The negative impacts of the recent global financial crisis of 2007-2008 on East Asian economies gave a signal for the need to speed up the promotion of closer regional integration in trade, the creation of a regional crisis financing facility and the development of the financial market.

The crisis filtered into the export-oriented East Asian economies through the current and capital accounts of the balance of payments.

The crisis hit the economies of this region hard through declining commodity prices, trade, capital outflows and lower remittances from citizens working overseas.

At that time, foreign demand for this region’s exports fell sharply as the interconnected world economy began to show signs of having entered a dangerous downward spiral: recession shown by low global economic growth, falling commodity prices, rising unemployment, faltering stock markets, exchange rate realignments, collapsing property values, the implosion of hedge funds, foreclosures, bankruptcies and write-offs, as well as a credit crunch.

To offset the negative impact of declining exports to its traditional markets in the United States and Europe, this region needs to gradually replace the current export-oriented development strategy with the promotion of sufficiently robust domestic demand and large intra-regional trade.

To overcome the economic crisis, many countries, including those in the ASEAN region, expanded domestic demand by introducing fiscal stimulus in 2008 and 2009.

Another way to boost domestic demand is to improve the social security system through social insurance and social assistance programs to reduce the need for the households to save for economic insecurity. Well-developed insurance companies and pension funds can provide financing for long-term investment projects.

Intra-regional trade can be promoted by pursuing trade liberalization, with the ASEAN FTA (AFTA) as a base, with a series of major trading partners, such as China under the ASEAN-China FTA (ACFTA).

This agreement came into force on July 20, 2005 and was fully implemented in 2010. It replaces non-tariff barriers with tariffs and at the same time reduces import tariffs. The ACFTA offers a wide range of benefits; however, it also creates problems for ASEAN countries since China is a destructive competitor to its neighbors.

The effects of China (and, to some extent India) on the goods markets of its regional neighbors, including in the ASEAN, are immense. The rapid industrialization, urbanization and motorization in China (and India) have caused positive external shocks, particularly export market shocks in ASEAN countries because these rapidly growing economies need more energy and many different types of raw materials that will raise their prices.

The rising consumer income, urbanization and demographic change increase demand for food and shift its structure toward high value added foods, partly exported from ASEAN. On the other hand, ASEAN countries import low-priced products from China.

On the negative side, China has become a destructive competitor to ASEAN mainly because of the undervaluation of Chinese currency, the renminbi (RMB), as a principal instrument for export-led development strategy.

Despite the policy change in its exchange rate regime, including the replacement in July 2005 of the RMB-dollar to pegging to several currencies, the pace of the RMB appreciation has been very slow.

Goldstein and Lardy (2008) estimate that the real effective exchange rate of the RMB (on trade-weight basis) is still undervalued on the order of 15 to 25 percent. Exchange rate undervaluation is a protectionist trade policy since it is like a combination of an import tariff and export subsidy.

It is interesting to note that Indonesia, the only ASEAN member country in the G-20, and the current chair of the ASEAN grouping never raised the issue of the exchange rate misalignment, either in the G-20 or at ASEAN meetings, to defend the economic interests of ASEAN.

Only India, Brazil and other member of BRICS have made loud noises about this. The reason is because these two countries and other emerging economies, such as those in ASEAN, are the main victims of China’s exchange rate policy as they compete more closely with China.

ASEAN also benefited from the second external shock, namely, the low interest rates in international markets during Alan Greenspan’s term at the US Fed and the quantitative easing policy adopted in OECD countries to overcome the Global Financial Crisis in 2007-2008. The low international interest rate reduces the cost of foreign borrowing for companies, banks and the public sector of ASEAN that were traditionally highly dependent on foreign financing. A combination of a high rate of growth and high interest rates in ASEAN has, again, attracted massive capital inflows to this region since 2009. The high interest rates in ASEAN are partly a result of inefficiencies and distortions in their banking systems, which are the core of their financial systems. –Anwar Nasution, Yogyakarta, Jakarta Post

The writer is professor of Monetary Economics at the University of Indonesia. He is former senior deputy governor of Bank Indonesia, the country’s central bank. This article is based on his presentation at a recent international conference in Yogyakarta hosted by Gadjah Mada University.