East Asian economic regionalism: progress and challenges

This paper demonstrates that the East Asian economies have achieved strong economic interdependence, particularly through external liberalization, domestic structural reforms and market-driven integration with the global and regional economies. Expansion of foreign trade, direct investment and financial flows has created a “naturally” integrated economic zone in East Asia. Reflecting the rising economic interdependence and in response to the traumatic financial crisis of 1997-1998, East Asia has embarked on various initiatives for economic regionalism. Such initiatives include the formation of several bilateral FTAs, the beginning of negotiations for sub-regional FTAs, the establishment of a regional surveillance mechanism, the introduction of a regional liquidity support system (CMI) and Asian bond market development. These essentially entail the formal institutionalization of de facto economic integration and interdependence in East Asia in a way that complements global frameworks of the WTO and the IMF. The paper identifies a number of challenges facing the region, including the need to begin negotiations on a region-wide FTA and to initiate exchange rate policy coordination.