ASEAN Economic Development: Policy and Strategy

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ASEAN Economic Development Policy and Strategy

• Dr. Jean-Pierre Verbiest
• Country Director
• Asian Development Bank

The Fourth National Conference of Economists
24 October 2008, Pasakluang, Lotus Hotel Pang
Suan Kaew, Chiang Mai
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Content

• Overview of ASEAN
• Major Strategic and Policy Challenges to AEC
• Addressing the ASEAN Development Divide
• Establishing a Single Market and Production Base
• Trade Facilitation Policies (TFP)
• ASEAN and FTAs
• Integrating Financial Markets
• Managing Macroeconomic Interdependence
• Making Growth Inclusive and Sustainable

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Overview of ASEAN
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ASEAN in ASIA

• Intra Asian trade growing fast but still well
  below potential (See next).
• Intraregional trade as share of East Asia trade
  up from 35 in 1980 to gt 50 in 2005.
• Intra ASEAN trade up 18 in 1980 to 25 in 2005.
• East Asia trade integration linked to trade-FDI
  nexus (Flying Geese and acceleration from 1980s
  with emergence of China).
• Regional production networks being reconfigured
  around China and increasingly also India.
• FOR ASEAN MAJOR CHALLENGE TO POSITION ITSELF

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Asian Trade Flows, 2005(percent of total Asian
trade)
Extra-regional demand remains a primary economic
driver.
Intra-Asian trade is far from reaching its
potential.
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From ASEAN (1967) to ASEAN ECONOMIC COMMUNITY
(AEC) (2015-2020)

• 1967 ASEAN-6
• 1992 AFTA (by 2008, then 2003)
• 1995 AFAS (ASEAN Framework Agreement on
  Services)
• 1995-1999 ASEAN-6 ASEAN-4 (CLMV)
• 1997 ASEAN Investment Area (AIA) (by 2011)
• 2003 (Bali Concord II) ASEAN to AEC (2020)
• 2007 AEC by 2015
• ASEAN Security Area and ASEAN Socio-Cultural
  Community

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From AFTA/AIA to AEC

• AFTA Free trade area by eliminating tariff and
  non-tariff barriers trade integration
• AIA Investment area for intra ASEAN FDI.
• AFS Liberalize trade in services.
• AEC Deep economic integration (of EU-type)

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ASEAN Vision 2020 and ASEAN Economic Community
2015 A bold vision

• AEC responds to concern of loss of
  competitiveness of ASEAN to China. ASEAN cannot
  compete with China on low labor costs, and FDI
  mainly flows to China.
• AEC aims to create a single ASEAN market and
  production base with free flow of goods,
  services, investments, capital and labor.
• AEC should position ASEAN as an integrated
  economic area capable of competing with China and
  India.
• Policy and strategic challenges formidable ! By
  maximizing complementarities between ASEAN
  economies and creating a single integrated
  production base, higher production efficiency and
  higher labor productivity could be achieved. But
  large diversity within China and India could give
  them similar advantages !

9
Broad priorities of AEC (Vientiane Action
Programme 2004-2010)

• Fast track integration of 12 priority sectors
  electronics, e-ASEAN, healthcare, wood-based
  products, automotives, rubber-based products,
  textiles and apparels, ago-based products,
  fisheries, air travel, tourism and logistics.
• Accelerate and deepen ongoing initiatives to
  remove barriers to goods and services trade,
  investment flows and skilled labor flows. Much
  remains to be done with regard to Rules of
  Origin, non-tariff measures and dispute
  settlement.
• Develop economic measures to create a single
  market and production base (vague).

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Major Strategic and Policy Challenges to AEC

• From the objectives of the AEC and from what
  has been achieved so far, 5 broad policy
  challenges can be identified
• How to overcome the ASEAN Development Divide ?
  ASEAN-6 and CLMV Similar issues in GMS
  cooperation initiative.
• How to integrate production barriers to goods
  and services trade, investment flows, labor
  migration. This includes cross border transport
  agreement, trade facilitation, SPS issues and
  logistics costs.
• How to integrate financial markets ?
• Harmonize macroeconomic policies/manage
  macroeconomic interdependence
• Ensure inclusive growth.

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Addressing the ASEAN Development Divide (I)

• A two-tier ASEAN (in particular CLMV-ASEAN 6)
  would be major impediment to economic
  integration.
• ASEAN-6 per capita income about 5 times larger
  than CLMV. Large discrepancies for other
  socioeconomic indicators.
• Initiative for ASEAN Integration (IAI) (2000)
  recognizes issues and gives longer transition
  time to CLMV to realize AFTA and AIA objectives.
  
• IAI expanded at Vientiane 2004 summit to enhance
  technical and development efforts to support more
  rapid integration of CLMV and other less
  developed sub regions. But terms rather vague.
  Some discussion on need to mobilize resources.
• In my view, main concrete proposal comes from EPG
  on ASEAN Charter Proposal to set up a Special
  Fund for narrowing ASEAN development gap.
  Voluntary contributions or tax proceeds

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Addressing the ASEAN Development Divide (II)

• From an economic theory point of view, issue to
  be dealt with is that of externalities not all
  countries benefit equally from economic
  integration. Hence compensation/transfers needed.
• Issue is same in ASEAN, GMS and .. EU
• EU handled issue upfront by giving less developed
  countries/regions access to social chapters and
  social cohesion funds.
• 4 structural funds set up to reduce social and
  economic disparities European Social Fund
  (training and education) The Regional Fund The
  European Agricultural Guidance and Guarantee
  Fund and, the Cohesion Fund (transport and
  environment projects).

