International Conference

# Workshop: Global Economic Crisis and Institution Building in East Asia for Peace and Development

## Information

• Time and Date: 9:00-19:00 Friday, August 29, 2009
• Venue: JICA Research Institute, International Conference Hall
10-5 Ichigaya Honmuracho, Shinjuku-ku, Tokyo Japan
• Language: English
• Organizers: Asian Peace Science Network (APSN), JICA Research Institute and Research Institute of Economy, Trade and Industry (RIETI)
• ## Summary

### Opening Presentation: Climate Change and India/China Cooperation

Dr. Walter ISARD, Emeritus Professor at Department of City and Regional Planning at Cornell University, made the opening presentation on climate change and India-China cooperation from the viewpoint of India.

According to Professor Isard, the first point is to recognize the tremendous economic development that has taken place in India. Over the last five years, although India's GDP growth has averaged just short of 9% per annum, the nation has simultaneously been suffering from severe poverty.

Poverty in India and the necessity to solve it can be seen in various fields. When we look at agriculture in India, the government has attempted to reduce poverty by raising agricultural productivity. However, it needs to change the existing subsidy based regime, which is no longer sustainable. Also, India's underdeveloped infrastructure has been a bottle-neck that has eroded the country's international competitiveness. The government's role will be to help support the implementation of existing projects while supporting additional investments to the level of 3% to 4% of GDP. In regards to education, India has made huge progress in getting more children, especially girls, into primary school, and now it's focusing on bringing the hardest-to-reach children into primary school. Equally important is the building of skills among India's rapidly rising workforce. To help produce engineers of international standards, the World Bank has supported improvements in the quality of education in engineering institutes in India. Finally, in relation to health, a high maternal mortality ratio and high levels of malnutrition can be seen and may be explained by the systematic problems and human resource constraints.

Professor Manas CHATTERJI from Binghamton University made a comment on this presentation to point out that we need to look further into the real problems in India. According to him, there are questions of regional inequalities, political conflicts, and the problem of nuclear facilities.

### Panel 1: Institution Building for Trade and Investment

In the first panel, two distinguished speakers were invited. Dr. Shujiro URATA, Faculty Fellow at RIETI and Professor of Graduate School of Asia-Pacific Studies at Waseda University, made a speech on the institutionalization of regional economic integration in East Asia and Dr. Biswa BHATTACHARYAY, Special Advisor to Dean at the Asian Development Bank Institute, talked on institutions for Pan-Asian connectivity.

Although the driver of regional integration in East Asia has been market forces until very recently, there is an increasing role of regional institutions. With the empirical data of intra-regional trade in East Asia, Dr. Urata insisted that East Asian countries depend on themselves for both supply of procurements and imports of components. This is partly because market forces helped the activity of multinational corporations in East Asia before the late 90s, in the form of foreign direct investment (FDI) and tariff liberalization.

During the financial crisis of 1997-1998, East Asia, in turn, started to see the emergence of institution-driven regionalization. One prominent phenomenon is the proliferation of free trade agreements (FTAs). These East Asian FTAs are characteristic in the sense that they often include trade and FDI liberalization and facilitation in addition to a pure FTA.

With this background in mind, Dr. Urata simulated the positive effect of future region-wide FTAs in East Asia. The numerical simulation results have two important messages. First, if the FTA includes trade liberalization, facilitation, and also economic cooperation, the impact is greater. Second, as the number of countries within the FTA increases, the impact becomes larger.

Dr. Urata concluded his speech by saying that successful institution-driven regionalization in East Asia could only be achieved with strong political leadership which can overcome the obstacles.

The microphone was then handed over to Dr. Bhattacharyay, who started his speech by explaining the concept and benefits of Pan-Asian regional connectivity. The connectivity realizes the "seamless Asia," where goods, services, ideas, and people can move smoothly and in a very cost-effective manner. In order to achieve this idea, we need regional projects including national projects with significant cross-border impacts and include both hard and soft regional infrastructures. Hard infrastructure refers to physical assets and soft refers to a variety of things including system procedures, rules and regulations, policies, institutions, and customs procedures.

Dr. Bhattacharyay then went back over the past and current situation of Pan-Asian regional connectivity. He explained the financial and institutional needs for the regional infrastructure. He described the current structure and role of existing institutions in Asia. He in particular shared the cases of ASEAN and APEC as well as the experiences in the EU and in Latin America. Since there have already been many cases of successful sub-regional cooperation in Asia, he noted that our efforts should now be focused on connecting sub-regions into Pan Asian connectivity.

