Suman Bery: The year of Asia?

Asia is in the spotlight: does trouble lie ahead.

It is famously said of London buses that they never come singly but always in pairs or even triples. The same is apparently true of conferences dealing with emerging markets. The year 2006 is clearly the year of Asia on the brie and Chardonnay circuit. It started with the "India everywhere" extravaganza at Davos, followed by a conclave on Asia in London in March sponsored by the UK's Department for International Development (DFID). The annual meeting of the Asian Development Bank will occur in the heat of May in our own Hyderabad. This will be followed by the annual meetings of the International Monetary Fund and the World Bank in Singapore in September. Even academics are not spared: the World Bank's Annual Bank Conference on Development Economics (ABCDE) is to be held in Tokyo this year.

For the international agencies involved, this focus on developing Asia is partly driven by the fear of irrelevance. Given Asia's strong growth, bulging reserves and attractiveness for private capital, the need for official financial assistance has virtually disappeared. This loss of appetite is compounded by memories of arm-twisting during the late-nineties financial crisis. For the international financial community, Asia's fast growth, growing middle class and the relatively undeveloped state of its financial markets make it a tempting target.

Were Asia a stock, such widespread, fawning attention would be a sign to sell. Certainly the precedent is not promising. The last Fund-Bank Meetings in Asia were in Hong Kong in 1997 just as the Asian financial crisis broke. Asia is once again at a delicate moment, both economically and politically.

Economically, developing Asia has been floating on the sea of liquidity unleashed by the US Federal Reserve and the Bank of Japan. This has been a major factor boosting growth in the region, and has helped in the rescue and repair of financial systems throughout the region. But as monetary policy has tightened in the US and Europe (and is beginning to tighten in Japan), the two giant engines of recent global growth, the US and China, are beginning to slow down. One hopes for a soft landing for Asia, but there will undoubtedly be bumps along the way.

One wishes for strong economic governance at such points of inflection. While there is increasing maturity in the economic relationship among the Asian Big Three (the US, Japan and China), political relationships are less straightforward. The US-Japan relationship is currently in robust health. Although China's economic relationship with Japan is thriving, domestic political compulsions on both sides have revived bitterness arising from the Second World War. Between China and the US, economic, security and human rights issues are divisive, including exchange-rate management, intellectual property protection, military spending, Taiwan and North Korea. An unknown element is the involvement of the US Congress, which is in an increasingly aggressive mood towards China largely because of the huge trade surplus that China is running with the US.

Despite India's historical links with both Japan and South-East Asia, from the 1960s till the 1990s we were relatively detached from developments in the arc from Bangkok to Seoul. This sentiment was largely reciprocated both within and outside the region: for the Americans "Asia" ended in Thailand. But things have changed substantially since the end of the cold war. Our "look East" policy in the 1990s sought to extend our diplomatic reach; diplomatic initiatives have been reinforced by an expansion of trade and investment links both with ASEAN (largely Singapore) and then with China. Our increased interest in the Asian rim has been marked by a proliferation of bilateral study groups and trade agreements with Singapore, Thailand, Japan, Korea and China.

India's new-found enthusiasm for bilateral agreements in turn reflects important structural developments in global and regional economic diplomacy. At the global level, the commitment to multilateral liberalisation by both the US and the European Union (EU) seems to be weakening even as both parties are busy signing bilateral and regional trade agreements. Within Asia, China has been setting the pace for bilateral trade deals, willingly granting access to its own market in exchange for preferred access to other countries in the region, setting up supply chains linked up with its own manufacturing sector and at the same time creating markets for the finished output. Both India and Japan, traditionally multilateralists, have been forced to respond in kind.

The economic integration of the Asian rim over the last 30 years has been market- rather than government-driven. While elements of protection undoubtedly remain, particularly in agriculture, the integration has taken place under the discipline of the multilateral "most-favoured-nation" (MFN) principle, and is an excellent advertisement for the efficiencies that result. This, together with strong infrastructure and logistics, has permitted efficient and dynamic supply chains to develop. While the underlying MFN framework will not disappear, there are clear risks in having it replaced by a patchwork of ad hoc and internally inconsistent bilateral trade agreements which, if nothing else, can add to transactions costs through the cumbersome rules of origin that follow in their wake.

The new enthusiasm in the region is for deeper financial integration, possibly leading to a common currency area in due course. The model here is the process followed by the European Union which resulted in the creation of the euro. India has been so far on the periphery, as the process is being driven by the grouping known as ASEAN+3, which includes all ten ASEAN members plus Japan, China and South Korea. Here the challenges are even greater and the stakes even higher than on the trade side, as both the experience of the Asian financial crisis and the current travails of the euro bloc indicate.

Asia has had a good ride these past five years, India included, but nothing good lasts forever. We may be entering a more turbulent time both economically and politically for the region. India's fortunes are now more closely linked with the region, but it is unlikely to be accepted as a full member of the club. We should not mind this, as long as we can use the opportunities presented by Asian integration to further our own liberalisation.

The author is Director-General, National Council of Applied Economic Research, New Delhi. The views expressed here are personal