The optimal path of regional economic integration between asymmetric countries in the North East Asia

This paper examines the optimal path of regional integration in the East Asian region from the perspective of Korea, as a country with an intermediate level of technology in the Asian region. Based on the welfare analysis of three types of FTA regimes between technologically asymmetric countries, this paper demonstrate that the optimal path of regional integration for the country with an intermediate technology level would be to form multiple bilateral FTAs, i.e., Hub and Spoke type FTA between technically asymmetric countries from the very initial stage. The second best regime is the multilateral Asia wide FTA. The worst case for a country with an intermediate technology would be to form a FTA with a country with advanced technologies, and extends the FTA with the less developed countries in the later stage. These results imply that the optimal strategy of regional integration for a country with an intermediate technology level, such as Korea, is to form a Hub and Spoke type FTA rather than a bilateral FTA with Japan followed by the participation of other Asian countries. The pre-requirement for the multiple bilateral FTAs is the fundamental industrial restructuring of the Korean industries, such as reallocating the human and economic resources from the sectors of comparative disadvantage to the sectors with comparative advantage. The successful FTAs assumes the nation-wide efforts involving the massive restructuring cost including the establishment of the social-safety net during the transition period. Moreover, the Asian type fiscal federalism is required for a genuine economic integration in the region. (c) 2005 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.