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9 Aug, 2011

Five Ways to Strengthen Asia-Pacific Economies

N.R. Narayana Murthy, Chairman, Infosys Ltd, India

By Mr. N.R. Narayana Murthy, Chairman, Infosys Limited

Adapted from a speech delivered at the Opening Session of the Asia-Pacific Business Forum 2011, Bangkok, 25 July 2011 on “Regional Trade and Investment Challenges and Opportunities in the Post Crisis Era”.

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This talk is focused on the Asia-Pacific region which has been at the heart of global economic growth in the last few years.

While robust domestic consumption in China and India has been a key factor for leading this growth, the increase in intra-regional trade has also supported this momentum. Regional trade in the Asia-Pacific region has boomed in the last decade aided by trade agreements and better transport and communications connectivity. Going forward, the economic growth outlook for the Asia-Pacific region looks promising. This translates to a lucrative trade opportunity for export-focused economies to diversify from their dependence on Western markets. The context Asia-Pacific (China, Japan, India, ASEAN Countries, and Australia) has been leading global economic growth in the post crisis era.

The V-shaped recovery in the region’s GDP growth (8.8% in 2010 as compared to 4.7% in 2009) is evidence of the momentum in these economies.

In 2010, the Asia-Pacific region saw a GDP growth of more than 8% as compared to 5% globally.

Asia-Pacific’s economic growth has been aided by strong domestic demand and the rapid turnaround in export.

It is not just exports outside the region but trade within the countries of Asia- Pacific region which has sustained the growth.

Take the case of India. Growth in exports from India in 2010-11 has been 37% out of which 50% of exports were with Asian economies.

The IMF, in its April 2011 Asia-Pacific outlook, notes that Asia’s trade with economies outside the region has doubled since 2000 while intra-Asia trade has tripled.

As a percentage of total exports from Asia, intraregional exports accounted for 55% of total exports as compared to 45% ten years ago.

This evolving change in the end markets has been led by:

1. The diminishing of demand in traditional Western markets

2. The need to find new export markets for trade development; and

3. Asia’s booming consumption demand.

Will this momentum continue into the future?

Future prospects

The prospects appear bright when you look at the outlook for the Asia-Pacific region.

The IMF projects that the Asia-Pacific region will grow by 7% in both 2011 and 2012. But how we leverage this opportunity is the key factor.

A closer look at the past growth trends shows that economic growth in the Asia- Pacific region has not been even.

Countries such as China, India and Indonesia enjoy twin engines of growth – domestic and export demand.

For export-oriented countries, differences in trade flow result in sizeable impact on their developmental agenda and economic stability.

There is a noticeable difference in GDP growth rates between the developed and developing economies within the region. This is partly due to the disparity in their economic, scientific, technological and infrastructural development levels.

Therefore, developing economies have to focus on boosting infrastructure, private investment and consumption.

To enable this trade shift, developing economies have to focus on intraregional trade for economic growth and development.

What should we do to enable the shift?

To overcome these developmental challenges and this growth dichotomy and sustain growing intraregional trade, we have to:

1. Open up more and more Asia-Pacific countries for free trade

2. Develop infrastructure to accelerate connectivity

3. Enhance trade facilitation procedures

4. Coordinate efforts on exchange management

5. Nurture growth of services trade in addition to goods trade

1. Open up all Asia Pacific countries for free trade

One of the enablers of trade has been the regional trade agreement (RTA). RTAs have increased significantly in the last few years.

Various studies show that countries in Asia and the Pacific have increased the number of RTAs in force by 18% since 2007 (17 added over 3-4 year period).

For instance, India has concluded 7 free trade agreements and 6 preferential trading agreements so far and 10 free trade agreements are under negotiation.

While there is no concrete evidence that RTAs actually make trade larger, cheaper and easier, we can draw conclusions about the utility of RTAs based on their outcomes.

Take the case of APTA – Asia-Pacific Trade Agreement – that links China and India, the two fast growing economies, under the same trade umbrella.

Studies show that intra-APTA imports showed an increase of 5% since 2001 and accounted for 15.2% of total imports of APTA in 2007.

