Taking Asean integration to the next level

Taking Asean integration to the next level

Former Malaysian central bank governor Zeti Akhtar Aziz, seen on screen, takes part in a panel discussion at
Former Malaysian central bank governor Zeti Akhtar Aziz, seen on screen, takes part in a panel discussion at "Asean@50: In Retrospect", held recently by Bangkok Post Plc. Photo: Wichan Charoenkiatpakul

This year marks a significant milestone for Asean as it celebrates 50 years since its formation. Regional integration has evolved and Asean has transitioned from strength to strength to become an important growth centre in the global economy.

This has taken place despite being one of the most diverse regions in the world, despite suffering setbacks during the Asian financial crisis 20 years ago, and despite operating in a world environment in which regional integration is increasingly being viewed with greater scepticism.

Asean has emerged as a group of highly dynamic economies that have demonstrated their ability to adjust to the changing regional and global environment. From being export-led in the 1990s, the economies in Asean have now been rebalanced to become more diversified and driven more by domestic demand. A more significant services sector is evident in most economies in the region.

This rebalancing has been an important factor explaining the economic resilience during the crisis in the developed economies in this decade. Domestic demand sustained overall growth in most Asean economies during this period.

A further transformation involves more developed financial systems in Asean, making them better equipped for a world in which financial flows now far exceed trade flows. Since 2004, global financial flows have increased two times faster than trade flows on average.

The moderating trend in trade that started early in this century became more pronounced given subdued global demand following the financial crisis in the developed world in 2008-09. Other factors such as the slower pace of liberalisation and increased protectionism also have had an impact.

In contrast, cross-border financial flows have increased sharply, reinforced by advances in technology and the intensification of financial innovation. The vast expansion of global liquidity in the post-crisis years from 2010-14 resulted in global financial flows increasing by 55%.

Despite being significantly exposed to greater and more volatile global financial flows, Asean financial systems have demonstrated their ability to effectively intermediate these flows. Financial intermediaries are stronger and financial markets, in particular bond markets, are better developed, as are prudential regulation and oversight and financial surveillance capabilities.

This has been reinforced by reforms that have resulted in greater market orientation and more competitive financial systems, while exchange rates have become more flexible. These trends have also been supported by buffers built during this period and increased regional cooperation.

The Asean solidarity and cohesiveness that has emerged over the past five decades have thus yielded benefits to the region despite operating in a world in which geopolitical, economic and financial developments have made it significantly more challenging.

While the achievements by Asean reflect the contributions of many, one towering personality in the Asean community, the late Surin Pitsuwan, leaves us with a great legacy marked by a commitment and drive for the Asean agenda. As secretary-general from July 2007 to December 2012, and in the years since, he always had a clear vision for Asean and worked unrelentingly for breakthroughs to achieve a more integrated, internationally more engaged region in an environment of peace and stability.

His contributions went beyond Asean. He was also an internationalist from the region pushing the many important agenda items confronting a world in search for solutions. He left a lasting impact by virtue of his personal charisma, his vision for the region, his extensive knowledge and great ability to interface with the many, ranging from prime ministers, presidents and royalty to technocrats, diplomats, politicians, corporate leaders and academia, and to those from the most humble circumstances. He was a rare individual who will be greatly missed by the Asean community.

In our drive to achieve greater regional integration, Asean has adopted its own distinct approach. The initial motivation of the five original member states -- Indonesia, Malaysia, the Philippines, Thailand and Singapore -- was to provide a platform at the political leadership level for amicably resolving issues and conflicts in the region while at the same time respecting values and cultural norms. This included political disputes and matters that concerned peace and security.

Over time, as ties strengthened, the collaboration extended to facilitating greater intra-regional trade and investment activities. By 1999, membership included five more economies -- Brunei, Cambodia, Laos, Myanmar and Vietnam -- making it more inclusive. During this period, the region watched with interest the integration that was taking place in Europe and the emergence of a single currency, the euro.

While having similar objectives as Europe to achieve a greater stability and shared prosperity, Asean has chosen a different approach. Being more diverse in every respect, it did not aspire to achieve convergence. Nor did Asean have the pre-conditions necessary for a single currency. Instead, Asean central banks concluded in 2004 that regional financial integration would be pursued instead.

Financial integration, they said, would facilitate intraregional trade and investment, allow for greater macroeconomic and financial stability and resilience, and lead to more efficient investment by the region's high-savings economies.

Significant strides have since been made. This has involved building the financial infrastructure, harmonising rules, regulations and standards, and establishing frameworks for cross-border institutional presence to enhance connectivity. Intraregional financial flows are now contributing to greater stability of regional financial markets. More recent developments have included the establishment of payment arrangements for the settlement of bilateral trade in local currency.

The region has not pursued currency arrangements as the global experience has shown that such arrangements tended to be unsustainable. Exchange rates have thus been left to find their own levels to reflect their underlying fundamentals.

While Asean has achieved great progress, much needs to be done to reap the potential benefits of greater integration and cooperation. Already in place is the engagement with the greater East Asia. This will contribute toward achieving greater regional stability and realising the future growth potential of the region.

Looking ahead, future megatrends also present us new challenges. These include the digitisation of our economies which may demand new growth models. Then there is the rising income inequality confronting the world in which Asean is no exception. Our demographic advantage, meanwhile, is slipping as our population ages.

Other vulnerabilities that need to be addressed include rising indebtedness and a rising cost of living associated with greater urbanisation. Then there are massive infrastructure requirements to ensure competitiveness as well as environmental sustainability.

Finally, there is the challenge of the reform of our education systems to prepare our workforce to function in a regionally more integrated environment that is significantly different from the world we previously succeeded in.

Solid foundations are, however, now in place for Asean. The current generation needs to build on these foundations. While we have clarity of our vision for the region, and the path for our journey toward a more cohesive region, we need to continue to prepare ourselves for a future that is going to be distinctly different.

Dr Zeti Akhtar Aziz is a former governor of Bank Negara Malaysia. The above was adapted from a speech given at the launch of the Asean Economic Association Conference in Kuala Lumpur on Dec 5. The dinner speech was a tribute to the late former Asean secretary-general Dr Surin Pitsuwan.

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