Economic transformations have accelerated regional cooperation and integration in Asia. In this ADB blog post, Mr. Cuong Minh Nguyen, Principal Regional Integration Specialist, Southeast Asia Department, ADB, discusses six paradigm shifts that are reshaping economic prospects in Southeast Asia, South Asia, and other parts of the region. It also highlights the need for governments and their development partners to work together to build a socially inclusive, environmentally friendly, and economically sustainable region.

This item was first published on ADB's Asian Development Blog.  

6 Ways Asian Economic Cooperation is Changing the Region
Mr. Cuong Minh Nguyen

Asia is going through sweeping transformations that have altered its economic landscape in fundamental ways.

The People’s Republic of China (PRC) is shifting from export-led to consumption-led growth. The opposite is happening in India, where the Make in India campaign hopes to create a new growth model driven by manufacturing and exports. The 2015 establishment of the ASEAN Economic Community seeks to facilitate greater movement of goods, services, and labor within Southeast Asian countries. Japan is embracing structural reforms to enhance competitiveness.

These trends are accelerating the pace of cooperation and integration among the region’s economies. They are also helping to drive 6 paradigm shifts, each of which has profound implications for the region’s economic prospects.

1. Direction of trade. The rise of new middle- and upper middle-income countries—especially the PRC—means that Asia will become a major global import market for final goods, just as the US and the EU are now. While intraregional trade in Asia and the Pacific increased to 57.1% in 2015, up from an average 55.8% during 2010–2014, in the Greater Mekong Subregion (GMS) it doubled to 8% ($400 billion) in the same period.

Although relatively modest until recently, inter-regional trade is expected to take off as Asian supply and value chains become more specialized. The ASEAN Economic Community might be the first step toward creating an Asia-wide single market within a few decades.

2. Investment flows. Intraregional investment is growing, and will rise further. Intraregional foreign direct investment (FDI) has increased over time to 52.6% of total FDI inflows to the region in 2015. In GMS countries, most FDI in Cambodia, Lao People’s Democratic Republic and Myanmar comes from the PRC, Thailand, and Viet Nam. PRC companies are driving regional mergers and acquisitions that totaled about $50 billion in 2015, accounting for a remarkable 40% of Asia’s total.

3. Supply and value chains. Regional supply and value chains are being reconfigured. Faced with higher wages in the PRC, Japanese firms are eyeing relocations to ASEAN countries. PRC companies are also expanding into Central, South and Southeast Asia. If this trend continues, Asian economies will soon be woven together in a network of regional supply and value chains that will deepen the interconnectivity and interdependence of their economies.

4. Cross-border mobility. Increased movement of people across borders is also deepening Asia’s economic interdependence. Although Asia’s intraregional migration as a proportion of its total outbound migration decreased from 38% in 2010 to 36.7% in 2015, it remains substantial at 30.6 million.

The surge of tourists in Asia is impressive; international tourist arrivals to GMS alone reached nearly 60 million in 2015, from 26 million in 2008. These figures put pressure on Asian governments to step up collective efforts on cross-border mobility of people.

5. Transport infrastructure. Asian governments need to develop a regional multimodal transport infrastructure network to move goods, services, and labor within the region and beyond. This is happening with construction of transport and economic corridor networks in the GMS and other subregions. Connections within regions are taking shape, but connections between regions are occurring slowly, as they require greater collective efforts and stronger political commitment by governments.

The next challenge is opening up Asian regional transport and logistics services, including software such as a regional framework to liberalize transport and logistics services that Asia currently lacks. The GMS Cross-Border Transport Facilitation Agreement is a positive development, but its scope is too narrow.

6. Capital flows. Over the past decade, Asia has overcome its capital deficit and now enjoys capital surplus. Foreign exchange reserves in emerging Asian economies have skyrocketed from less than $700 billion in the early 1990s to more than $4 trillion in 2014.

Capital flows have increased not only within Asia, but also to other regions, changing the regional and global development financing landscape. While international financial institutions remain important for Asia’s development prospects, they should review and improve their business model to become more competitive; they are no longer the only or even the main source of development finance.

Economic transformations have accelerated regional cooperation and integration among countries in Asia. At the heart of these changes are rising economic interdependence and the increasingly fluid cross-border movement of people, goods, and investments.

The vision of an Asian single market and integrated production base, at the core of the ASEAN Economic Community, connected through an efficient regional multimodal network, is within reach in the coming decades. But for that to happen, governments need to work together—and with their development partners—to build a socially inclusive, environmentally friendly, and economically sustainable region.