09.00-10.30 - Economic Integration in Asia: Recent trends

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 Session 1 : 09.00-10.30

Economic Integration in Asia: Recent trends

 Session 2 : 11.00-12.00

Winners and losers in economic integration: Discussion

 Session 3 : 12.30-14.00

The Impact of Economic Integration on Indonesian Economy: A Simple IIlustration by using a Social Accounting Matrix Approach

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Recent Trends

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 Central Asia: Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan.

 East Asia: People‘s Republic of China, Hong Kong (China), Japan, Republic of Korea, Mongolia, Taipei (China).

 South Asia: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka.

 Southeast Asia: Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Viet Nam

 The Pacific and Oceania: Cook Islands, Fiji, Kiribati, Marshal Islands, Federated States of Micronesia, Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Timor Leste, Tonga, Tuvalu, Vanuatu, Australia, New Zealand.

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 Central Asia, South Asia and the Pacific and Ocenia have a relatively low intra- subregional trade.

 The share of intra-subregional trade in all subregions are lower than the previous period.

 There are 2 possiblilities:

1. an increase in inter-subregional trade 2. an increase in trade with non-Asian

countries

Source: Asian Economic Integration Monitor (April 2014)

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A

B

C

D

E X

Subregion 1

Subregion 2 ASIA

Intra-subregional Inter-subregional

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 Central Asia, Southeast Asia, the Pacific and Oceania have more trade with other Asian countries (outside their subregion) and less trade with non-Asian countries in 2013 relative to the previous period.

 What about East Asia and South Asia subregion?

Source: Asian Economic Integration Monitor (April 2014)

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 Positive trend in intra-subregional trade in Central Asia and South Asia

 The level of trade integration of Southeast Asian countries in the region (Asia) is getting higher in 2014 relative to the previous period

Source: Asian Economic Integration Monitor (November 2014)

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 Trade between People‘s Republic of China and ASEAN increased

dramatically since the PRC‘s accession to the WTO in early 2000.

 The share of Japan in total ASEAN trade drop continuously since 90s due to more FDI flows from Japan to ASEAN.

Trade share with Southeast Asia – PRC, Japan, ROK and Hong Kong (in %)

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 Asia is not immune to the slowdown in global trade.

 Since June 2013 Asia‘s trade fell below global trade growth.

 Similar trends is also found in intra-Asia trade.

 WHY ??

 One of the arguments is the rising of trade impediments as a respond to the 2008/09 global financial crisis.

Total trade growth – Asia (y-o-y, %)

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Types of Trade Measures:

 Conventional:

- consumption subsidy - export subsidy

- export taxes - import ban

- import subsidy - quota

- tariff measure

- trade defence measure such as anti-dumping, safeguard mechanism

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Types of Trade Measures: (continued)

 Unconventional:

- Intelectual Property Protection - investment measure

- local content requirement - migration measure

- NTB

- Public Procurement

- Sanitary and Phytosanitary (SPS) - Technical Barier to trade (TBTs)

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 The Global Trade Alert defines red

measures as measures that almost certainly against foreign commercial interests.

 Among G20 economies, the BRICS, the EU, Japan and the US cover 60 percent of all G20 trade impedements implemented from 2009 to present.

 Approximately 35 percent of total red

measures that were implemented from May 2009 to May 2014 were in Asia.

Top Source and Most Affected Economy

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 Understanding the trade linkages through trade intensity.

 Trade intensity is the ratio of the trading partner j‘s share to a country/region i, and the share of world trade with the same trading partner.

 Trade intensity (AND trade bias) is an alternative to measure the level of trade integration.

 An intra-regional trade share is a common indicator that measures the level of trade integration.

 However, this indicator is not appropriate for trend analysis or cross-regionals comparison.

 WHY ? Because intra-regional share tend to be higher for a region that consists of large economies

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 How to calculate trade intensity?

 Region i‘s intraregional trade share = T_ii / T_i

 Region i‘s intraregional trade intensity = (T_ii / T_i)/(T_i / T_W)

 Region i‘s trade bias toward region j = (T_ij / T_i)/(T_j / T_W)

 Where:

T_ii : exports of region i to region i plus import of region i from region i

T_ij : exports of region i to region j plus export of region j from region i plus imports of region i from region j plus import of region j from region i

T_i : total exports of region i to the world plus total import of region i from the world T_j : total exports of region j to the world plus total import of region j from the world T_w: total world exports plus imports

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 Numbers indicate trade bias in 2012 and 2000 (in paranthesis).

 Values in boldface are intra-subregional trade bias index.

 Values along the lines are inter-subregional trade bias index.

 An index greater than 1 indicates the trade flow between countries/regions is larger than expected given their importance in world trade.

Intra and inter-subregional trade bias

Source: ADB calculations using data from Direction of Trade Statistic, IMF

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 Intra-subregional bias is high in Central Asia in 2000. Then, the values are declining significantly from 34.6 in 2000 to 11.3 in 2012.

