DEEPENING economic integration brings benefits from international trade and capital flows. However, it can also aggravate the transmission of external shocks that can be important sources of fluctuations in the domestic economy. This requires policymakers
Moreover, international interdependence provides important information to help the government choose the suitable level of the country’s openness via trade and financial liberalisation.
After the Asian economic crisis of 1997-98, the Southeast Asian countries began deepening regional economic collaboration. Moreover, the Asean states have also been enhancing their collaboration with other Asian countries and the developed economies outside the region, especially in East Asia, for example Asean+3, Asean+6, and the Trans-Pacific Partnership.
A recent study for the National Institute of Development Administration by this writer and Thi Mai Lien Dau examined international interdependence in Asean. We first compared the effects of external shocks in the real sector (GDP growth) from different regions and found that the shocks from the Asia-Pacific region had the strongest impacts on the Asean economy.
After 2000, the most important countries have shifted from Japan to China. The shocks from the United States’ GDP growth are the only significant source of variation outside the Asian region. Even though the patterns of responsiveness are consistent among the Asean countries, the magnitudes of effects are varied. Economic growth in Singapore reacts to foreign shocks more than the others, followed by Thailand, Malaysia, the Philippines and Indonesia, in that order.
Global financial turmoil has significantly affected the Asean countries. For example, major currency crises in Latin America have been important sources of economic fluctuation in most of the Asean countries.
In the US and other developed countries, the shocks from the financial sector (equity, interest rates) also have stronger effects than GDP shocks.
The evidence of this increasing degree of regional and global interdependence has several important policy implications for the Asean countries.
First, an increasing role of the demand shock from other Asian countries shows that intra-regional trade is an important source of economic interdependence. The important roles of China and Japan suggest that the future direction of Asean should emphasise enlarged regional collaboration. The Asean+3 negotiations that include China, South Korea and Japan should be the most suitable because they cover the important countries in Asia that affect fluctuation in most of the Asean countries.
Second, policy coordination should help the Asean countries tackle the effects of external shocks. However, common monetary and currency policies within Asean are still not necessary because the magnitudes of their reactions to external shocks are still different.
Finally, financial linkage is an important transmission channel of shock from the global economy outside Asia. Regional collaboration in financial-safeguards policy should be an important issue. For example, the multilateral Chiang Mai Initiative should be further implemented to strengthen the regional safety net for Asean and other East Asian countries from future global economic crises.
Yuthana Sethapramote, PhD, is with the Graduate School of Development Economics, National Institute of Development Administration. E-mail: email@example.com. Additional details on the subject of this article can be found in the 2016 paper “Exploring International Interdependencies in Asean Using a Global Vector Auto-Regression Model” by Thi Mai Lien Dau and Yuthana Sethapramote.