Multilateral Economic Cooperation in Northeast Asia


A keynote address before the Fifth Meeting of Northeast Asia Economic Forum, Niigata, Japan, February 16-17, 1995.


               This is the Fifth Meeting of the NEA Economic Forum following the Yong-pyeong Conference held in Korea in September 1993. Many participants in previous meetings pointed out that the close complementarity that exists among countries in the region provides a strong basis for regional economic cooperation and development. In the words of Chairman Kanamori: " Economic cooperation between regional states is very important because of a very high complementarity between their natural resources, labor forces, technology and capital. Every country of the region faces limits for its development but cooperation will open great possibilities for growth." I may add that regional economic cooperation is the primal condition for preserving peace in the region.

Is Multilateral Cooperation Impossible in the Region?

The reality, however, is that there are innumerable political and economic barriers standing in the way of regional economic cooperation, impeding realization of such potential. For this reason, opinion is divided as to the ways and means of promoting regional economic cooperation in the context of existing reality. One question relates to the efficacy of the multilateral as opposed to the bilateral approach to regional economic cooperation. I propose to focus on this question on this occasion.

To begin with , there is an argument that the bilateral approach is the only means available for economic cooperation in Northeast Asia (NEA) until market forces prevail in all the economies in the region to such an extent that market integration naturally calls for institutionalizing regional economic cooperation. In reference to PECC and APEC, skeptics maintain that market integration preceded institutionalization of Pacific economic cooperation, and that no governments in the Asia-Pacific region deliberately pursued regional integration; they merely refrained from interfering with the working of market forces across borders. Moreover, under the present political environment in which mutual trust is weak, the skeptics say, multilateral decision making is a remote possibility.

Although I agree for the most part with this observation, I have lingering doubts as to whether we should rule out any possibility of a multilateral approach to economic cooperation in any form in our region. We all know that even socialist countries used to have a multilateral framework without market orientation-referred to as COMECON -prior to the disintegration of the Soviet Union. To be sure, market integration is important, yet it is not the sole precondition for multilateral economic cooperation. Even we can think of multilateral cooperation for advancing market integration itself with the conscious efforts of all parties concerned. It should be noted that we need not view bilateral and multilateral approaches as mutually exclusive. My own professional experience has convinced me that the two approaches can play mutually complementary roles. Discussions in PECC or APEC on trade issues, for example, influenced the bilateral trade talks between the United States and South Korea. Conversely, as we all know, the U.S. government often starts with bilateral negotiations on trade matters and then brings them to the multilateral table to elevate it to a general agreement.

Admittedly, the multilateral approach has been severely constrained by political rivalries between countries in the region. Yet situations are changing, and in a more favorable direction. I wonder to what extent the northern territorial issues are really impeding economic exchanges between Russia and Japan, even though many Japanese are saying they are. North Korea is also changing. Although the political outlook remains uncertain after the death of President Kim Il-Sung, Pyongyang seems to be determined to pursue normal relations with the United States, Japan, and, eventually, with South Korea. The Geneva agreement on nuclear issues between the United States and North Korea is significant not only in terms of the prevention of nuclear proliferation, but also in terms of its economic impact on North Korea. Construction of light water reactors in North Korea in compliance with the agreement will call for a massive movement of people and materials from the South and its allies, which will in turn make it more difficult for Pyongyang to seal the country off from the outside world. In fact, Pyongyang has started to take cautious steps to open up the Rajin-Sonbong area for free trade and investment, while the United States has opted to partially lift economic sanctions against North Korea. All told, it appears to be a matter of time until North Korea follows the Chinese example of economic reform and gradually opens up its economy, participating in the multilateral institutions.

Skepticism about the multilateral approach may have some sort of regional grouping in mind such as ASEAN. Incidentally, the NEA is the only area in the Asia-Pacific community that is not covered by a subregional grouping. I personally happen to believe that such a subregional grouping for the NEA is not necessary at the present time because it is difficult to visualize any real gains that can be derived from such a grouping. Rather, we may try to invite Russia, Mongolia, and North Korea into membership in the APEC as soon as possible.

Proposals for NEADB

Yet there are other forms of multilateral approaches to economic cooperation in the region. The Tumen River Project is such an example. This project is the first multilateral approach of its kind to regional economic cooperation. As was expected from the beginning, the multilateral negotiations under the aegis of UNDP have been dragging on for years, and the final result is yet to be seen. Skeptics of the multilateral approach may find justification for their views in this situation. However, in my opinion this kind of multilateral approach should be continued with patience until it finally reaches a successful conclusion. The learning process takes time, but is important in the NEA because of the lack of experience in multilateral dealings.

