23 Apr, 2014

Free Download: ADB report Outlines Impact of Shifting Global, Asian Landscapes

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MANILA, PHILIPPINES, 22 April 2014 (ADB media release) – Shifting relations between Asian countries and the changing global economy mean that Asia needs to strengthen its economic cooperation, says the Asian Development Bank’s (ADB) Asian Economic Integration Monitor released today.

“Asia needs stronger cooperation now more than ever,” said Iwan J. Azis, Head of ADB’s Office of Regional Economic Integration. “Regional trade and financial integration have ratcheted up over the past decade and closer cooperation is needed to counter geopolitical risks while surveillance and financial safety nets can address contagion.”

Asia’s intraregional trade share has risen to about 54% in recent years and into early 2013, with trade between subregions rising, particularly for Central Asia as well as the Pacific. Asia-Pacific’s trade share with other emerging markets outside the region continues to rise while the trade share with the US and Japan continues to decline.

Video: Asian Economic Integration Monitor – April 2014

Financial integration continues to deepen too, with an increase in cross-border equity and debt holdings and foreign direct investment. Intraregional bank credit flows – particularly from Japan and Australia to other Asian countries – is emerging as an important source of stable external financing.

Southeast Asian nations are attracting more foreign direct investment from within the region and from East Asia, strengthening production networks as the region gears up for the establishment of the ASEAN Economic Community at end 2015. For example, businesses from Japan, the biggest foreign investor in Southeast Asia, are increasingly shifting their production chains to the region.

The report shows that with the economy of the People’s Republic of China (PRC) growing and driven by domestic shocks, economic growth in Japan, the Republic of Korea, and ASEAN is increasingly correlated to the PRC.

As well as closer forms of economic cooperation, the region urgently needs to improve its insurance and other disaster risk financing to address the high human and economic toll of floods, droughts, and other increasingly common natural disasters that have cross-border impacts.

Asia and the Pacific is more vulnerable to natural hazards than any other region in the world, with financial costs alone totaling about $53 billion annually over the last 20 years. However, in 2013 only 7.6% of those economic losses were insured, so costs are threatening to outstrip governments’ ability to finance recovery. Long-term damage to infrastructure, businesses, farms, and homes can push many back into poverty.

Key priorities for developing disaster risk financing markets and strengthening financial resilience include business continuity planning, enhanced technical and institutional capabilities, and better coordination among public authorities.

Highlights

This issue of the Asian Economic Integration Monitor includes the following highlights:

• The external environment for developing Asia should improve through 2015 with the United States, Japan, and eurozone all showing signs that economic recovery is finally gaining traction.

• Even as growth in some of the region’s largest economies moderates, developing Asia should see a marginal increase in growth over the next 2 years as improved demand from advanced economies spurs exports and several economies boost investment.

• There are three main downside risks, none of which are new and all have been on policymakers’ radar for some time: (i) an economic shock or reversal in any G3 economy could derail the nascent global recovery; (ii) the People’s Republic of China (PRC) economy moderates too quickly, affecting the rest of developing Asia; and (iii) volatile capital flows affect financial conditions across the region.

• Global and regional supply chains continue to evolve, affecting the nature and dynamics of foreign direct investment and trade integration; this presents an opportunity to further open individual economies and strengthen trade and investment regimes.

• Asia’s intraregional trade remains strong, if falling marginally from 54.9% in 2012 to 54.1% in 2013; nonetheless, inter-subregional trade between each subregion and the rest of Asia is rising, except for South Asia; Asia’s intraregional trade bias also remains strong but is falling slightly—Southeast Asia has high intra-subregional trade bias and strong links with East Asia and South Asia.

• Financial integration across Asia continues to deepen both in terms of quantity and price measures; intraregional bank credit flows—particularly from Japan and Australia to other Asian economies—have emerged as an important source of external financing.

• Despite the sharp decline in global foreign direct investment in 2012, inflows to Asia decelerated much more slowly—due to a significant increase in intra-Asian foreign direct investment flows, especially from East Asia to ASEAN.

• There are strong trade, finance, investment, and tourism links between the PRC, Japan, and the Republic of Korea, with economic growth among the three becoming more correlated, and the PRC having a greater impact on growth in Japan and the Republic of Korea.

• People traveling within Asia continue to bolster economic and cultural ties, although emerging geopolitical trends may have hurt some tourist flows recently; worker remittances provide households a means to spread risk and mitigate income shocks.

• Deepening economic links imply more significant spillovers and increased contagion during crises; strengthening regional cooperation in surveillance and financial safety nets is imperative.

• As growth moderates in some of the region’s largest economies—and with the potential for increased geopolitical tension—it is critical Asia continues to strive toward broader and more effective regional cooperation.

Theme Chapter: Insuring against Asia’s Natural Catastrophes

The theme chapter of the April 2014 Asian Economic Integration Monitor issue includes the following highlights:

• Over the past 20 years, Asia has borne half the estimated global economic cost of natural disasters—about $53 billion annually; this could potentially wipe out gains from economic growth in many economies.

• The gap between total economic losses and insured losses can be so wide that it may outstrip government’s ability to act as insurer of last resort. Regional cooperation along with better and more effective national policies to offer disaster risk financing instruments is therefore critical.

• Key priorities for developing disaster risk financing markets and strengthening financial resilience should include business continuity planning, enhancing technical and institutional capacities, and coordinating various governmental authorities across all levels.