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Addressing the ASEAN Development Divide (III)

• Funds needed to support structural adjustments
  and HRD (upgrading labor force).
• Huge funding required for transfers ASEAN has
  limited financial resources Where can funds come
  from ?
• Creation of ASEAN regional development fund would
  show real solidarity and commitment to create
  single economic space.
• Who would administer such a Fund ? EU can give
  some lessons but not necessary best practice.
• How to deal with absorptive capacity ? In EU,
  once accession begins, prices and costs equalized
  very rapidly thus contributing to significant
  hardship, and necessitating massive transfers
  (See East Germany also).

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Establishing a Single Market and Production Base

• Lowering of tariffs under CEPT program has been
  largely successful, but little impact on intra
  ASEAN trade as tariffs already low. Given low MFN
  tariff rates, emphasis on tariff structure not
  much relevant.
• Much remains to be done on (i) Non tariff
  barriers (NBTs) (ii) Rule of Origin (ROO) and
  (iii) Dispute Settlement Mechanisms (DSM).
• Issues relating to NBTs basically involve trade
  facilitation issues/policies. This is where
  little progress achieved on intra ASEAN
  relations, in contrast to ASEAN-Rest of World
  relations (It is easier to move goods outside
  ASEAN than within ASEAN).

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Trade Facilitation Policies (TFP) (I)

• TFPs involve physical trade related
  infrastructure (maritime and air ports,
  logistics) (CBTA in GMS cross border transport
  agreements), transit regime, customs
  administration and sanitary and Phytosanitary
  (SPS) issues. All these affect trade transaction
  costs equivalent to a tariff. (E.g. 1 day delay
  in shipment to US from Asia equivalent to 7
  tariff).
• ASEAN countries at very different stages of
  development on TFP (Singapore vs Myanmar). Even
  within GMS, huge differences.
• Applying a gravity model to ASEAN trade data, WB
  study (Shepherd and Wilson, 2008) shows gains
  from improving air and maritime ports facilities,
  reduce unofficial payments and improve
  competitiveness in internet services to boost
  intra ASEAN trade by 5.7-7.5 . Cuts in tariffs
  much less impact. Several simulations using the
  GTAP model (Hertel) show similar gains from
  improved trade facilitation.

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Trade Facilitation Policies (TFP) (II)

• Improved intra ASEAN logistics would
  substantially cut costs of Intra ASEAN trade
  (border payments and time) Ruth Banomyong
  (Thammasat) studies on GMS EWEC and NSEC indicate
  significant gains possible.
• Transit regime still largely inexistent (even in
  GMS some bilateral agreements but no single
  system.
• Major area of cooperation needed to upgrade
  customs administrations Thai customs is
  e-customs, Laos only paper Major differences in
  capacity.

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Trade Facilitation Policies (III)

• On ROO, each customs still interprets
  requirements differently (FORM D) Little
  coordination to investigate compliance with AFTA
  One problem is no central legal authority as in
  EU or NAFTA.
• ASEAN Single Window project a good initiative by
  introducing electronic transfer of information,
  accelerating processing and limit fraud but
  still a long way to go because of differences in
  capacity (institutional and regulations) across
  countries. (In EU, EU system imposed on newly
  acceding countries).
• ROOs and DSM needs significant improvement
  (Establish ASEAN Compliance Body).
• Finally, much progress needed on intra ASEAN
  investment and services liberalization

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ASEAN and FTAs

• Slow progress in Doha WTO round has let many
  ASEAN countries to sign various bilateral and
  multilateral FTAs
• FTAs complicate considerably ROO monitoring Can
  also have significant unexpected adverse impact
  on some members (of ASEAN).
• Good case to consolidate FTAs into a single
  ASEAN-wide FTA. But probably difficult as speed
  of liberalization and structures of the economies
  very different. (In EU, transfer of funds were
  used as compensation).

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Integrating Financial Markets

• Financial integration next step
• ASEAN bond market Expand SWAPs.
• Coordination of supervision, surveillance and
  financial/capital market reforms (see Indonesia
  today).

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Managing Macroeconomic Interdependence (I)

• ASEAN sensitivity to global shocks remains high,
  but macroeconomic interdependence increasing, yet
  little cooperation.
• Global payments imbalances will be unwinding, and
  this might be happening just now.
• Policies need reorienting to domestic demand,
  partly away from export orientation. Rebalancing
  required. Asia cannot continue accumulating
  reserves. Current credit market turmoil makes
  this the more urgent.
• Disruptive exchange rate adjustments quite
  possible.
• ASEAN should develop a regional response.

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Managing Macroeconomic Interdependence (II)

• Strengthen monitoring and develop coordinating
  mechanisms for macroeconomic and exchange rate
  policies.
• Set up a secretariat to implement the monitoring
  and coordinating mechanism.
• ASEAN 3 process can be developed further
• Set up a policy coordination mechanism (e.g.
  develop rapid actions to respond to sharp
  exchange rate adjustments).
• Short term financing facility (CMI) should be
  vastly expanded.
• See how some reserve pooling could be undertaken
  in case of crisis.

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Making Growth Inclusive and Sustainable

• AEC will become a reality if income disparities
  within and across countries can be addressed.
  Social transfer funds ? (see the development
  divide discussion).
• With underdeveloped social protection systems in
  most ASEAN countries, labor migration will become
  a major issue in the AEC unless labor markets
  remain heavily protected, which is probably not
  an option.
• ASEAN cooperation to address health, natural
  disasters and environmental issues (regional
  public goods) needs to be substantially enhanced.

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THANK YOU Kop Chai Lai

• See ADB study on Emerging Asian Regionalism
  (ADB, 2008)