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FiguresPageI.1.Gross national income per capita to trade share .14I.2.Gross national income per capita to inward stock of foreigndirect investment .14I.3.Gross national income per capita to intensity of Internet users .15I.4.Gross national income per capita to intensity of telephoneand mobile phone users .15II.1.Regional cooperation in different sectors and their interlinkages .26III.1.Kaleidoscope of selected Asia-Pacific trade agreements .49III.2.Percentage increase in trade with the world and partners(Bangkok Agreement countries compared with AFTAand SAARC countries) .56Consolidating BTAs among BIMST-EC and Bangkok Agreementmembers: An example towards future integration .62Bridging the digital divide and regional cooperation .90III.3.V.1.Annex figure VII.1.Two-tier securitization scheme for SME financing .157Annex figure VII.2.An example of securitization .158xi

MapsPagexiiAsian Highway route map .76Trans-Asian railway network map .77ESCAP region .134

AnnexesPageI.Selected major agreements and other cooperation arrangements .135II.Selected trade and investment agreements in the region .140III.Other important initiatives in the area of ICT .147IV.Regional strategy for ICT proposed by ESCAP .150V.Structure of the Chiang Mai Initiative .153VI.Credit guarantees and credit guarantee agencies .155VII.Securitization of SME bonds .156xiii

AbbreviationsxivADBAsian Development BankAFTAASEAN Free Trade AreaAPECAsia-Pacific Economic CooperationAPTAsia-Pacific TelecommunityAPTAAsia-Pacific Trade AgreementASEANAssociation of Southeast Asian NationsBTAsbilateral trading arrangementsECEEconomic Commission for EuropeECOEconomic Cooperation OrganizationESCWAEconomic and Social Commission for Western AsiaEUEuropean UnionFDIforeign direct investmentGATSGeneral Agreement on Trade in ServicesGATTGeneral Agreement on Tariffs and TradeGDPgross domestic productGNIgross national incomeGNPgross national productICSTinformation, communication and space technologyICTinformation and communication technologyIMFInternational Monetary FundITinformation technologyITUInternational Telecommunication UnionMFNmost-favoured-nationODAofficial development assistancePPPpurchasing power parityPTAspreferential trading arrangementsRTAsregional trading arrangementsSAARCSouth Asian Association for Regional CooperationSMEssmall and medium-sized enterprisesUNCTADUnited Nations Conference on Trade and DevelopmentUNDPUnited Nations Development ProgrammeUNESCOUnited Nations Educational, Scientific and Cultural OrganizationWTOWorld Trade Organization

INTRODUCTIONGlobalization is a complex, multidimensional and unevenprocess through which goods and services, capital, people,information and ideas flow across borders, leading to greater integrationof economies and societies. The benefits are clearly visible in theincreased trade, higher growth and falling poverty of countries fullyengaged in the process. Globalization, however, has become controversial precisely because of the uneven distribution of its benefits andits equally visible negative impacts in countries where it has caused joblosses, rising income disparity and environmental challenges.Globalization is acomplex, uneven andhence controversialprocessThe Asia-Pacific region vividly illustrates this phenomenon.It spans countries which have been among the most vigorous adherentsand major beneficiaries of globalization. The newly industrializedeconomies (NIEs) such as Hong Kong, China; the Republic ofKorea; Singapore; and Taiwan Province of China, together withemerging South-East Asian countries, like Malaysia and Thailandhave experienced high growth rates, improved living standards andan impressive drop in poverty. The number of poor in East Asiaand the Pacific dropped from 457 million in 1990 to 282 million in1999.1However, the region contains many other countries, including leastdeveloped and landlocked countries, small islands and transitionaleconomies, whose lack of infrastructure, resources and skills leavesthem unable to compete in fast-paced world markets or exploit theopportunities presented by globalization. In the face of falling commodityprices and protectionist trading practices, they are at risk of becomingincreasingly marginalized in the world economy.Emerging socio-economic and geopolitical issues add to thecomplexity of the international business environment. The presentglobal security climate and the associated costs it imposes on the free1 World Bank, “East Asia update: regional overview, October 2003”, 03.pdf , 20 November 2003.1

