Asia Society's 14th Asian Corporate Conference



Envisioning the World's Next Great Market: Korea and the Economic Future of Northeast Asia Asia Society Dow Jones

Prospects for Economic Integration on North-East Asia
and the Wider Region

Keynote Speech

Dr. Kim Hak-Su
Under Secretary-General of the United Nations,
Executive Secretary, United Nations Economic and
Social Commission for Asia and the Pacific

Distinguished Representatives, Ladies and Gentlemen,

It is a great pleasure for me to have this opportunity to present the keynote speech at this Asia Society conference. As you know, globalization has led the world toward greater integration of economies and societies. The benefits are clearly visible in the increased trade, higher growth and falling poverty of countries fully engaged in the process. However, globalization has also been controversial because of the uneven distribution of its benefits and its equally visible negative impacts such as job losses, rising income disparity and environmental challenges.

The Asia-Pacific region vividly illustrates the phenomenon of globalization. Many East and South-East Asian countries have experienced high growth rates, better living standards and an impressive drop in poverty. But many other countries, including the least developed, landlocked and small island countries and transitional economies in the region, have been unable to properly compete in fast-paced world markets or to exploit the opportunities of globalization owing to lack of infrastructure, resources and skills.

The Asia-Pacific region has considerable potential strengths with which to promote development in poor and marginalized countries to ensure that global development agendas work for them. The region’s savings level is the highest in the world and the amount of accumulated foreign reserves was about $2.1 trillion at the beginning of 2004. Even when we look at the sub-region of North-East Asia, it contains the world’s most populous country, China and the world’s second largest economy, Japan, as well as the largest country in terms of land size, the Russian Federation. Increased economic integration and cooperation in the region can certainly improve specialization of production and provide a powerful driving force for its development process.

In a period of growing global economic interdependence, regional cooperation offers Asia-Pacific countries an effective vehicle for promoting sustainable development. It would enable Asia-Pacific countries, particularly small island economies and least developed countries, to overcome the limited size of their domestic markets, achieve economies of scale in production and diversify exports. More efficient use of financial resources and technology available within the region would also help to shield countries from the kind of economic and financial volatility experienced in the 1997 financial crisis.

Let me now address the trade and investment issues in North-East Asia. The North-East Asian sub-region, which consists of China, Japan, Democratic People’s Republic of Korea, Republic of Korea, Mongolia, and the Russian Federation, is characterized by its low level of economic integration, despite the fact that the economies in the region are complementary to a large extent and could potentially benefit substantially from economic integration. All countries in the region, except the Russian Federation, are members of the WTO. While Japan and the Republic of Korea are the most advanced economies in the sub-region, China has emerged as an engine of growth, not only in the sub-region, but also in the Asia-Pacific region and, indeed, for the world at large. China has emerged as the leading export market for the Republic of Korea, replacing the United States, and also has become a leading destination for foreign direct investment (FDI) from the Republic of Korea, and, to a lesser extent, Japan.

All North-East Asian countries underscore the primacy of the multilateral trading system. However, in the wake of the breakdown of multilateral trade negotiations at Cancun, the countries have been slow to reconsider their trade policy options towards deeper and wider sub-regional economic integration. Although some bilateral investment treaties have been signed in the sub-region (that is, between Japan and the Republic of Korea), there are no bilateral trade agreements among any of them. Instead, the sub-region is potentially bound together through initiatives that countries are taking individually to sign BTAs with ASEAN. ASEAN and China are establishing a free trade area by the year 2010, and the Republic of Korea and Japan have followed suit with proposals to negotiate similar arrangements with ASEAN. Japan is negotiating FTAs with individual ASEAN countries, and has already an FTA with Singapore. The ultimate result could well be a mega-bloc consisting of ASEAN + 3. But, at the moment it looks more like ASEAN + 1 + 1 + 1.

Given the trend towards deeper integration between South-East and South Asia through the BIMST-EC process, and the planned FTA between India and ASEAN (India already has a BTA with Thailand), ASEAN + 3 linked with South Asia could eventually evolve into a pan-Asian free trade area by the year 2020. The key is political will. However, due to many reasons, which include historical ones, the economic integration process in North-East Asia has been slow. Opposition of vested interests and the political importance of sensitive sectors such as agriculture, are also major obstacles. For instance, the Japan-Singapore BTA excludes agricultural products, while in the Republic of Korea there were large demonstrations against the Republic of Korea-Chile FTA. Similar obstacles are also hampering progress in the Doha Development Agenda. In North-East Asia, the Democratic People’s Republic of Korea’s isolation is also not conducive to economic integration, although a slow but gradual opening up seems to be taking place.

Political obstacles can be overcome, however, as witnessed by the recent establishment of the South Asia Free Trade Area (SAFTA) after years of slow progress, as countries realize that in an era of globalization, economic prosperity can only be increased and sustained through deep and meaningful economic integration. However, in order for such economic integration to be successful, Governments need to engage the private sector, civil society and other stakeholders in the decision-making process to build a solid national consensus. At the same time, reforms and deregulation efforts at the national level should also be sustained.

