Regional Integration in Asia and the Pacific, and Dealing with Short and Long Term Challenges

In the last few decades, Asia and the Pacific has established itself as a formidable economic force that has proven remarkably resilient to difficulties, weathering both the Asian financial crisis in 1997 and the global financial crisis (GFC) in 2008.² While countries elsewhere on the globe continue to struggle to shake off the worst effects of the 2008 GFC, Asia and the Pacific has continued to prosper and post gains in economic growth and poverty eradication.

Coming into 2018, the outlook for the region was largely optimistic. Early in the year, the global trade slowdown, which started around 2010, appeared to have begun bottoming out, with East and Southeast Asia in particular leading the recovery. Export growth in the second half of 2017 reached 7.9 per cent in the People's Republic of China (PRC) and 16.5 per cent in the five largest ASEAN economies: Indonesia, Malaysia, the Philippines, Thailand and Vietnam.³ That Asia and the Pacific managed to achieve this in the midst of growing protectionism elsewhere speaks volumes about the region's commitment to regional and global integration.

Unfortunately, more recent data suggests that the recovery in global trade may have been short-lived. With growth expected to ease in some advanced economies, the growth in world trade is projected to decline slightly from 4.7 per cent in 2017 to 4.5 per cent in 2018. In developing countries in Asia and the Pacific, trade volume growth is also projected to ease from the estimated 7.6 per cent in 2017 to 5.5 per cent in 2018.⁴

Moreover, although the economic outlook for the region in 2018 and 2019 remains somewhat favourable, downside risks are on the rise. The Asian Development Bank (ADB) still expects developing countries in the region to hit 6 per cent growth this year, but it has trimmed the forecast for 2019 by 0.1 percentage points to 5.8 per cent.⁵

A number of critical changes are afoot. Many of the favourable conditions that have helped fuel the region's successes may not hold in the short-term, while emerging trends such as population ageing and the fourth industrial revolution (4IR) bring with them new long-term opportunities as well as challenges. The region's ability to evolve amidst these changes will determine whether it can continue to be a powerhouse in the global economy. This chapter examines the role which regional cooperation and integration (RCI) can play in this evolution.

This chapter is divided into six parts. Following this introduction, the next section provides an overview of recent economic progress in Asia and the Pacific and gains made by the region in pursuing RCI. The third section discusses the immediate challenges facing the region's economy as a whole and RCI in particular. The fourth section then takes a broad sweep of two major developments that are likely to affect the region in the medium and long-term: population ageing and the 4IR. The fifth explores what policymakers can do to address these challenges, followed by a conclusion.

Economic Performance and Progress of Asia and the Pacific in RCI

Recent Economic Gains

The economic performance of Asia and the Pacific over the last two decades has been nothing short of impressive. Although the Asian financial crisis in 1997 caused growth to stall in several countries in the region, it also laid the foundation for many critical reforms that allowed the region to withstand the worst of the GFC that hit the globe about a decade later. Sound macroeconomic fundamentals coupled with appropriate policy measures enabled the region to grow at an average rate of 6 per cent per year since the GFC. They also made it possible for Asia and the Pacific to increase its share of global gross domestic product (GDP) from 25 per cent in 2000 to 33 per cent in 2016, as Figure 1 illustrates.⁶ The emergence of the PRC as a major economic player accounted for much of this expansion.