Meeting the Challenges in an Era of Globalization by Strengthening Regional Development Cooperationflow of goods, services and people threaten to act as further constraintson developing countries’ ability to reap the benefits of globalization.Lack of regional and international cooperation arrangements has led toexcessive transaction costs and rent-seeking in international migration,an important source of foreign exchange for many developing countriesin the region and a source of low-cost labour for host economies.Outbreaks of disease in the absence of effective surveillance mechanisms, collaborative research or the supply of drugs at affordable pricescould hurt or reverse the development process in affected countries, asseen in the case of HIV/AIDS.The challenge is how tomanage globalization;regional cooperationcan helpSo what options are available to policy makers? Is South-Southcooperation useful either as a defence against the negative falloutfrom globalization or for exploiting its benefits? Should globalizationbe discarded altogether? The Millennium Summit made it clear that theimportant debate is not whether globalization is good or bad but how itshould be managed to make it a vehicle for broad-based development.The present study analyses how strengthening regional developmentcooperation can contribute to that result.The rewards from exploiting globalization can be substantial.Openness to international trade and investment facilitates the acquisitionof inputs and technologies which strengthen growth and increaseefficiency. Access to wider markets and more diverse exports reducethe risks of trade volatility and exclusion by particular country markets.Openness to the free flow of capital helps to attract FDI, whichcan stimulate domestic investment, thus contributing to employmentgeneration and economic growth. Financial openness also helps toincrease the depth and breadth of domestic financial markets, leading toincreased efficiency in financial intermediation through lower costs andimproved resource allocation.But globalization also carries risks and sometimes heavy social andeconomic costs, as Asia’s 1997 financial crisis starkly revealed. Opennessto global capital markets leaves domestic financial markets vulnerable tosudden shocks, leading to greater volatility in exchange rates and abruptreversal of financial flows, particularly in countries where financialsystems are weak and economic policies lack credibility. Trade liberalization has left many developing countries marginalized as demand fortheir unskilled labour and real wages fell. Fear of job losses because ofcheap labour in developing countries has heightened the sense of vulnerability among blue and white collar workers in industrialized countries.Many countries lack either the resources or the skills to upgradeproduction technologies, widening the technological gap between industrial and developing countries. This compels them to continue to dependon primary commodity exports, with the well-known structural problems2

Introductionassociated with them.2 Moreover, developing countries’ access to capitalmarkets tends to be asymmetric: they are able to borrow only in “good”times and face severe credit constraints during “bad” times.Managing globalization to maximize the benefits and minimizethese potential costs depends as much on political will as on marketforces and new technologies. The factors within the control of policymakers, such as structural reforms, ensuring consistency in policies,transparency and good governance, support this strategic aim. Theeconomies that gained the most from globalization are those, like EastAsia’s NIEs, that adjusted their policies and institutions to exploit it.At the Fourth WTO Ministerial Conference, the InternationalConference on Financing for Development and the World Summit onSustainable Development, a global consensus was forged on prioritiesand policies for a new partnership for development between developedand developing countries aimed at accelerating economic growth, reducingpoverty and promoting sustainable development so that the benefits ofglobalization could be shared by all. The Doha Development Agenda isaimed at establishing a development-friendly multilateral trading system.The Monterrey Consensus pledged action on domestic, international andsystemic policy issues, in particular those relating to financing for development. It made a further commitment to enhance the role of regional andsubregional agreements and free trade areas consistent with the multilateral trading system. The World Summit also supported the emergence ofstronger regional groupings and alliances to promote regional cooperation, improved international cooperation and sustainable development.The Asia-Pacific region can draw on considerable strengths in thetask of bringing poor and marginalized countries into the developmentprocess and ensuring that global development agendas work for them.First, the region’s level of savings has been the highest in the world.Over the past five years, the total combined savings of the 10-countryAssociation of Southeast Asian Nations together with China, theRepublic of Korea and Japan (ASEAN 3) have accounted, on average,for 19.7 per cent of global savings and are larger in absolute terms thanthose of the European Union. Second, the region has a large accumulation of foreign reserves. The total foreign reserves of ASEAN 3alone amounted to 1.9 trillion at the end of 2003. Third, the regioncontains Japan, the second-largest economy in the world, and two largeand populous economies, China and India, which could serve as stimulito growth in the region. Growth in income and demand arising withinAsia and the Pacific is expected to provide a powerful driving force fordevelopment in the region.The Asia-Pacificregion needs to buildon its strengths, whichare many2 The structural problems faced by primary commodities producers include falling relativeprices and increasing protectionist measures by industrialized countries, which negate the benefits ofcompetition for developing countries.3

Meeting the Challenges in an Era of Globalization by Strengthening Regional Development CooperationRegion’s reservesinvested abroad whilepoorer countries faceresource gapBut the region also contends with weaknesses. It is home to twothirds of the world’s poor. Many countries in the region have yet tointroduce the economic policies, institutions and standards of governanceneeded to exploit the benefits of globalization. The lack of physical andsocial infrastructure and limited access to financial capital hinder manyof the region’s developing countries. So do poor standards of governance, transparency and accountability and low regard for the environment. The region continues to lend a large part of its savings to theindustrialized world to finance their investments at the same time asmany developing countries in the region face difficulties in mobilizingdevelopment finance. The region’s large foreign exchange reserveshave been invested mainly in low-return safe assets in more advancedcountries, particularly the United States of America, and are recycledback into the region at a higher cost in the form of short-term capital,with potentially destabilizing effects on financial markets in times ofdistress.In a period of growing global economic interdependence, regionalcooperation offers Asia-Pacif

iv Acknowledgements This study, Meeting the Challenges in an Era of Globalization by Strengthening Regional Development Cooperation, has been prepared by a team of staff members of the Poverty and Development Division of ESCAP