We can think of other types of multilateral approaches to economic cooperation in our region. There have been some discussions in this forum about the idea of establishing a Northeast Asian Development Bank (NEADB). It is not a regional grouping as such but it is a way of institutionalizing regional cooperation in Northeast Asia. It is not an institution for rhetoric, but an organization for action and results. It will serve to tap a greater amount of financial resources from international sources for the NEA than the amount that will be forthcoming without such a bank. The NEADB will help the NEA developing countries finance transportation, communication, and energy infrastructures and start up new business ventures. It will facilitate the exchange and dissemination of reliable information for investors and policy makers in the region. It will become a catalyst for transferring knowledge, experience, and institutions from the developed market economies to the old command economies in transition. It will be able to assist institution building in developing economies by providing or arranging for professional training in such areas as banking, insurance, telecommunications, and so on. Above all, it will help promote mutual understanding and foster conditions for multilateral cooperation for mutual benefit.

The rationale for and attendant problems in establishing a NEADB were well discussed in the papers and report prepared by the late Dr. Burnham O. Campbell and Professor Hiroshi Kakazu, and its summary was presented at the last meeting of the forum at Yong-pyeong and later again in a seminar held in August 1994 at the Sejong Institute in Seoul. There is, therefore, no need for me to go into the details of that discussion on this occasion. However, as an exponent of a NEADB, I may make a few comments on the skeptical views expressed by some authors in Japan and elsewhere.

The first and the fundamental question raised by the skeptics is why there is need for a regional bank in Northeast Asia while all countries except North Korea are already covered by the World Bank, ADB, and the European Bank for Reconstruction and Development(EBRD). Would it not merely overlap in membership and duplicate the function of the existing banks ? This view, however, immediately begs the question of why there are so many multilateral development banks established on a regional basis in addition to the World Bank, such as the Inter-American Development Bank, the African Development Bank, the Middle East Development Bank, the European Bank for Reconstruction and Development, as well as the Asian Development Bank. There must be some valid reason for those banks coming into being in spite of the global coverage of the World Bank. The major reason specialized banks are needed is to better serve the specific needs of the unique environments of the regions under consideration. Along this line, Professor Campbell gave us a good account of the reason why we need a regional bank in Northeast Asia, which I will rephrase in a somewhat different vein as follows.

First, Northeast Asia is unique in that two developed market economies (Japan and South Korea) and four old command economies in transition to market economies coexist adjacent to each other, and the mode of economic exchange and cooperation is markedly different from the rest of the regions of the world. And the two market economies, Japan and South Korea, have many means of helping their neighbors' developing economies transform their economic systems and promote economic development as speedily as possible. What is needed most now in the former command economies is to learn from the experience of the market economies and at the same time to build up transportation and communication infrastructures to link their production of primary resources to markets at home and abroad. However, "given the very different economic system involved and the transition problems being faced, it does not seem likely that any but a regionally specialized lending institution will be sensitive enough to the region's requirements and political realities."

Second, we have to consider the problem of Northeast Asia's access to financial resources from the World Bank, ADB, and other international sources. In allocating loanable funds among various development projects, the existing banks seek to maintain a reasonable historic balance in distribution to various countries competing for funds. Otherwise it would raise the political problem of inequity for the Board of Directors of these banks. This constraint has two implications for Northeast Asia. One is that it makes it difficult for the banks to take into account the disproportionately large size of the Chinese economy-and its correspondingly large demand for funds-with the result that Northeast China has to face fierce competition in Beijing for access to bank funds. It is also likely that the interests of the Russian Far East may not be well served by the EBRD, which has limited resources and is closer to and places greater emphasis on Eastern Europe and Western Russia. "The existing banks may not pay enough attention to regional complementarities and cross border requirements in making loans and giving advice. Being a new and relatively small member, Mongolia is likely to be on the periphery of ADB/World Bank concerns," while North Korea is not covered by the existing banks for political reasons. Another implication following from this situation is that the NEA may have to take recourse to self-help efforts to maximize tapping of financial resources from international sources in addition to funds available from the existing banks. This is, I believe, a strong case for establishing a NEADB.

Third, Professor Campbell pointed out that "infrastructure projects in the NEA will be better planned and carried out as multi-national projects than on a country by country basis, as required by the charters or self-imposed lending criteria of the existing banks." This is particularly important in the NEA to minimize political suspicion of economic domination by one country or another.

