By Ahn Choong-yong

The world economic outlook for the short and medium term has grown increasingly uncertain due to the confluence of nearly three years of adverse developments. Both Europe and the United States face gloomy and uncertain growth prospects due to the former’s lingering sovereign debt crisis in the southern eurozone and the latter’s lack of credible medium-term plans for debt reduction. A vicious cycle between low underlying growth and fiscal debt as well as financial uncertainty in advanced economies may well feed off each other, placing the global economy on the brink of a long double dip recession.

Asia, on the other hand, has experienced exceptional recovery and growth in the past three years. Developing Asia grew 9.5 percent in 2010, shining amid a gloomy world economy. China and India recorded the highest growth rates in the world in 2010, at 10.3 and 10.1 percent, respectively, and near double digit growth again in 2011. Clearly, global economic gravity is shifting to “rising Asia” from the “falling West.” Of course, Asia’s growth prospects will likely be affected by those of the West, but it appears that Asia can help save the sinking world economy.

Then, how can Asia contribute to achieving balanced and sustainable global growth? The continent’s growth for this year is expected to remain strong through still-solid domestic demand. But to achieve robust, sustainable and balanced world growth, Asia must shift from its conventional extra-regional export orientation to one of intra-regional demand. Asia must also strengthen its mechanism for minimizing external financial contagions and expanding intra-regional free trade arrangements (FTAs) to spur economic growth in a sustainable framework. Immediately following the Asian financial crisis, East Asian economies responded to external financial shocks with a newly awakened East Asian identity by establishing the Chiang Mai Initiative (CMI). The aim was to provide liquidity under a self-help financial mechanism through currency swap arrangements among member economies.

One effective way to expand intra-regional trade would be to create a cross-border free trade regime in East Asia. The rational for expanding intra-regional trade can be explained by the East Asia’s relatively low degree of intra-regional trade share, about 37 percent, which is still lower than that of NAFTA and far lower than the eurozone’s 60 percent. Asian policy makers should recognize that even in the absence of formal integration, intra-regional interdependence in trade and investment has been deepening due to geographical proximity and sheer market forces, as evident in supply chains. Furthermore, the CMI experience has created a web of formal intra-regional FTAs in East Asia. Within the ASEAN plus three framework, China, Japan and Korea should pursue region-wide FTAs toward an East Asian economic community.

At the 21-member Asia-Pacific Economic Cooperation forum held in Honolulu last November, momentum for an East Asian FTA was created. Japan declared a willingness to join the negotiation process for the U.S.-backed Trans-Pacific Partnership (TPP). Given the East Asia’s competitive FTA leadership, a rivalry between the U.S.–led TPP and China-led ASEAN plus Three FTA is likely.

Whichever of the two larger FTA initiatives comes first, it should be a building block for an FTA encompassing all of Asia and the Pacific. Recognizing that a bilateral FTA or plurilateral FTAs should help Asian countries to emerge into a larger FTA entity. When they share common values in economic management systems on a level playing field, Asia should be poised to establish open-regionalism, in which a variety of intra-regional and extra-regional stakeholders can join, including the U.S., India, Canada, Australia and New Zealand. Eventually, Asian open-regionalism must be translated into an Asia-Pacific economic community. At this critical juncture of world economic development, Asia must aggressively shift its focus to the region’s 3.5 billion consumers so that its regional demand–led growth can contribute to balanced and sustainable global growth.

Ahn is the Foreign Investment Ombudsman and Chair of the Regulatory Reform Committee.