According to Dr. Bhattacharyay, what we need is not an entirely new institution, but a new institutional framework. The two concepts of the "Pan-Asian Infrastructure Forum (PAIF)" and the "Asian Infrastructure Fund (AIF)" were discussed and proposed as more concrete forms of institutional framework.

Following these two insightful speeches, Dr. Yuyan ZHANG from the Institute of World Economics & Politics at Chinese Academy of Social Sciences (CASS) was asked for his comments. He shared a wide variety of his thoughts, ranging from some ideas on the weak regional institutions in Asia, which were mentioned by the previous two speakers, to the relationship between China and Japan.

At the end of the session, two questions were raised from the floor. The first question was regarding Dr. Urata's numerical simulation method. The second question was related to the political, not economic, context of regional institutionalization. After the questions were answered, the session was closed with the chairman's comments.

### Panel 2: Institution Building for Finance, Currency and Macro-economic Policy

In the second panel, the focus shifted to institution building for financial transactions in East Asia. Two presentations were made on this subject. Dr. OGAWA Eiji of RIETI and Hitotsubashi University reported on the interrelations between the recent sub-prime crisis and the financial circumstances in East Asian countries. Dr. Sussangkarn CHALONGPHOB of the Thailand Research Institute focused on the roles of two financial crises, the Asian Financial crisis in 1997 and recent sub-prime crisis, as impetus for East Asian financial cooperation.

Dr. Ogawa pointed out the relationship between the global imbalances and the growth of financial crises in his presentation. From 1995, the United States increased the global current account deficit while oil exporting countries as well as Japan and East Asia increased the current account surplus. These imbalances resulted in ample capital inflows into the United States, which are invested into risky assets like credit default swaps through U.S. and European financial institutions. Thus we can see the global imbalances as a background of the growth of the recent sub-prime crisis. Based on the empirical analyses, a realistic scenario of U.S. dollar depreciation to reduce global imbalances that keeps the U.S. dollar at the current level in the short run was suggested. Yet, increases in the fiscal deficits of the U.S. might cause a harder landing in the long run.

Reactions of East Asian currencies to the global financial crisis are asymmetric. Dr. Ogawa defined the Asian Monetary Unit (AMU) as the weighted average of East Asian currencies and showed some of them are overvalued and others are undervalued against the AMU. This reflects the fact that the monetary authorities of East Asian countries are adopting a variety of exchange rate systems. In other words, a coordination failure in adopting exchange rate regimes among them increases volatilities and misalignments of the intra-regional exchange rates in East Asia. Based on these findings, Dr. Ogawa implied that regional financial cooperation like the Chiang Mai Initiative (CMI) has to be implemented more effectively.

Dr. Chalongphob also discussed the importance of regional financial coordination in East Asia, emphasizing the roles of two outstanding financial crises as impetus for East Asian financial cooperation. The Asian financial crisis in 1997 was an obvious impetus of building ASEAN+3 and CMI. Prior to the crisis, the East Asian region as a whole was financially strong, with a combined current account surplus of about $100-$150 billion per year and combined foreign reserves of about \$600 billion. However, most of the surplus was invested outside the region, and deficit countries within the region, such as Thailand, Indonesia, and South Korea had to rely on short-term foreign borrowing. This was a fundamental reason that precipitated the crisis and made East Asian countries move toward regional financial cooperation.

Although stock markets have been severely affected in line with the global trends, direct exposure of East Asian financial systems to sub-prime assets was relatively limited. This is because financial institutions in East Asia learned from the Asian financial crisis and tended to be more risk averse than the western financial institutions. However, it was worrying that financial regional arrangements, particularly the CMI, did not play any role in assisting liquidity constrained countries such as South Korea and Singapore. Instead countries went to the U.S. Federal Reserves.

Both of the presenters in the second session pointed out the importance of improving the CMI. They made much of multilateralization of the CMI, reducing the IMF Link, and strengthening monitoring and surveillance schemes over exchange rates and macroeconomic conditions of East Asian countries. Establishing a standing organization for monitoring and surveillance is also suggested as a good direction for future financial cooperation in East Asia.

One of the discussants of the second panel, Dr. Iwan AZIS of Cornell University, pointed out one additional aspect, namely, the development of democracy in the region, noting that more and more countries in the region are moving toward democracy. The lack of popular support may be one of the reasons why many of the regional cooperation projects do not work despite their importance as Dr. Ogawa and Dr. Chalongphob discuss in their paper. Dr. Azis implied that the leaders in East Asia should promote regional financial cooperation winning popular support through democracy.

