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Toyoo Gyohten of Institute for International Monetary Affairs:
Asia Lacks Political Will to Support Regionalism

“Which leader has the stature to lead the region as a whole? I do not see anyone.”

BACK IN THE BOOM DAYS Toyoo Gyohten (left) shares a laugh with former Thai Finance Minister Tarrin Nimmanahaeminda in 1999.
Photo by AFP

In recent decades, East Asia has become what Toyoo Gyohten, a doyen of the Japanese financial world, describes as the “factory” of the world, but its production lines are grinding to a halt now in the midst of the global economic crisis. A “new business model” is needed for the region, says the one-time Japanese vice finance minister for international affairs and former chair of the Bank of Tokyo.

This new model must focus on creating domestic demand rather than relying so heavily on exports, and it must be based on a system of “horizontal rather than vertical integration” of production, says Gyohten, who now serves as president of Japan’s Institute for International Monetary Affairs.

In an interview with Development Asia in Tokyo, Gyohten gave his views on where East Asia has gone wrong in its postwar development model, and where it needs to go from here to achieve sustainable prosperity. He also set out a vision of how economic cooperation is likely to develop among Asian nations—the People’s Republic of China (PRC) and Japan especially—in the future.

In his long career, Gyohten has served at the International Monetary Fund (IMF), the Asian Development Bank, and the Organisation for Economic Cooperation and Development, as well as teaching at Harvard University.

Gyohten hides an ability to speak bluntly behind his amiable personality. Asked about Asia’s response so far to the global crisis, he says: “I’m afraid the response of Asia as a region cannot earn high marks.” The reaction of governments in the region was “a bit complacent.” They argued that “Asia is de-coupled, so don’t worry. In that sense the response from many Asian countries was not quick or forceful enough.”

“After they realized that they were going to suffer from the bursting of the export bubble, countries tried to mitigate the impact and secure an early recovery. But so far there is no well-organized and concerted action in the region.”

The extent of damage differs from one country to another but they all suffer from the same defective economic model, he said.

“Asia was very successful in establishing a regional manufacturing center—a global factory—but the fatal flaw of this was that final demand was outside the region. The Asian factory enjoyed a very high level of activity and everyone profited but because they had to rely substantially on (external) demand, when this collapsed, the factory collapsed.”

How can East Asia establish a new business model for itself, one where economies have an adequate portion of their final demand within the region?
“In order to achieve that, I think Asia has to give much more serious consideration to establishing a horizontal rather than vertical division of labor,” Gyohten responds.

Countries in the region should not rely only on a “vertical” system of production whereby they produce different parts of a product that is finally shipped to markets outside the region. Instead they should shift to a “horizontal” model where goods are designed and produced more in a particular country for consumption in that country.

Toyoo Gyohten President of Japan’s Institute for International Monetary Affairs
Photo by AFP

What are the other defects of the Asian model?
“Asian countries are still very dependent on external financing,” says Gyohten. “There has been no well-established regional mechanism through which Asian savings could circulate within the region to meet the needs of all countries.”

The failure to mobilize regional savings is adding to the impact of the current crisis, he says.

“Some kind of regional financing facility is urgently needed. It can be done through bolstering the IMF and other global institutions or strengthening regional facilities, such as the Asian Development Bank and [the] Chiang Mai Initiative.”

Why are East Asian nations turning to bilateral sources of emergency financing in the current crisis?
For example, the Republic of Korea has negotiated large currency swaps with the PRC and Japan while Seoul (along with Singapore and Hong Kong, China) has also arranged big swaps with the United States Federal Reserve.

“This is because there is little by way of regional arrangements that could be of use quickly,” says Gyohten. That, and the fact that some Asian nations are “ambivalent” about turning to the IMF after their bitter experiences of the 1997 crisis. “But if we quickly establish an Asian facility then everybody will use it.”

Is he optimistic about this?
“No,” he says bluntly. To “multilateralize” the bilateral Chiang Mai Initiative network “requires Asian countries to go through “serious hurdles. There must be agreement concerning burden sharing and what kind of loan conditionality you will be asking for, and that requires an economic surveillance capacity that East Asia does not possess.”

How does he see the future of regionalism more generally in Asia?
“I think Asian regionalism will develop at the functional level but probably not as a comprehensive single institution like the European Union,” he says. “For Asia, the hurdles are too high, and it will follow a very different path from Europe.”

What are these hurdles?
“The most serious one is the lack of political will,” he says. “Europe had a very strong unified political [will to achieve unity] and there was a historical, cultural, economic, and political background to support that political will. In the case of Asia, this is still nonexistent.”

“Also in the case of Europe, there was a group of major members—Germany, France, and the United Kingdom. But in Asia we still do not have these things. So, it will be quite a different path for Asia. I think Asia certainly can achieve a process of regionalization on different functional issues.”

He cites “environmental policy or energy saving” as examples. “These arrangements may not require complete political unification or agreement. It may be a marriage of convenience. Regional agreements could well support each member’s own economic interests.”

What role will the PRC and Japan play in the process of integration?
“It is quite obvious that China will eventually become the leader of Asia,” says Gyohten. “But China’s leadership role will not be as hegemonic as that of the United States. I think China knows that in order to establish its role in Asia it needs strong and friendly cooperation with Japan.”

Finally, does he see any politician or statesman on the horizon in East Asia who could be capable of leading the region into a brave new world of cooperation?
He laughs. “Which leader has the stature to lead the region as a whole? I do not see anyone.” •