Keio University, Japan

1
East Asia's Growing Economic Weight Present
State and Challenges

• Keio University, Japan
• December 4, 2008
• Prof. Sayuri SHIRAI

2
Structure of Presentation
3
Part 1. East Asia's Growing Presence and
Trade/Production Linkages
4
Growing East Asias Presence
Source Prepared based on WB data.
5
Changing Pattern of GDP Share in East Asia
1970
2007
Asian GDP
Japan 69
Japan 48
6
Foreign Reserves in East Asia
( World Foreign Reserves)
7
Chinas Trade Balance ( Billion)
Source Datainsight.
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Production and Trade Linkages in East Asia
USA EU Japan
Japan ASEAN-4 Korea Taiwan
China
Computers TV, VCR
Intermediate goods
USA EU Japan
Japan ASEAN-4 Korea Taiwan
Intermediate goods
Clothes Shoes Toys
?ASEAN-4 Thailand, Indonesia, Malaysia,
Philippines
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Japans Export and Imports with China

• Japans Export with China (Example)
• Textile Yarns 43 (of total exports)
• Textile Machineries 46
• Batteries and accumulators 42
• Semiconductors 25
• Parts of audio apparatus 21

• Japans Imports with China (Example)
• Food 15 (of total import) gt Vegetables 52
• Textile Yarns 55
• Metals 47
• Computers 63
• Audio apparatus 52

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Chinas Top Trading Countries/Regions
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The Shifting Pattern of Production Sites
1985
1990s
Recent Years
NIES Hong Kong, Taiwan, Korea,
Singapore ASEAN-4 Malaysia, Thailand,
Philippines, Indonesia
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Major Factors Behind the Shift in Japans
Production Sites to Asia

• Intensifying Japans Trade Conflicts with US and
  EU
• Growing Labor Cost in Japan and Wage Gaps with
  Asia
• Japanese Sharp Yens Appreciation (after the
  Plaza Accord of 1985)
• Investment Promotion Policy provided by Asian
  Governments
• (e.g., tax benefits, infrastructure, foreign
  ownership deregulation)
• As recipient countries improved the technology
  level, Japan increasingly shifted its production
  sites for some higher value-added products
• Textiles, Clothes ? Computer, TV, Cameras
  (Finalized Products) ? Parts (semiconductors,
  engines, etc.), Machinery
• Growing per capita income and large potential
  market

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Wage Growth Patterns Contribute to FDI Move
Source IMF, http//www.imf.org/external/pubs/ft/f
andd/2007/06/picture.htm
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Workers Wage Comparison

• 1995

• 2006

Japan (100) Korea (63) Taiwan (38) Singapore
(34) Malaysia (11) Thailand (9) Indonesia
(4) China, Shanghai (4)
Japan (100) Korea (55) Taiwan (42) China,
Shanghai (12) India (8) China, Dalian (8) Vietnam
(5) Cambodia (5) China, Qungdao (5)
Source Japan, Jetro
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Part 2. Comparison between EU and East Asian
Economic Integration
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Regional Economic Integration Asia and EU

• EUs advantage EU is likely to integrate faster
  due to (1) common market, (2) common currency,
  and (3) greater convergence on regulations (e.g.
  safety)
• Asias advantage Asia is likely to become an
  engine for the global growth because of
• (a) Large market Population (2.1 billion)
  Middle/high-income pop. (over 500 million ?
  Equivalent to EU population)
• (b) Large supply base many competitive
  manufacturers (Japan, Korea, Taiwan, Singapore,
  Thailand, China)
• (c) High technology base Japan (30 of triadic
  patent families), Korea (6), China (0.8) ? EU
  (28)

EU Institution-Based Economic Integration ?
Asia De-facto Economic Integration
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Growing East Asias Intra-Regional Trade
EU 62
Asia 56
Source IMF, Direction of Trade Database.
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Workers Wage between Asia and EU
Japans wage 100
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Part 3. Challenges for East Asia for Further
Integration and Growing Presence in the World
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Challenges Faced By East Asia

• (1) Asia needs to foster a greater internal
  market for final goods gt greater degree of
  independent trade integration
• (2) Asia needs to increase the investment level
  gt better investment climate (promotion
  strategies, FTA, property rights, financial
  markets, etc.)
• (3) Asia needs to circulate savings within Asia
  invest in US (mainly treasury securities) gt US
  or Europe (partly financed by US) invest in Asian
  stocks
• US and Europe are risk-takers, while Asia is
  highly risk-averse
• Heavy dependence on US dollar and US (and EU)
  risk-taking money
• Need to develop international financial centers
  in Asia
• (4) Asia needs to develop risk-free liquid assets
  (alternative to US treasury bills)
• gtGreater efforts to develop Asian bond markets
  (e.g., currency basket)
• gtExpansion of Chiang Mai Initiative
• gtNeed to consider the basket peg including Asian
  currencies in the future

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Challenge 1 Less Independent Intra-Regional
Trade in Asia
Source METI, White Paper 2007.
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Challenge 2 Declined Level of Fixed Investment
of GDP
Source Prepared based on ADB data.
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Relatively Stable Domestic Saving Level
of GDP
Source Prepared based on ADB data.
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China Gap between Saving and Investment
( of GDP)
of GDP
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Challenge 3 The Pattern of Capital Flows Before
the Global Financial Crisis
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Growing International Financial Centers (IFC) in
East Asia
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Japans Current IFC Status in East Asia
28
Challenge 4 Limited Demand for Debt Securities
by Non-residents ()
As of 2006
Source Prepared based on ADB data.
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The Size of Bond Markets in East Asia
Source ADB