At a recent seminar held here to discuss the East Asian Summit (EAS), it was reported that economics is unlikely to be the main issue to be discussed at its inaugural meeting to be held in Kuala Lumpur next month. The summit will bring together the ASEAN+3 countries (i.e. the 10 member countries of ASEAN plus China, Japan and South Korea), India, Australia and New Zealand.

To the contrary, economics will be very much driving the EAS agenda for three main reasons.

First, the economies of East Asia have become increasingly integrated and inter- connected over the past two decades. In particular, one observes a relatively high degree of trade and investment integration in this dynamic region. Intra-regional trade as a share of East Asia's trade has risen from 35% in 1980 to 54% in 2003. This means that, by 2003, about half of East Asia's trade was with itself, a trend comparable with the 64 % in the European Union, a far more formalized economic grouping.

How was this form of market-driven integration achieved? East Asia has long embraced trade liberalization, avoiding the discriminatory trade practices practiced elsewhere. Decades of FDI flowing into the region have led to a high level of cross-border integration of production value chains and rapid growth in intra-industry trade - reinforcing the nexus between trade and investment.

In recent years, that has been further reinforced when China's rapid industrialization is taken into account: China is not only a major destination for FDI but also an important market for exports of specialized components and other intermediate inputs from the region. Concomitantly, India, Australia and New Zealand are also increasing their economic linkages with the ASEAN+3 members, and particularly with Southeast Asia.

Second, substantive work has been done to promote financial cooperation at the ASEAN+3 level. In May 2000, ASEAN+3 finance ministers agreed to set-up a regional financing arrangement called the Chiang Mai Initiative (CMI).

The CMI has 2 main components: an expanded ASEAN Swap Arrangement (ASA); and a network of bilateral swap arrangements (BSAs). The ASA, originally established in 1977 between Indonesia, Malaysia, Philippines, Singapore and Thailand, is now worth US$1 billion. The BSAs which currently totals US$36.5 billion, comprises arrangements in which one party requests another to enter into a swap transaction that provides liquidity support to overcome balance of payments difficulties.

Last May, the ASEAN+3 finance ministers agreed to strengthen the CMI by integrating and enhancing economic surveillance, adopting a collective decision-making mechanism for bilateral swaps, and doubling the size of available swaps.

It seems to be a propitious time to enhance this framework, which could pave the way for an Asian Monetary Fund in the near future. (An earlier attempt failed during the Asian financial crisis due to lack of support). Moreover, cooperation of this kind strengthens the regional financial architecture and may one day lead to the introduction of a common currency in the region. In fact, the Asian Development Bank (ADB) is currently undertaking research on the feasibility of establishing an Asian Currency Unit, a precursor to a regional common currency.

Third, every EAS participant has a free trade agreement (FTA) with ASEAN, which is itself is moving towards a fully functioning FTA under the ASEAN Free Trade Area (AFTA) framework. What is urgently needed is to mutilateralise the existing FTA initiatives among EAS members to facilitate economic integration. This means that EAS members should develop a common understanding about FTA negotiations so that business does not perceive the costs of implementing FTAs to be unacceptably high.

The Pacific Economic Cooperation Council (PECC) has already undertaken studies in this direction. But above all, East Asian integration must be market driven. Domestic reforms by each individual nation will be necessary for each to attain higher level of competitiveness. This is especially true for countries with a sizeable domestic market and so are not highly dependant on the external sector for growth.

Deeper economic integration in East Asia will also require a stronger institutional structure. Professor Masahiro Kawai of Tokyo University, who is currently head of the ADB's Regional Economic Integration Office, argues that regional economic integration can be institutionalized by establishing regional frameworks for trade and investment liberalisation as well as macroeconomic and financial management. If so, establishing a regional economic and financial secretariat could be discussed at the summit.

True, there is some concern that enlarging the participation beyond ASEAN+3 may give rise to conflicting interests. But, market forces have bound the economies of all participating countries together, creating greater impetus to cooperate in trade, investment and finance. Such linkages suggest that economics will be the summit's top priority.