### Panel 3: Development Cooperation for Institutional Capacity Development

Three eminent speakers were introduced for the third panel which featured the development cooperation for institutional capacity building: Mr. Naoshi SATO, JICA Senior Advisor; Dr. Yasuyuki SAWADA, associate professor at The University of Tokyo, visiting fellow at JICA Research, and faculty fellow at RIETI; and Dr. Tatsuhiko KAWASHIMA, professor at Gakushuin University.

Then Mr. Sato gave a speech on the institutional capacity development issues in JICA's cooperation to strengthen "Rule of Law" in developing countries. Without appropriate institutional capacity development, JICA believes that it is impossible for a developing country to independently promote legal and judicial development. Since the objective of Japan's ODA is to support the developing countries' self-help efforts, focusing on the institutional capacity, building is reckoned as one of the characteristics of JICA's cooperation. Particularly, JICA's support for institutional capacity building is based on the Japan's experience of developing a legal system in late 19th century. Japanese experts, living in the aid recipient countries for a couple of years, support the local working groups formed for the particular legal topic, and advisory groups in Japan also provide technical assistance through seminars or TV conferences. Though different models of implementation structure are feasible, it is necessary to make sure the knowledge and skills are shared properly so that the aid contributes not only to the individual capacity development but also to the institutional capacity development. Since improving legal and judicial systems is an endless challenge, it is also crucial to have a long term vision in addition to a short term plan.

To identify the key factors for institutional capacity development, Dr. Sawada investigated the role of technical cooperation aid in international technology transfer from developed to developing countries which had been largely unexplored. With his co-authors, Ms. Ayako MATSUDA, UC Berkeley and Ms. Hidemi KIMURA, Japanese Ministry of Finance and RIETI, Dr. Sawada investigated the nexus between technical cooperation (TC) and total factor productivity(TFP). The research strategy was to augment a standard model of international technology transfers by incorporating TC, foreign direct investment (FDI), and the degree of openness to international trade, and to compare the relative importance of different channels in facilitating international technology transfers. With the use of cross-country data of 85 countries for the period of 1960-1995, two robust findings emerge. First, TC, FDI, and external openness all contribute to facilitate international technology transfers and openness seems to contribute the most followed by TC. Second, a significant number of countries in the sample fail to catch up to the technological leader during the 36 year period. These two results suggest that TC is likely to play an important role in facilitating institutional capacity development.

### Panel 4: Institution Building for Environment and Resource Governance

Panel 4 continued with the theme discussed in the prior panel looking at the effect of institutions on the internal dynamics within a country, and focused on institution building for environment and resource governance.

JICA Research Institute Visiting Fellow, Dr. Jin SATO, associate professor at The University of Tokyo, talked about the governance of nature, its historical roots and contemporary challenges at the state level. He led the panel with his observation that state expansion often comes with segmentation of the planning research branch and the implementation branch, which tends to invite inaction. As an implication of this phenomenon, he addressed two questions during the discussion: how do growth-oriented developmental states adopt environmental institutions, and why countries have such poor environmental performance even when taking early action.

By comparing cases from Thailand, Indonesia and Japan with a historical context, he discovered serious disconnection between the creation of institutions established to protect the environment, and the pre-existing departments that were originally created to produce, develop, and exploit those respective resources. Cumulative effects of power relations and techniques employed in the governance process are central to the understanding of resource policy. It is not only organizational rules, regulations and end goals, but also the bureaucratic division of labor that gives us hints on why good institutional arrangements perform poorly. Based on these findings, Dr. Sato suggested that new institutions be implemented in light of accumulated layers of property relations. Moreover, as bureaucracy develops its own enemy within, he argued that it is more promising to strengthen area-based governance, instead of functional governance.

Dr. Huijiong WANG, Advisor of the Academic Committee, Development Research Center of the State Council, China, gave a very comprehensive overview of environmental institution building for environmental and resource governance at the global and regional level. Dr. Wang suggested that countries should fully support the role of the United Nations and UNEP to improve their performance. He also emphasized the need to promote awareness of environmental governance at a grassroots level. In conclusion, he regarded it necessary to strengthen and improve the existing institutions for environment and resource governance at international, regional, and national levels.

The discussant, Dr. Jurgen BRAUER, Professor of Economics at Augusta State University, called attention to a piece of economic work from Professor Todd Sandler on collective action theory and shared a few rules on the economics of institution building. He nailed down the central concerns of the burden shift between nations and generations when building institutions, and explained the concept through economic analysis stating that the desired goods will be undersupplied. After explaining the four rules of awareness and countries' reactions to free-riding with graphs, his conclusion was that loosely structured institutions have been preferred because they economize on transaction costs. Dr. Brauer recommended a trans-generational perspective when considering institution building, and suggested that institutions supply the current generation with sufficient benefits to motivate action. He closed out the session by stressing the mission of peace science: to go beyond raising questions by starting to construct answers and learning from lessons through experimentation.

