Geoscience Reference
In-Depth Information
powerful reminder of the danger of contagion. An idiosyncratic shock, an exchange
rate collapse followed by widespread financial crisis occurring in Thailand, leaped
across boundaries, devastating economies of Indonesia, Malaysia, and the Republic
of Korea. And yet the scale of integration in Asia at the time was more limited than
now, despite some policy convergence. One can only imagine how much worse the
crisis would have been had intra-Asian cross-border financial holdings had been
larger than they were.
In adopting a single currency, the risks of integration cannot be overemphasized.
Many studies prior to the formation of euro emphasized the benefits and
opportunities of a single currency. This could be true for Asia as well. But when
critical preconditions are not in place, and a desirable sequence is not followed (for
example, political before economic integration), forcing a single currency on a
group of countries can be risky—and costly as in the Eurozone today. Taking
account of these risks and costs—some of which are intangible—a single currency
remains a long-term prospect for Asia. Even after running some sensitivity tests, the
outcome is the same (Azis
2009
). Clearly, it could be counterproductive to focus on
potential benefits while neglecting the risks and costs of a single currency in
promoting regional integration.
Proposition 5
Trade diversion is another potential risk from regional integration,
potentially detrimental to welfare.
Trade diversion is a classic integration risk debated among academics and policy
makers alike.
7
It often occurs under free trade agreements (FTAs), when reduced
tariffs give a less efficient producer under the FTA comparative advantage over a
more efficient competitor outside. In Asia, the South Asia Free Trade Area is a
notable example. Given relatively high levels of protection in the region, many
predicted the risk of trade-diversion would be high (Baysan et al.
2006
). This could
be minimized, however, if regional integration was driven by unilateral and multi-
lateral liberalization.
8
When geographical agglomeration effects are also at work,
regional integration produces unequal net benefits; development takes place in a
few rather than in all.
Proposition 6
Integration tends to increase inequality within countries
In a report by the Commission on the Measurement of Economic Performance
and Social Progress, Stiglitz et al. (
2010
) viewed inequalities as the first cross-
cutting challenge for quality-of-life indicators. They argued that inequalities should
be assessed comprehensively by examining differences in the quality of life—
across people, groups, and generations.
7
A customs union is a form of regional integration likely to cause the largest trade diversion,
where effects are distributed unequally.
8
The trade-off between trade creation and trade diversion is often used to back north-south FTAs.
South-south FTAs are more prone to trade diversion.
