Asia‘s Economic Independence

A relationship between two or more parties, when they become dependent on each other for economic values such as services, products, currency, etc. is defined as economic interdependence. Asia has a long history of international trade with cultural and political relations with neighbouring countries. During World War II, there was a reduction in these activities because of political conflicts. After 1970, the intra-regional trade activities started picking up the pace again because of export-led growth strategies of many countries. After observing the success of Japan, many new economies such as Korea, Hong Kong, Taiwan, Thailand, etc. started focusing on industrialisation and export. Later on, around 1980, China also adopted the trade and payment liberalisation. Over the course of time south, Asian countries also started opening their economies. Additionally, different initiatives were taken by Asian countries to increase regional economic cooperation. Various trade agreements such as ASEAN Free Trade Area (AFTA), the South Asian Preferential Trade Agreement (SAPTA) and Asia Pacific Economic Cooperation (APEC) were signed.

As a result of all these efforts, the Asian economies became more and more dependent on each other. Over the course of time, the scope of economic interdependence increased from the international trade of goods and services to flow to capital as well as people. To look out for better options, firms and individuals started looking at neighbouring countries from investment and job point of view. Thus, the structure of economic interdependence became more complex. Hence to analyze the current situation of economic interdependence of countries, it is mandatory to look at all the factors described in the figure given below –

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Capital Flow – One of the key measures of international capital flow is a foreign direct investment (FDI). With the slow growth of developed economies and eurozone crisis, Asia has become the center of attraction for FDI. The positive outlook for many Asian economies and high growth prospects of developing countries are attracting foreign investments from big Asian players also.

As per UNCTAD data, the increase in FDI inflows to Asia has been around USD 75 billion per year between 1997-2004. On the other side, the outflows from the Asian nations have also increased by USD 50 billion per year. The major contribution of the FDI flows comes from China, Hong Kong, Singapore, South Korea, Taiwan and Malaysia. The recent increase in the aggressive expansion plans of Indian firms has increased India’s ranking in FDI outflow from 39 in 1990 to 20 in 2007.

It can be easily observed that in terms of FDI flows, Southeast Asian countries have been much more successful than other regions in Asia. The intra-region investment in the south-east Asian countries is continuously on the rise.

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Source: ASEAN Investment Report 2013-14, United Nations

Out of this huge FDI in South Asian countries, two third is accounted by higher-income countries such as Singapore, Malaysia, Thailand, etc. On the other side, the flow of FDI among other regions of Asia has been relatively low and constant.

Trade Activities – The earlier trade activities of Asian countries were limited to the neighbourins but as the transportation methods evolved, Asian countries started to explore other options. After 1990, the share of trade activities of Asian economies with other Asian economies increased significantly. The chart given below gives the % share of imports from Asian countries for the five regions of Asia.

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Source: Internation Trade Corporations calculations based on UN COMTRADE statistics

It can be oberved from the chart that the share of imports from other Asian countries has been either increasing or constant for most of the regions within Asia. The comparison across regions shows the high dependency of countries from southeast region on other Asian countries. The geographics location of west and central Asian countries puts them in a position to have trade significant proporation of trade with European and African countries. Hence the west and central region have comparatively less % share of imports from asian countries.

People’s Movement – With the ease in visa norms, people became more open towards migrating to some other country for work. According to the report of International Federation of Red Cross and Red Crescent Societies, the number of international migrants increased by 77 million during the period of 1990-2013. Out of these 77 million migrants, 21 million migrants were within Asia. The table given below gives some sample datapoints that show the extent and effect of labor migration with respect to Asian economies –

UntitledSource: Manila Conference on Labor Migration, 2015

From the given table, it can be observed that a majority of Asian migrant workers are working in other Asian countries. Significnat proporaton of these workers comes from the south Asian countries such as India, Pakistan, Nepal, Bangladesh, etc. and works in East Asian and Gulf region. The number of workers and monetary size of remittances are significant enough to emphasize the level of dependency of Asian economies.

Trade Agreements – As the flow of goods and services, people and capital started to increase, Asian countries too felt the need of free trade agreements. The major push to FTAs began in 1990 and since then the growth in the number of FTAs has been high. By the end of 2010, Asian countries had concluded 61 FTAs, and round 79 were under negotiations.

Apart from the increase in the number of FTAs, another key point to note is the geographic orientation of these FTAs. The fraction of FTAs concluded with another Asian countries out of total FTAs done by a country is quite high. The chart given below gives the information on geographic break up of FTAs for major Asian countries –

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Source: Asian FTAs: Trends, Prospects and Challenges, Asian Development Bank, 2010

The high inclination towards the FTAs between Asian countries strengthens the argument of economic interdependence in Asia.

Conclusions: Based on the factor analyzed above, it can be concluded that while the economic interdependence among asian countries has increased significantly over the years, not all the countries are benefitting proportionately. The center and west asian countries are till now the major employment source for unkskilled labour force of the nearby and southeast asian countries. The focus of FDI flows within and from outside Asia has been southeast Asian countries.

References:
  • Wu, Shiau and Chiang, Economi Interdependence and Security in the Asia Pacific, Taiwan University, 2006
  • ASEAN Investment Report 2013-14, United Nations
  • Manila Conference on Labor Migration, 2015
  • Asian FTAs: Trends, Prospects and Challenges, Asian Development Bank, 2010
  • Ashley J Tellis, Michael Wills, Trade, Independence and Security, 2007
  • FDI in Asia, Financiar Worldwide Magazine, January 2015
  • FDI Database: United Nations Conference on Trade and Development (UNCTAD)
  • Trade Database: International Trade Centre
  • Peter Drysdale , Asia’s economic and political interdependence, East Asia Forum, May 2012
  • What is Interdependence of Countries, Economics Essay, UK Essays
  • Ramkishen Rajan, Foreign Direct Investment Flows within Developing Asia, Ecomonitor, May, 2008

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Mohit is a PGP 1 student at IIM Ahmedabad. A Gold Medalist and All-Rounder, he also headed the Training and Placement Cell at IIT Delhi. In last 3 year at PwC-Diamond, he has worked with several Fortune 500 clients in healthcare, energy and retail sectors and published thought leadership reports on Customer Experience in Grocery and Retail Banking verticals.