### Panel 5: Security Issues (including non-traditional Security)

In Panel 5, the focus shifted to security issues, which included so-called "non-traditional security" issues. Two presentations were made on this topic. The first focused on institution building in the borderlands of weak states, presented by Dr. Patricio-Nunez ABINALES, Professor, Division of Economic and Political Dynamics, Center for Southeast Asian Studies (CSEAS), Kyoto University. The second dealt with infectious diseases as a human security issue, presented by Dr. Takeshi ONIMARU, Assistant Professor of National Graduate Institute for Policy Studies (GRIPS).

The first speaker, Dr Abinales, described the reality of illicit activity, such as smuggling arms or drug trafficking, in the borderlands of weak states, mainly south-east Asia. He listed seven points below, which he believes need to be considered when thinking about institution building for peace and development in these areas: (1) the extreme poverty in the area; (2) that the states' approach to these borderlands is mainly by militaries and ill-trained bureaucrats, both of whom are so easily corruptible; (3) it is always in the borderlands where separatist communities resist, partly because the state is weak there, but partly because it is easier to smuggle arms; (4) the important role played by the local power, such as political clans, families, and warlords; (5) globalization surely opens local economies, but also enriches illicit activities; (6) we should not treat borders as static areas; and (7) we have to make some major compromises with those local, and sometimes "dirty," political elites. In his conclusion, he suggested that we should think outside of our disciplinary grids and national frames when it comes to the creation of institutions of development and peace in these areas.

Dr. Takeshi Onimaru, the second speaker, introduced his study on infectious disease as a human security issue, citing the 2009 case of the newly emerging influenza virus H1N1. He stated that, from the H1N1 case, several lessons on the role of public health institutions in developing countries can be learned. For example, it took too much time to detect and confirm that H1N1 was an emerging virus and this time lag made it difficult to prevent the virus from spreading to other countries. In addition, he said it remains quite difficult to measure the impact of the virus in developing countries. All of these can be attributed, he said, to the lack of effective surveillance capacity, and the uneven distribution of medical staff and hospitals.

After the above presentations concluded, Dr. Manas Chatterji, Professor of Management, Binghamton University, the discussant, raised a very fundamental question, "Institution building for whom?" for Dr. Abinales. That is, he meant, it is possible that those illicit activities should be allowed to some extent, as far as illicit businesses are the only way to survive for local people. Another interesting question for Dr. Abinales was raised by Dr. Pempel, about what kinds of institutions should be developed. Answering these two and other questions, Dr Abinales cited a successful case of USAID operation in the Southern Philippines, and he once again emphasized the need to compromise with corrupted local powers and tap into their power to maximize public welfare and minimize their patrimonial side. After Dr. Onimaru's presentation on infectious disease, many interesting questions, or even some admirations for his very timely and important study, were raised, and an active discussion ensued for some time.

### Panel 6: Future Peace Science and APSN

In Panel 6, the concluding section of the workshop, three presentations were made focusing on the future of the study of Peace Science and the Asian Peace Science Network (APSN). Dr. Glenn PALMER, Professor of Political Science, Pennsylvania State University, argued that the coordination among Peace Science Society International (PSSI) and APSN scholars could be fruitful. Dr. Raul CARUSO from Universita Cattolica del Sacro, Cuore, Milan, introduced future directions on the journal, Peace Economics, Peace Science and Public Policy (PEPS). Finally, Dr. Ling XUE of Peking University made a presentation on the upcoming third APSN conference in Beijing in 2010.

Dr. Palmer first outlined the features of PSSI, an organization consisting of about 225 regular and 75 student members, which is managed by an executive director and council, whom are elected from the membership. PSSI publishes a journal, Conflict Management and Peace Science (CMPS), which mainly deals with analyses of international conflict, although Civil war is covered regularly at PSSI meetings.

Right now, PSSI is coordinating efforts with the Network of European Peace Scientists (NEPS), and the Eurasian Peace Science Society and talking about coordination with APSN, as there is room to work together despite the differences between PSSI and APSN.

As a second presenter, Dr. Caruso talked about the journal called PEPS, which he says is committed to publishing not only the positive aspect of conflict studies but also the normative aspect of peace science. Based on this criterion, he emphasized that PEPS is willing to publish articles which focus on Asian countries and the problems of regional security.

Dr. Xue closed this panel by emphasizing the purpose of the next APSN conference in Beijing. Although research in Peace Science has only recently that gained attention in Asia, reconsideration of eastern wisdom reflected by history and culture can contribute to the field of Peace Science.

*This summary was compiled by RIETI Editorial staff.