Additional skepticism relates to the mobilization of the financial and managerial resources needed for establishing and operating the NEADB. According to these views, financial resources available from South Korea will be very limited, while Japan will be forced to readjust the geographical distribution of its aid funds. Moreover, Japan's weakness in the management of external cooperation-reportedly the result of inadequate qualified manpower-is well known, while Korea has even less experience in this area. Since the NEADB is bound to be smaller than the ADB, its efficiency may be doubtful in terms of economy of scale. However, this observation in my view significantly underestimates the economic and intellectual strength of the regional countries, including Japan and South Korea. As for the financial requirement, Professor Kakazu's paper provides us with a rough estimate of the magnitude of funds involved. According to him, the initial subscribed capital of the ADB was $600 million, which was computed on the basis of 0.5 percent of the national income of regional members. If we apply this formula to the NEADB, the initial subscribed capital will be in the range of $15 to $20 billion, which is almost comparable to ADB's $23 billion and the African Development Bank's $21 billion capital subscription in 1992. He also noted that about one-half of the total subscribed capital would need to be paid within five years, the balance being callable capital. He reminded us that "with a paid-in capital of $8 billion to $10 billion within five years, $2 to $3 billion could be mobilized annually for loans and investments. This is a considerable sum, but it alone would fall far short of the region's legitimate capital requirements, unmet by private sector lenders." So Professors Kakazu and Campbell rightly point out that "other multilaterals will have to be tapped and the NEADB will have to act as the leader of the lending consortia, bringing in private sector lenders that would not be there without the NEADB's intervention." This last point reinforces the need for a regional bank in the NEA.

The problem, then, is how to mobilize subscribed capital of the magnitude mentioned above. My candid observation in this regard is that it is more a matter of political will than of availability of funds involved. The amount of around $10 billion for the total subscribed capital is less than 8 percent of the surplus in the current account balance of Japan in 1992 and a small fraction of the total surplus accumulated in the past ten years. Japan, of course, will be required to take up only a part of the $10 billion-about $7 billion if we apply the formula of 0.5 percent of national income. If we can persuade Taiwan and other countries such as the United States and the European countries to become members, the capital share for Japan and others will be further reduced.

South Korea will need to pay in $500 million within five years. This is a sizable amount of funds, considering the recurrent deficit in the current account balance of this country. However, there appears to be the political will in place for this country to accept such a financial obligation in the interest of regional economic cooperation, judging from her commitment to $3 billion of economic aid to Russia and the commitment to another multibillion dollars for the construction of light water reactors in North Korea in keeping with multilateral efforts for the nonproliferation of nuclear arms.

Russia and China's shares for paid-in capital are estimated at about $900 million, respectively. In the case of China, it is equal to about 2 percent of its international reserves at the end of 1991. China, one of the major beneficiaries of the proposed regional bank, is not likely to refuse this amount of financial obligation. As for Russia, data on its international reserves is not available. But relative to its economic size and in view of the great benefits that can be derived from a regional bank, Russia is likely to jump on the wagon.

I wonder why it has been suggested that the managerial resources needed to create and operate a regional bank are not available. There are many well-experienced and well-educated overseas Asians who could be tapped for the bank's operations. If it is not enough, the bank will be able to recruit talented professionals from Western countries. Professor Kakazu reports that in the ADB, professionals from the developed countries within and outside the region outnumber professionals from the region's developing members.

Skeptics also argue that the World Bank and the ADB are better suited for taking politically neutral positions mainly focused on the economic rationality of the proposed projects from the borrowing countries. The advice of these banks on economic reform for the old command economies is less likely to be taken as interference into domestic affairs. But, in my view, there is no reason why the proposed NEADB cannot be made politically neutral to the same degree as the World Bank or the ADB. If a multilateral financial organization is involved openly in the political affairs of a country, that organization is doomed to fail in any event.

Concluding Remarks

On balance, the real problem lies with the lack of political will and leadership in the region. It is reasonable to expect Japan to exercise its political will and play the leadership role in the region with aid from other countries. Japan's self-imposed inhibition from playing a leadership role in international affairs is well known. However, Japan needs to reappraise her position in the NEA and in the world. How long will Japan be able to depend on the U.S. and European markets for its exports and pile up trade surpluses year after year, becoming a major target of economic criticism from the West? Situated in Northeast Asia, Japan, like South Korea, may realize how important this region will be as a potential market for Japanese products and how important it is to speed up the growth and development of this region for its own interests. Based on its experiences in trade relations with the United States and Europe, Japan might have come to realize that a chronic trade imbalance with the countries in the region and elsewhere is not desirable even if it is in part the result of faults on the part of deficit countries themselves. Japan also may well consider whether or not economic penetration of the Northeast Asian developing countries solely on a bilateral and market basis will reinforce Japan's image as an economic giant tending to stay away from the leadership responsibility in Northeast Asia and in the world.

In conclusion, there are many difficulties, to be sure, in multilateral approaches to economic cooperation in Northeast Asia, and Asians are generally weak in pursuing common interests by doing things together. It is, however, hasty and ill-advised to conclude that market forces alone will take care of this weakness. By means of conscious efforts by the governments involved and through the process of learning by doing, we can foster multilateral approaches to regional problems. Relegating the problem to market forces contradicts in a sense the tradition of Japan, Korea, and others in the region in which the role of government has been predominant not only in economic but also in every facet of national life. The experience of ASEAN tells us that regional cooperation is a tedious and thorny process, but it can evolve into a free trade area in the long run. In the age of globalization, we are well advised to make a start on the long journey toward a free and prosperous Northeast Asian community, and the creation of the NEADB would be a first step in that direction.