Economic integration: What can Asia learn from the European experience?

Dear Readers,

This edition of Miyakodayori, written by Denis Tersen of the French Embassy, is based on the luncheon speech he gave at RIETI's two-day symposium on Asian economic integration (April 22 and 23). He contributed this comment on a personal capacity. Transcripts, presentation materials, and video from the conference will be available on RIETI's website in May.

East Asia has begun the long journey towards regional integration. In recent years, several initiatives have been developed--AFTA, ASEAN plus one, plus three, China-Korea-Japan dialogue, and the economic partnership agreement between Japan and Singapore. Naturally, the experience at the other end of the Eurasian continent, the European Union, has sparked a lot of interest.

It is clear that the EU was unique, as the Asian integration will be, and that there are many differences between Europe 50 years ago and Asia today. But that doesn't mean that there aren't European lessons for Asia. First, how will the two experiences diverge?

European integration has proceeded through institutions with elements of federalism, while Asian integration has been a de facto integration led by Japanese corporations and overseas Chinese corporations. Politically, it has been restricted to a classic intergovernmental cooperation, under the principle of non-interference.

On the economic side, under a common set of rules, European integration has been based on competition. Asian integration, meanwhile, has been based on corporate and relational networks, as well as a supply chain division of labor.

In Europe, there is a "European party" in each member state that is committed to strengthening integration and gathering support for Europe, across the political lines in the center of the political spectrum. In Asia, there is no equivalent. Perhaps, an Asian party is unnecessary because decisions are made through a process of consensus building.

In Europe, there has been since the beginning a good internal balance between the three big countries, Germany, France, and Italy (four after the Great Britain joined). Germany was ahead economically, but has a weaker hand in politics.

In Asia, there is an economic superpower, Japan, and a demographic and political--and potentially manufacturing--superpower, China. How to reach a balance? It is a sensitive problem, one that we have yet to solve in Europe. Future regional arrangements in Asia will require imagination and flexibility to deal with this and related issues or they will remain limited:

The income gap per capita was 1 to 1.5 in Europe at the start. It has risen to 1 to 2.5 with the accession of Ireland and Greece. It is 1 to 30 in East Asia.

Shared values versus political heterogeneity. Europe was created on the rejection of fascism after World War II. It is doubtful that "Asian values" can be a credible substitute.

Regional priority versus multilateral priority is also an interesting point. It brings us to the problem of the political economy of reforms. In most European countries (France, Italy, Germany; it is not the case for UK) reforms imposed for the sake of Europe are more easily accepted and implemented than those decided under the pressure of globalization or international organizations. The building of Europe is an overarching value, which has done a lot to oblige European countries to restructure their economies. Bureaucrats and ministers fight hard in Brussels, but afterwards they accept compromises and sell them to domestic constituents. In Asia, it may be easier to reform or open your economy because of external pressure coming from the WTO, for instance, than for the sake of regional integration. For China, the WTO is clearly the third party that leads to reform. In Japan, vested interests in agriculture, for instance, have been more ready to compromise within multilateral negotiations than in the framework of bilateral discussions.

Finally, thanks to a relative coherence, European integration has relied on a single institution, the EU (formerly the EEC), with its peripheral extensions. In Asia, there are a myriad of forums and a competition of initiatives. All these differences are the consequence of a difference of ambitions, what Tommy Koh of Singapore described as the opposition between the happy family policy versus the good neighbors policy.

It feels like Asia and Europe are getting closer. There is a European fatigue and the effectiveness of the French-German engine, which has driven Europe, has been recently questioned. The dynamic of integration through economy has reached its limits. The new challenges are now in the fields of democratic accountability, defense, or foreign policy, and new forms of cooperation will have to be established. The case for Europe has recently weakened among the elites. But a lot more worrying, the adhesion for the European project has been undermined in large parts of the population as recent polls in France and other countries have demonstrated. There is also more and more de facto integration through firms, which do not wait for institutions to adapt to globalization.

In Asia, corporate-led integration is also exhausted. Markets are segmented. Companies cannot benefit from the market effects and political side effects - if any - are very weak. The time has come for an institutional process.

With enlargement, the EU has come to accept countries at different levels of development, which means the income gap per capita will rise to 1 to 5. The challenge is not far from that in East Asia. Integration through trade has to make way for integration through development.

The relevant benchmark for East Asia is less the original EU than it is enlargement, or the partnerships between the EU and its neighbors from the south bank of the Mediterranean sea, which include trade and asymmetric liberalization ODA, capacity building, and political dialogue.

What can East Asia learn from the EU experience? I believe the following elements would help facilitate economic integration in Asia:

1. Common projects and concrete realizations by pooling resources. Asia should explore integration through joint industrial projects in the high tech sector
2. Political commitment. Regional integration is a strategic choice, which must be supported by strong and direct political commitment and leadership.
3. A core group. In East Asia, there are 13 countries. A vanguard is needed too. I don't know if the French-German engine must and can be duplicated, but clearly Japan and China will have a special role to play
4. Commitment to domestic reforms. It is difficult to achieve an external FTA and promote competition between neighbors if a state is not ready to implement its own domestic free trade economy and to develop internal market mechanisms.
5. Trade liberalization and asymmetric liberalization. Most developed nations have a special responsibility and must lead trade liberalization because the creative destruction effect of trade will be more disruptive for poor countries and the "losers" more difficult to offset.
6. Recognition of the dynamic effects of trade. Don't be obsessed by static comparative advantages. At the beginning of European integration, France was bound to become an agricultural power and Germany to specialize in manufacturing. The results have been different, and nobody had predicted that the services industry would be the core of post-industrialized economy.

I will leave the conclusion to a founding father of modern Europe, Jean Monnet: "Nothing is possible without people, nothing can last without institutions." Above all, the leaders of Asian economic integration can certainly take this idea to heart.

Author, Denis Tersen
Minister Counselor
Trade and Economy
French Embassy Tokyo

Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: araki-ichiro@rieti.go.jp
tel: 03-3501-8248 fax: 03-3501-8416

RIETI invites you to visit its English website
[ http://www.rieti.go.jp/en/index.html ].

The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).