, Singapore.


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