We can conclude that RTAs which have depth in commitment and breadth in the scope of coverage do result in freer movements of labour, capital and knowledge in addition to free trade.

Some of the new agreements are constructive or are bilateral/subregional in nature. They do not create a single, seamless, unified Asia-Pacific market.

To overcome this, we should look at a broad trade agreement that can form a unified free trade market.

2. Develop infrastructure to accelerate connectivity

While regional connectivity has improved in the last decade, moving goods is still very expensive within the Asia-Pacific region.

Long distances, ageing vehicles, high shipment costs – all add up to trading cost. A common regional agenda focused on infrastructure development to connect proximate trade partners is a must. From a longer term perspective, ESCAP estimates that the region needs an annual investment of more than $600 billion in transport, energy, water and telecommunications, with an annual shortfall of more than $200 billion.

We should facilitate and attract FDI from the developed countries of the Asia-Pacific region to meet the region’s investment needs. We can look at forming a regional financial ecosystem comprising the Asia-Pacific economies to intermediate between the developed and the developing economies, and to leverage growing savings and foreign exchange reserves to bring them to meet uncovered investment requirements.

3. Enhance trade facilitation procedures

Tedious trade procedures within the region need to be simplified. There has been a significant reduction in trade transaction costs by China, India, and Viet Nam in the last few years.

To further streamline, Asia-Pacific countries should leverage the advances in e- commerce and build a robust ICT network. This network should enable easy trade and improve trade data sharing.

Complications such as lack of privacy laws and sharing of cross border trade data should be overcome through concentrated dialogue.

Many Asia-Pacific countries have to harmonize existing legal regimes to improve trade facilitation and a unified Asia-Pacific trade agreement can look to incorporate these developmental aspects within their goals.

4. Coordinate effort on exchange rate policies

The Asia-Pacific region has a number of exchange rate regimes. Large swings in US dollar rates cause instability in Asian exchange rates and at times, make trade uncompetitive.

Asia-Pacific requires a coordinated currency management system which reduces exchange fluctuations and facilitates trade and macroeconomic stability.

There have been talks of a common Asian currency from 2007 onward. Merits of such a common currency and its impact on trade should be discussed and implemented for regional economic and financial integration in the long term.

5. Nurture growth of services trade

After a weak 2009, reports show that commercial services saw a revival in 2010. A closer look at data on services in Asia-Pacific shows that intraregional trade in services is still small. Regional trade in services is poor. Most of the trade in services is conducted with economies outside the region.

There are several “behind-the-border” barriers for services trade. We should look at removing such barriers and expanding on existing agreements. This shift offers a great opportunity to move up the value chain in services. A well-articulated and focused approach to grow intra-regional commercial services benefits all the interested parties.

Cooperation is the key

When I look at the progress of trade in Asia-Pacific over the last decade, I see a region which has survived multiple economic crises and one that is poised for greater heights in the coming decade.

This has been possible despite uneven development across the region. Intraregional trade is a powerful means to bring cooperation, economic growth and poverty alleviation. Trade is also a two way process – export and import.

This would require a sound policy mix within countries – a mix that supports trade liberalization and economic reforms and at the same time fosters cooperation amongst trade partners.

To strengthen our regional bond, we should build consensus and resolve easier issues before taking on the difficult ones.

We should be open and inclusive, trust each other, and work towards a common agenda.

References

(+) IMF: Asia Pacific outlook 2011

(+) UNESCAP: Asia Pacific Trade and Investment Report 2011, 2010 & Economic and social survey Asia-Pacific 2011

(+) OECD policy dialogue on trade and aid

(+) Statistics from various commerce ministries

(+) Website references: IMF, UNESCAP, FT, ADB

  • Dr Joshua Peter Tan

    I totally agreed with Mr. Narayana, the key factors in order to increase the momentum of trade and other services within the Asia-Pacific sector would be the element of trust and cooperation which are the vital factors which are deemed extremely important principal in any joint cooperation.

    Sad to say, organisations/association are been set up not agreesively promoting this two important values and this old existing setup seem to serve unfortunately only self benefiting group of people. In order to re-energise it is my hope to see massive revamp in existing large association/organisation so that whatever been said by Mr. Narayanan will excel further to greater height.