ASIAN TRADE AND INVESTMENT

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ASIAN TRADE AND INVESTMENT

• Douglas H. Brooks
• Asian Development Bank
• 2-3 December 2003
• Phnom Penh, Cambodia

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Key Messages

• Developing Asia remains fastest growing region -
  GDP growth of 5.6 in 2003, 6.2 in 2004 and 6.3
  in 2005, led by PRC, Viet Nam, Thailand India
• Strong growth in 2003 in spite of multiple shocks
  - high oil prices, terrorism, Iraq conflict,
  and SARS epidemic
• Inflation generally low in 2003-2005
• Current account surplus average 2.5 of GDP over
  2003-2005
• Foreign exchange reserves of developing Asia
  total 1.2 trillion
• Weak business investment keeps growth in many
  countries below long term potential
• Domestic demand, particularly consumption,
  increasingly play an important role in growth
• Intraregional trade with PRC is major driver of
  growth in Asia
• Risks and uncertainties remain

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Baseline Assumptions on External Conditions
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Economic Indicators Developing Asia, 2002-2005
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Economic Indicators Developing Asia, 2002-2005
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Economic Indicators Developing Asia, 2002-2005
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East Asia

• Domestic demand and exports drive growth in PRC.
• Exports, mainly to PRC, and domestic demand
  underpin growth in East Asia.
• Continued strong trade integration with PRC.
• Continued accumulation of foreign exchange
  reserves.
• Major structural imbalances exist in PRC PRC
  could face major risks and uncertainties.
• Other East Asian countries, particularly Korea,
  need to balance domestic demand, exports to PRC,
  and exports to rest of the world.

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Contribution to Growth East Asia
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Contribution to Growth East Asia
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Growth of East Asian Exports to PRC
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Southeast Asia

• Recovery in industrial countries to benefit
  Southeast Asia.
• PRC market offers huge opportunity and challenge.
• Growth in Thailand and Viet Nam driven by
  domestic demand and exports.
• Consumption remains strong in Indonesia,
  Philippines, Thailand, and Viet Nam.
• Firmer recovery in business investment in
  Indonesia, Malaysia, and Thailand.
• Singapore should come out of recession in
  2004-2005.
• Current account to remain in surplus foreign
  exchange reserves comfortable.
• Fiscal consolidation a priority in Indonesia,
  Philippines, Malaysia, and Thailand.
• Indonesia and Philippines growing below
  potential.
• Reforms to raise productivity, competitiveness,
  and growth needed.

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Contribution to Growth Southeast Asia
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Contribution to Growth Southeast Asia
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Contribution to Growth Southeast Asia
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Share of ASEAN-5 Exports to PRC
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Growth Rate of ASEAN-5 Exports to PRC
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South Asia

• Rising agricultural incomes and strengthening
  exports to benefit South Asia.
• Strong growth forecast for India continued
  recovery in Bangladesh and Pakistan.
• Modest growth in Nepal due to political
  uncertainties.
• Continuation of peace process supports growth in
  Sri Lanka.
• Current account surpluses projected for India and
  Pakistan India accumulates foreign exchange
  reserves.
• Fiscal consolidation, a priority for all South
  Asia countries.
• Reforms to liberalize and open the economies and
  a major investment program in physical
  infrastructure essential for higher growth for
  all South Asia.

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Risks and Uncertainties

• Recurrence of SARS Milder impact as lessons
  learnt
• Threats of Terrorism
• Risks on tourism growth
• Risks on investment sentiment
• Volatile oil prices average price forecasts
  higher
• Long-term interest rate rise
• Possible if strong recovery anticipated
• If US fiscal budget deficit balloons further
  
• Derail recovery in early stage (impact on housing
  refinance and investment)
• Jobless recovery in US and unemployment high in
  Europe and Japan
• Derail recovery through weaker consumer spending
• 6. Sharp exchange rate adjustments
• 7. Overheating of investments in PRC

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Key Messages
 

• Developing Asia remains fastest growing region -
  GDP growth of 5.6 in 2003, 6.2 in 2004 and 6.3
  in 2005, led by PRC, Viet Nam, Thailand India
• Strong growth in 2003 in spite of multiple shocks
  - high oil prices, terrorism, Iraq conflict, and
  SARS epidemic
• Inflation generally low in 2003-2005
• Current account surplus average 2.5 of GDP over
  2003-2005
• Foreign exchange reserves of developing Asia
  total 1.2 trillion
• Weak business investment keeps growth in many
  countries below long term potential
• Domestic demand, particularly consumption,
  increasingly play an important role in growth
• Intraregional trade with PRC is major driver of
  growth in Asia
• Risks and uncertainties remain

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Foreign Direct Investment

• The surge in flows of FDI in the last 2 decades
  has had important effects on global value chains
  of production, on developing countries (DCs), and
  on attitudes towards such investment.
• Attitudes towards FDI and experiences with it in
  DCs affect host economy policies, which in turn
  affect subsequent experiences.
• Both FDI policies and experiences, as well as
  their perceived feedback, influence attitudes
  toward negotiating a multilateral framework for
  investment (MFI).

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Recent Trends and Effects

• Very rapid growth in global FDI 1980-2000, though
  sharp fall in 2001.
• Especially rapid growth 1985-90 (general opening
  up) and 1995-2000 (MAs, Asian crisis LatAm
  privatizations).
• In most years, FDI grew faster than global trade
  and GDP.

