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    Could Asia Create an Economic Union?

     
    2/23/2004
    A formal Asia bloc along the lines of the European Union is not likely, panelists said. But expect Asian countries to find other ways to benefit each other.
    by Sean Silverthorne, Editor, HBS Working Knowledge

    An Asian bloc could be one of the most powerful economic institutions on earth, but social and historical differences between Asian nations make such a pact unlikely, panel experts at a recent Harvard Business School discussion agreed.

    But that doesn't mean Asian countries won't find other ways to leverage their weight in the marketplace.

    Panelists were asked to assess the likelihood of Asian countries banding together along the lines of the European Union, where member countries delegate some of their sovereignty to establish institutions that regulate commerce, law, finance, and other issues surrounding a unified market.

    Clearly such a bloc would foster cooperation and improve the economic climate of the region and let East Asia companies compete more effectively globally, said Milan Brahmbhatt, a lead adviser for The World Bank's East Asia and Pacific region.

    But he doubted an EU-type bloc is in the offing in Asia because the local economies depend as much on the outside world for success as they do with each other. Also, most blocs have a dominant leader, and that would not be the case in Asia, where key players could include China-Hong Kong-Taiwan, Japan, India, and South Korea.

    Panelists pointed to a number of cultural differences that work against establishment of an economic super-authority in Asia.

    Dajin Peng, associate professor of International Studies at the University of South Florida, said Western countries rely on law and formal agreements to tie parties together, while East Asia cultures use personal connections to build informal networks based on cooperation.

    Although very powerful, the downside of informal networks is that they can lead to ambiguity, and you can't have ambiguity in a formal arrangement such as the EU.

    "There never will be an EU or NAFTA type of formal integration," Peng said. But there "quite likely" will be more integration and trade agreements and treaties between Asian players.

    That's already beginning in Greater China (China, Hong Kong, and Taiwan), Peng added, where ethnic Chinese networks are building "informal institutions" among highly clustered industries even as the respective governments refuse to talk with each other. "These networks will be the predominant force in integration,' he said.

    Even without a formal bloc, there are many opportunities available to Asian partners to improve their economic relations with each other and with global markets. Regional institutions are already in place such as the Association of Southeast Asian Nations (ASEAN), the Asia Development Bank, and the South Asian Association for Regional Cooperation, which are slowly making headway in reducing trade barriers, panelists said.

    Several panelists focused on China as a potential lynchpin of Asian regionalism. In 2005, China is expected to consume half of the region's exports, up dramatically from 11 percent in 1999, said Gary H. Jefferson, the Economics Department chair at Brandeis University and director of the school's China Economic Research Program.

    Certainly, Asian companies would benefit by having China as a bloc partner, Jefferson said. Access to China's markets would allow partners to achieve scale economics and recapture some of the foreign direct investment that has migrated to Northeast China.

    But rallying around China could also backfire for those partners, he continued, if China's structural financial problems implode or the Taiwan question damages China's relations with the U.S. Another unknown, he said, is uncertainty regarding China's transition from a central government into a competitive, multiparty system.

    There is also the argument, Jefferson said, that China would not reap sizable benefits by being a member, because the country is not capital- or technology-constrained, enjoys a labor surplus, can capture huge gains simply by redeploying resources, and is already a member of the World Trade Organization.

    In addition to the uncertainties about China, a question remains about another nation that could be a major part of an Asian bloc: India. Richard Cooper, a Harvard economics professor, said India would have to change its strong protectionist policies, and that the issue of globalization is a topic of hot debate in the country.

    The discussion took place February 14 at the 2004 Asia Business Conference.

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