It is interesting to note that both China and the Republic of Korea are bound together through Asia’s oldest regional trade agreements, the Bangkok Agreement, while Mongolia has expressed interest in joining the Agreement. The recent revitalization of the Bangkok Agreement has paid off, as its members are currently concluding the third round of concessions and are on the verge of agreeing on a common set of preferential rules of origin. Once this task has been finished, the first session of Ministerial Council is planned sometime this year when the Agreement is renamed as the Asia Pacific Trade Agreement. As APTA has members from South, South-East and North-East Asia, it may well act as a building bloc and catalyst towards deeper economic integration of the Asia-Pacific region as a whole.

While there is certainly scope for economic integration in North-East Asia, as there is in the rest of the Asia-Pacific region, such integration should always be seen as a building bloc of the multilateral trading system. Therefore, any regional or bilateral trade agreements should be consistent and conform to the principles and rules of the multilateral trading system in order for them to work efficiently.

In addition to the trade and investment issues, I would like to mention UNESCAP’s initiatives in transport cooperation. UNESCAP has worked extensively in the transport sector to promoted regional development cooperation as an effective means for countries to meet the emerging challenges of globalization. The most significant transport projects promoted by ESCAP are the Asian Highway and the Trans-Asian Railway, which together provide a web of transport links spanning the region.

The Intergovernmental Agreement on the Asian Highway Network was signed by 26 member countries at Shanghai during the 60th session of ESCAP. China, Japan, Mongolia, the Republic of Korea and the Russian Federation from the North-East Asian region have signed the Agreement, and the Democratic People’s Republic of Korea is positively considering the signing of the Agreement. The process of negotiating the Agreement has been one of constructive partnership involving all countries concerned. It clearly demonstrates the desire and capacity of Asian countries to work together, now and for the future, to achieve common goals.

As you know, trade among the countries of the region is growing faster than anywhere else in the world. With the Asian Highway in place, new opportunities will be created, and economic growth and social development will be further strengthened. The involved Governments are committed to developing the 140,000 kilometer regional transport network that spans 32 countries. This will certainly strengthen regional integration and economic cooperation, accelerating trade and tourism in the region.

As a further step in the development of the Asian Highway, UNESCAP will continue to implement programs aiming to promote the mobilization of resources for the development of roads in member countries in collaboration with regional and international development banks and bilateral donors.

Realizing the potential benefits of the Asian Highway agreement, UNESCAP member countries requested this year to develop a similar agreement for the Trans-Asian Railway (TAR) network. The Trans-Asian Railway network, cutting across the entire Asian continent, offers a land transport alternative, which connects Asian markets with Europe and facilitates intra-regional and inter-regional movements. The network was updated in 2003 to include new linkages proposed by member countries and now comprises over 80,000 km of tracks in 25 countries. Rail transport has considerable potential, particularly for Asia’s landlocked countries, and offers significant advantages for the environment and safety. UNESCAP secretariat is now working on an intergovernmental agreement on the Trans-Asian Railway network, as well as assisting countries in developing appropriate regional strategies to meet their social and environmental needs. The improvement in interconnectivity among the countries in the region is expected to make better use of their infrastructure and contribute to economic development of regional countries with strengthening regional economic integration.

Recognizing the potentials of ICT in alleviating poverty and its impact on globalization processes, UNESCAP set up the Information, Communication and Space Technology Division in mid-2002, and has been working on the promotion of the use of ICT to reduce the digital divide in the Asian and Pacific region. In response to the need to strengthen regional broadband network infrastructure, UNESCAP is focusing on creating the necessary regional consensus and regulatory environment, and building the requisite skill base, as well as promoting broadband applications such as e-government, e-business and e-learning.

Regarding the regional cooperation and integration in finance, I would say that the countries in the region started to work together much closer after the 1997 financial crisis. The various regional initiatives on finance, including the ASEAN Surveillance Process, the Manila Framework Group, the Chiang Mai Initiative, the ASEAN Framework Agreement on Services and the Asian bond initiative, emerged after the crisis. The Chiang Mai Initiative was designed to provide liquidity support for member countries that experience short-run balance-of-payments deficits in order to prevent future crises, while the Asian bond initiative is expected to lead to a basket of dollar-denominated bonds issued by Asian sovereign and quasi-sovereign issuers.

An extension of the Chiang Mai Initiative that cover a large section of the Asia-Pacific region would raise liquidity and make the initiative an effective line of defence against speculative attacks. Convergence criteria similar to those proposed for the Asian bond market could be developed for the extended the Chiang Mai Initiative. Further organizational and operational details would have to be worked out before it could serve as a fully-fledged regional financial mechanism comparable to the European Monetary System.

Together with the Chiang Mai Initiative, establishing an Asian monetary fund (AMF) has been also debated as a complementary role to IMF, that can provide funds required in a crisis. However, setting up an AMF would depend on the region’s ability to integrate with the international financial system. An extended Chiang Mai Initiative could be a stepping-stone in establishing an AMF. The linkages between AMF and IMF would need to be spelled out to ensure that they are complementary and not competing arrangements.

Distinguished participants,
Various trade, finance and transport agreements have contributed to regional integration in many ways and the signs are that forces of integration are gaining strength. UNESCAP is uniquely positioned to assist countries in forging greater integration in the region and in particular promoting greater linkages among sub-regional institutions. In order to promote greater regional integration, UNESCAP is coordinating, facilitating and improving the cooperation mechanisms that are being pursued, as well as their linkages to the multilateral processes. The end-result, I am sure, will be a vibrant North-East Asia stimulating trade and growth across the entire Asia-Pacific region.

Thank you.