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Growth of World Exports FDI Outflows (average
annual growth rate)
Source Exports WEO database FDI outflows
UNCTAD FDI database.
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Index of World Exports, FDI Outflows, and
Output, 1990-2002 (1990100)
Source Exports GDP WEO Database FDI
Outflows UNCTAD FDI database.
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Recent Trends and Effects

• Among recipients, Asia-Pacific economies
  increasingly important in 2002, PRC emerged 1.
• Some reordering of major recipients during 1990s
  note continuing negative flows from Indonesia.

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FDI Top 10 in Developing Asia
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FDI Top 10 in Developing Asia
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FDI Top 10 in Developing Asia
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Domestic Policy Changes

• Host country policy framework plays a critical
  role in determining the effects of FDI on a
  recipient country.
• A key argument concerns the nexus between trade
  and FDI liberalization. Trade reform alters the
  incentive of production for the domestic market
  relative to exports, resulting in a fundamental
  shift in the behaviour of MNEs and in the FDI
  cost-benefit calculus from rent-seeking to
  efficiency-seeking FDI.

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FDI Regimes

• Dual policy regimes
• FDI regimes have become more open but
  considerable selectivity across sectors and
  firms. Typically a mix of both rent-seeking and
  efficiency-seeking FDI, reflecting partial
  reform of trade regimes, and the political
  economy of dispensing patronage, e.g.
• FDI policy may differ between regions.
• Large inter-industry differences in protection,
  and thus incentives.
• SOEs typically receive preferential treatment,
  especially in PRC, India and Viet Nam, and their
  MNE joint venture partners.
• Most countries offer fiscal or financial
  incentives. These vary by sales orientation, the
  technology introduced by the foreign investor,
  location of investment, and other factors.
• The regulatory regime frequently offers more than
  one entry option.

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FDI Regimes

• Dual policy regimes (contd.)
• Dual policy regimes are particularly pronounced
  in the more recently reformed economies e.g., at
  one extreme FDI flowing into joint ventures with
  SOEs, often in protected, uneconomic sectors,
  producing negative value added at international
  prices, alongside other foreign investors
  entering comparative advantage sectors SMEs,
  labour-intensive, export-oriented activities.
• No such thing as a single FDI model.
• Even among the relatively successful late
  reformers, policy progress is invariably uneven
  and unpredictable e.g., Viet Nam in the 1990s.
• Note partial reform is desirable providing it can
  be a precursor to successful economy-wide
  liberalization.

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FDI Regimes

• Reform rhetoric versus reality
• Crucial to distinguish between formal FDI and
  trade regimes, and their operation in practice.
• Reform at the centre does not necessarily ensure
  that liberalization will proceed smoothly e.g.,
  India, also Korea considerable bureaucratic
  ambivalence towards recent reforms.
• Frequently, the investment boards charged with
  regulating FDI have limited general authority.
• Especially in larger states, sub-national policy
  regimes matter increasingly. Moreover, as
  international barriers to commerce decline,
  paradoxically sub-national barriers are sometimes
  rising.

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The Commercial Environment

• As economies open up, governments have to make
  the transition from protectionist/regulatory
  regimes to an emphasis on promotion and
  efficiency.
• The three Is incentives, infrastructure, and
  institutions.
• Note too that domestic investors are invariably
  the key players in any economy.

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International Investment Agreements

• Wide variety of resource endowments, policy
  regimes, and experiences with FDI
• different views toward international investment
  agreements.
• MFN treatment obliges the host country to offer
  national treatment to both foreign and domestic
  investors.
• Over 2,100 BITs and 2,200 double taxation
  treaties. BITs generally contain binding
  commitments on expropriation, transfer of funds,
  and compensation. BIT implementation not always
  effective, and there is not a strong link between
  their existence and FDI flows. BITs appear to
  complement, rather than substitute for,
  institutional quality.

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The TRIMs Agreement

• TRIMs are a subset of the incentives and
  regulations designed to influence FDI. The most
  common are local content requirements and export
  performance requirements, also trade balancing
  measures.
• TRIMs Agreement formulated in the Uruguay Round.
• The Agreement recognizes that certain investment
  measures distort trade and are not consistent
  with GATT/WTO principles.

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The Ongoing Divide

• Investment again on the agenda for the WTO Doha
  round but members are still far from in agreement
  on investment issues.
• Since the TRIMs Agreement came into effect in
  1995, operational details have caused contention
  between developed and developing countries.

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The Ongoing Divide

• Several DCs are of the view that TRIMs etc are
  domestic investment issues that should therefore
  not involve WTO officials. India and others also
  assert that the mandate of the WTO is confined to
  trade and does not extend to investment.
• Asymmetries in the obligations and in the
  distribution of benefits, limited capacity to
  negotiate, and limited resources for
  implementation.

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The Ongoing Divide

• Liberalization of investment is more constrained
  by political factors than is trade.
• Many DCs wish to ensure the benefits of a future
  agreement outweigh the risks of trade sanctions
  before they are willing to commit to
  negotiations.
• Many DCs lack the capacity to negotiate
  effectively on a wide-ranging agenda. Developed
  countries already meet the standards likely to be
  negotiated, placing proportionately greater
  burden on DCs.

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The Ongoing Divide

• Joint Brazil/India submission to the WTOs
  Committee on TRIMs in October 2002, arguing that
  the TRIMs Agreement should be amended to provide
  DCs flexibility to implement development
  policies.
• Still unclear if the WTO will negotiate
  investment related issues further.