A Realistic Vision of Asian Economic Integration

20 Pages Posted: 19 Mar 2010 Last revised: 23 Dec 2013

See all articles by Wing Thye Woo

Wing Thye Woo

University of California, Davis - Department of Economics

Date Written: March 14, 2010


In thinking about Asian economic integration, it is noteworthy that most attempts at regional economic integration have been failures. Beside the European Union (EU), the only other case that has been meaningful enough and durable enough is the North American Free Trade Area (NAFTA). Unlike the EU, NAFTA allows only limited labor mobility across countries; has no plans to coordinate exchange rate policies; and does not envisage an eventual political union.

Our conclusion is that the feasible architecture for an Asian Economic Union would be a free trade and open investment area that has a regional financial facility. For the medium run, an Asian Financial Facility (AFF) would operationally be a large Asian swap facility that has its own surveillance mechanism to pre-qualify members for emergency loans. The primary mission of AFF is to reduce the cost of bad luck and not the cost of bad policies. AFF would evolve according to the progress of reforming the IMF, and to the needs created by an increasingly integrated Asia. Given the large size of East Asian foreign reserves, the AFF should take on the additional task of designing a pooling scheme where part of the East Asian reserves could be safely used to finance sound infrastructure projects in the poorest Asian countries. It is important that the AFF does not suffer from the institutional inertia that is characteristic of the present global organizations like the Security Council of the United Nations, the World Bank and the International Monetary Fund. The leadership structure of the AFF should be designed to avoid simply locking in the balance of economic power that existed at the time of its founding. Given the great disparity in the present and future distribution of economic power in East Asia, and the greater restrictions on labor mobility within the (commonly proposed) Asian Economic Union, a NAFTA-type of Asian Economic Union would be preferable to an EU-type of Asian Economic Union. Exchange rate coordination might occur sporadically but it is unlikely to be the norm in the medium term, and most possibly even in the long term. East Asia should therefore be focusing its energy on creating as wide a free trade area as possible (i.e. be geographically unrestricted), and forgo the unrealistic goal of a common Asian currency. However, if an Asian common currency is still adopted, then the lesson from the Greek crisis in early 2010 is that it is necessary for the Asian Financial Facility to become the Asian Monetary Fund.

Keywords: Asian Currency Unit, Asian Economic Union, Economic Integration, NAFTA, EU, ASEAN, Common Regional Currency, Optimum Currency Area, Free Trade Area

JEL Classification: F15, F36, F42, O53

Suggested Citation

Woo, Wing Thye, A Realistic Vision of Asian Economic Integration (March 14, 2010). Available at SSRN: https://ssrn.com/abstract=1570409 or http://dx.doi.org/10.2139/ssrn.1570409

Wing Thye Woo (Contact Author)

University of California, Davis - Department of Economics ( email )

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HOME PAGE: http://www.econ.ucdavis.edu/faculty/woo/woo.html

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