Comment on “Macroeconomic Linkages and Regional Monetary Cooperation: Steps Ahead”

Abstract

The principle of “comparative advantage” says that countries prosper first by taking advantage of their resource endowments to concentrate on what they can produce best, and then by trading these products for products that other countries produce best. A corollary is that unrestricted flows of goods and services at the global level, rather than at the regional level, should be pursued so that countries involved in the trade can take full advantage of comparative advantages. Why has there been considerable interest in economic integration in Asia as well as in many other regions of the world in recent years? Regional economic integration can be discussed conveniently in terms of trade and finance. Economic integration is a path-dependent process. The integration in East Asia in the 1970s, 1980s, and early 1990s was characterized by the flying geese formation, and now by international production networks. The Asian financial crisis in 1997 and its aftermath made East Asia realize the need for a regional financial architecture and coordination of regional exchange rate arrangements. Economic integration in East Asia is market-driven and event-driven. Only after the Asian financial crisis has the institutional building for the regional integration been brought to the agenda of governments in the region. De Brouwer et al. (2006) provide a useful taxonomy of the forms of cooperation that allows for five incremental levels of cooperation: discussion at the official or the political level of economic issues; discussion of national policies; informal or ad hoc cooperative action on national economic policies to ensure regional or global consistency; formal, binding, or contractual cooperative setting of national economic policies at the regional level; and formal setting of economic policy at a regional supranational level that determines policy outcomes at a national level. As de Brouwer et al. point out, East Asian countries have “a preference for institutional structures that allow them to retain national and political control and avoid supranational and excessive bureaucratic decision-making.” I strongly believe that there is a solid economic basis for more institutionalized economic integration in the region. However, because of political and ideological reasons, East Asian economies have failed to achieve a higher level of economic integration. East Asia will not achieve a level of economic integration comparable to that of the European Union for decades to come. According to traditional theory, it is most important for macroeconomic policy cooperation that economies perform similarly and react similarly to shocks. De Brouwer et al. survey the literature on the convergence of economic growth of countries in East Asia and their similarities in exposure to shocks. However, their results are not conclusive. According to de Brouwer et al., the test results are sensitive to the period of the data, data frequency, econometric techniques, and variable specification. Personally, I do not think convergence and similarities tests are so important in explaining the progress or lack of progress in East Asian economic integration. Rather than constituting obstacles to integration, divergence and dissimilarities to some extent are equally conducive to integration. I am a believer of Frankel and Rose's endogenous theory of integration. As Frankel and Rose pointed out, “Trade patterns and income correlations are endogenous. . . . A country could fail the OCA [optimum currency area] criterion for membership today, and yet, if it goes ahead and joins anyway, as the result of joining, pass the OCA criterion in the future” (quoted in Kiss, 2004). However, to examine data on macroeconomic variables for signs of convergence and approaches to the analysis of convergence is a very useful exercise. Another focus of de Brouwer et al. is to draw a link between the evidence of macroeconomic convergence, and the market development, institutional coherence, and consistency of policy objectives required for deeper economic and monetary cooperation. I agree with de Brouwer et al. that formal policy convergence “requires agreement on the extent of independence of the central bank from direct political control, about the transparency of the central bank, and about the role of the central bank in dealing with financial crises. Many of these preferences concern the role of the state, the relationship between the state and the private sector, and the relationship between government and the general public.” Unfortunately, East Asian economic integration is losing steam because of political squabbling. We have to wait and see how far market forces can drive the process of integration forward. Perhaps only a dramatic correction of the global imbalances can remind us once again how greatly East Asian countries need each other.