Asia aims to find its own economic solutions

Although the meeting of Asian leaders at Pattaya this past weekend turned into a farce and had to be aborted, it is impossible to ignore either its intentions or the portents.

The richest and fastest growing countries in Asia seem to have looked at the turmoil afflicting the rest of the world and decided that it's not for them. Instead, they perhaps see this as an opportunity to shift the axis of the world, or rather confirm the centre of the global map to where China has always believed it to be.

A central part of the East Asia Summit, to be held in the Thai resort town of Pattaya at the weekend, was to be the development of plans to set up an East Asia free-trade zone. Leaders of the 10-member Association of Southeast Asian Nations (Asean), plus China, Japan and South Korea, were planning to further "explore ways and means to increase regional trade", according to a draft statement released on Friday to AgenceFrance-Presse. They were to be joined by the prime ministers of Australia, India and New Zealand on Sunday.

Of course, the meeting was postponed after supporters of former Thai prime minister Thaksin Shinawatra invaded the conference venue in the latest stage of what some refer to as a simmering Thai civil war.

Nevertheless, the intention to establish a pan-Asia free-trade area, which would encompass nearly half of the world's population, is intact, and a final report of the "second phase feasibility study" is due to be submitted by economic ministers at their next summit in October, said the leaked document. The region-wide zone would build on bilateral arrangements already forged within Asean.

Asia looks to be turning US and European criticisms for building up vast foreign exchange surpluses and maintaining large domestic savings on its head. At the Davos Summit in January, the no longer so great and good tried to shift blame for the West's spending binge on the cheap money resulting from cash-rich Asian central banks purchasing US Treasury securities, which depressed interest rates and made it too easy for households (as well as investment banks, hedge funds and private equity firms) to borrow cash to buy Asian exports. The temptation was too great, it seems, but it is a tad desperate, even childish, for a spendthrift to blame a prudent saver for supplying the means for his profligacy.

But although most commentators agree that Asian savers need to pick up the slack of reduced US consumer demand, the unintended consequence (from a Western standpoint) might be an Asian block that chooses to go-it-alone. The region's main concern, after all, is to find and consolidate markets for its exports.  

An International Monetary Fund report in February 2008, said that the "importance of exports to the (Asian) region has reached an unprecedented level. While the share of exports in GDP was already high for emerging Asia in 1990, it increased further over the past decade, reaching almost 50% in 2006". The IMF concluded that "this trend is key to understanding economic developments in the region".

Asia's growing share of world trade has resulted largely from increased regional trade integration. While trade flows in the rest of the world roughly tripled between 1990 and 2006, inter-regional trade involving emerging Asia rose by five times, and intra-regional trade within emerging Asia increased by eight-and-a-half times. As a result, trade between the economies in emerging Asia has risen steadily from about 30% of total exports by the region in 1990 to more than 40% in 2006, according to the report.

But the IMF warned that developed economies outside the region remain the main destination of final goods exported by emerging Asia. "Indeed, the exposure of Asian economies to inter-regional exports has actually increased over the past 15 years", because trade within Asia largely reflects a chain of "vertical specialisation".

And Michael Buchanan, Asia chief economist at Goldman Sachs, points out that the big drop in Chinese imports from other Asian countries in January this year shows that Chinese consumers have not replaced their US and European counterparts. Instead, he says, a lot of intra-Asian trade still "smells a lot of just supply-chain dynamics" feeding exports to other regions.

But although Asia's most open countries -- Japan, Korea, Taiwan, Hong Kong and Singapore -- are set to see their economies contract this year, the rest of the world must look a bit of a mess to Asian eyes.

Eastern Europe is close to bankruptcy; Russia's post-communist advance appears to have been nothing more than an oil-fuelled boom, and its leadership's macho posturing has consequently been humbled; Western Europe is ridden alternately with conflict and paralysis as it wonders how best to tackle the recession and how to regulate the new financial order; Latin America is veering towards a recidivist socialism -- even Peru's Maoist Sendora Luminosa guerrillas reappeared last weekend; Africa still looks unstable and poor, but useful as a source of raw materials; while the US's Armageddon-like crisis of confidence, as much as its financial and economic woes, has undermined its ideological credibility and its leadership credentials.

Amid the chaos, it's tough to view China's Delphic suggestions to replace the US dollar with an alternative reserve currency, as anything but mischief-making. The renminbi is hardly a viable replacement: it's not yet fully convertible and isn't even legal tender in Hong Kong SAR. Pointing to the IMF's special drawing rights (SDRs) is surely disingenuous: SDRs are not a real currency, but an IMF accounting unit allocated to countries in proportion to their IMF quotas.

Even China's insistence on a bigger voice in IMF decisions as a reward for greater financial contributions seems designed to irritate the West and ensure that China won't have to contribute more cash to the fund. Besides, it's doubtful whether Asia (at least its wealthier countries) either needs or wants the IMF. More than anything else, the 1997-98 crisis taught Asian countries an important and long-lasting lesson, namely to build up a war chest of foreign exchange reserves to prevent a repeat of the run on their currencies. It was the currency collapse that forced them to turn to the IMF, which then imposed its ruinous dogma of fiscal and monetary austerity, and enforced bank closures and corporate fire-sales to US predators.

Indeed, there is an evolving view in Asia that there are other sources of funding to draw from, given the region's holding of around $3.5 trillion in foreign reserves. In response to rapidly weakening foreign exchange rates, Asian finance officials agreed in March to enlarge a foreign currency pool to $120 billion from $80 billion proposed last year, to help defend their currencies. The 10 members of Asean plus Japan, China and South Korea had previously pledged to pool bilateral currency swap arrangements under the so-called Chiang Mai Initiative within a multi-lateral fund that could be tapped in emergencies.

Increasingly, Asia is looking like a region set to find its own solutions -- not just to the current crisis, but to the inherent structural weaknesses in its economic models. Of course, its success is by no means certain: it is a vast heterogeneous area made up of diverse interests, conflicting world-views and the traditional rivalry between China and Japan. But a free-trade zone, multi-lateral currency agreements and closer cooperation over investment decisions will make the region an even more formidable force than it is already. And it will be a power that doesn't need to lobby for influence in established multi-lateral global forums or institutions, such as the IMF. Instead, it will acquire de facto dominance, while the rest of the world postures, and huffs-and-puffs like so many President Sarkozys.