 The same trend can also be found in the Pacific and Oceania even with smaller values.

 Inter-subregional bias of Central Asia

toward other sub-regions are smaller than one in 2000 which indicate that the sub

region is not well connected with the rest of Asian countries.

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 Intra-subregional bias is smaller in all Asian subregions in 2013 relative to 2010.

 Inter-subregional bias of Central Asia

toward other sub-regions are smaller than 1 except Central Asia‘s inter-subregional

bias toward East Asia.

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ASIA AND THE REST OF THE WORLD

 Values in boldface are intra-subregional trade bias index.

 Values along the lines are inter-subregional trade bias index.

 An index greater than 1 indicates the trade flow between countries/regions is larger than expected given their importance in world trade.

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 FTA by Scope

Source: Asia Regional Integration Center FTA Database, ADB Data as July 2014

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 FTA by Country

Source: Asia Regional Integration Center FTA Database, ADB Data as July 2014

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FOREIGN DIRECT INVESTMENT

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FOREIGN DIRECT INVESTMENT

 30 percent of global FDI in 2013 went to Asia.

 FDI inflows to Asia increased from 439 billion USD in 2012 to 449 billion USD in 2013.

 49.2 percent of Asia‘s FDI inflows went to East Asia and 27.9 percent went to ASEAN.

 Asia‘s intraregional FDI declined to 221 billion USD in 2012 from 223 billion USD in 2011, but remains about half of the total Asia‘s FDI inflows.

 31.2 percent of intra-regional FDI came from Hong Kong and about 22 percent others came from Japan.

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 FINANCIAL INTEGRATION

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 The share of intraregional portofolio

investment increased from 18.3 % in 2012 to 18.5% in 2013

 Regional investors prefer to hold more debt instruments than equity.

 Equity prices dropped in the region in 2013 and investors prefer to hold non- Asian equities

Portofolio Holdings – Asia (%)

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 Variance decomposition based on VAR results suggest there has been some reduction in the global shock (US influence) on the region‘s equity and bond market.

 On the other hand, Japan‘s influence over the region‘s bond markets has increased.

The influence of global, regional and domestic shock on the Asian equity and bond market

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 MACROECONOMIC LINKS

 Output correlation is calculated based on simple averages of 3-year rolling bilateral correlation of annual growth rates of GDP series in constant price

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 MIGRATION

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 Summary: Regional Integration Indicators – ASIA (intraregional as % of total)

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 Nearly all five indicators are larger after the crisis relative to ist position before the crisis except foreign direct

investment.

 However, the share of

intraregional FDI after the

global crisis is larger than ist position before the global crisis.

 SO…

Regional Economic Integration Indicators – ASIA (three selected period)

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EUROPE

a. Focused on setting institutions and procedures to integrate

economies. The Common

Agricultural Policy (CAP) was established to manage Europe‘s market for agricultural products.

b. Intraregional trade was a key driver of economic integration

c. EU corporate bond and equity market remained fragmented along national lines. But

integration advanced significantly in terms of debt flows.

ASIA

a. No “heavy“ institutions were established. Diverse stages of economic development,

integration has been largely driver by market forces.

b. Intraregional trade was a key driver of economic integration

c. Asia‘s cross border portofolio investment is smaller than

Europe. Asia‘s financial markets are more integrated with market outside the region.

DRIVERS OF ECONOMIC INTEGRATION

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EUROPE

a. Europe‘s debt problem can be directly linked to Global Financial Crisis.

b. A sharp fall in GDP is responded by countercyclical fiscal policies  increased budget deficit

c. Tax revenue declined, more

unemployment results larger transfer payment.

d. Government bailed out banks, boosting public debt.

e. Diverging inflation between countries and converging yields implied lower interest rate  Large capital inflows to periphery

f. ECB kept ist interest rate excessively low

 large imbalances. A credit boom in periphery that is financed by the surplus in the core economies

g. Crisis emerged  private debt became public debt

ASIA

a. One major reason was investor overconfidence in Asia‘s economic prospects.

b. Resulting mispriced risk on the Asian economy.

c. PLUS dollar pegs  currency mismatches

d. PLUS short-term foreign currency- denominated debt (mainly in private sector)

e. PLUS lack of prudential supervision

f. ASEAN+3 introduced the Asia Bond Market Initiative to develop stronger bond market.

g. ASEAN+3 provide emergency liquidity through the Chiang Mai Initiative Multilateralization (CMIM) CRISIS LESSONS

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 TO SUM UP

 EUROPE : Economic integration was one of the drivers of the crisis

 ASIA : The Asian Financial Crisis was one of the main drivers of economic integration

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1. Among countries

 Population

 Purchasing power

 Structure of the economy : share of agriculture sector, manufacturing sector, etc

 Net Exporter or Net Importer

 Etc

2. Within country

 Sectoral analysis

 Economic agents

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 See excel files

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