Economic Globalization and Asia: Essays on Finance, Trade and Taxation

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Economic Globalization and Asia
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World Scientific

Economic Globalization and Asia Essays on Finance, Trade and Taxation

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Economic Globalization and Asia Essays on Finance, Trade and Taxation

Ramkishen S. Rajan University of Adelaide, Australia and Institute of Policy Studies, Singapore

iRS

Institute of Policy Studies CrMiming M Years 1988-2003

Y | p World Scientific NEW JERSEY • LONDON • SINGAPORE • SHANGHAI • HONG KONG • TAIPEI

Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: Suite 202, 1060 Main Street, River Edge, NJ 07661 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

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ECONOMIC GLOBALIZATION AND ASIA Essays on Finance, Trade and Taxation Copyright © 2003 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

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VII

Preface

The term "economic globalization" has been discussed extensively in the popular press, by business executives and by policy makers all over the world. While academic economists have made some excellent contributions to specific, technical aspects of economic globalization, there appears to be a need for economists to discuss the broader aspects of the issue in a more accessible manner. Failing this, the general debate will be informed only by the writings of non-economists. This is the motivation for this volume which is a collection of essays on various aspects of economic globalization in general, but with specific reference to Asia. Apart from the Introductory Chapter, the other eight chapters in this volume explore various issues pertaining to finance, trade and taxation in Asia. While all the Chapters in this volume have been interlinked, each has been written — and therefore can be read — as a distinct self-contained piece. In fact all the Chapters are extensively revised and updated versions of separate papers written for various other outlets. A n extensive bibliography has intentionally been included at the end of each Chapter to assist readers who may be interested in pursuing specific topics in more detail. Certain Chapters in this volume were co-authored. In particular, Chapters 6 and 7 were co-authored with Rahul Sen (Institute of Southeast Asian Studies, Singapore), while Chapter 9 was co-authored with Mukul Asher (National University of Singapore). The other Chapters, while not explicitly co-authored, have been influenced in one way or the other by many other collaborators whom I have had the good fortune of working with. In particular, in addition to Mukul Asher and Rahul Sen, I would like to acknowledge the stimulating intellectual partnerships I have thus far had with Graham Bird (Surrey University, UK), Chang Li Lin (Institute of Policy Studies, Singapore), Sanjay Marwah (Ohio University) and Reza Siregar (University of Adelaide).

VIII

Preface

I would also like to express my gratitude to Senada Nukic who painstakingly read through an earlier draft and offered valuable editorial assistance. My appreciation also to Ms Kim Tan of World Scientific Publishing who ensured smooth and timely publication of this book. My colleagues at the Institute of Policy Studies have always been a source of cheer and encouragement. My most heartfelt thanks must go out to my wife, Harminder Chyle, who has always been fully supportive of my work but has also ensured I have remained grounded and kept everything in perspective. This book was completed while I was visiting Claremont McKenna College (CMC), California as a Freeman Foundation Asian Scholar. I am grateful for the financial and intellectual support offered by C M C and the Freeman Foundation, as I am for the facilities made available to me at the Lowe Institute for Political Economy at CMC. Needless to say all remaining errors are solely due to my own ignorance or oversight. Ramkishen S. Raj an University of Adelaide, Australia & Institute of Policy Studies, Singapore October 2003

IX

Contents

Preface I.

vii

Economic Globalization: Finance, Trade and Taxation Chapter 1. Economic Globalization and Small and Open Economies: Finance, Trade and Taxation 1. Introduction 2. Globalization of Finance and Capital Flows 3. Globalization of Production and Trade: Agglomeration versus Fragmentation 4. First versus Second Waves of Globalization 5. Globalization, Public Finances and Income Distribution 6. Concluding Remarks Bibliography

3 3 4 7 9 12 13 16

II. International Monetary and Financial Issues in East Asia Chapter 2. International Capital Flows and Regional Contagion: Boom and Bust in East Asia in the 1990s 1. Introduction 2. Dynamics of Capital Flows in East Asia in the Late 1990s 3. Contagion: Definitions and Transmission Channels 4. Concluding Remarks Bibliography Chapter 3 . Liquidity Enhancing Measures and Monetary Cooperation in East Asia: Rationale and Progress 1. Introduction 2. Liquidity, Enhancing Measures: Safeguarding against Capital Account Crises

27 27 28 33 40 41 53 53 55

X

Contents

3. Regional Response to Regional Crisis: The Chiang-Mai Initiative 58 4- Beyond the Chiang-Mai Initiative 62 5. Concluding Remarks 70 Bibliography 71 Chapter 4. Choosing the Right Exchange Rate Regime for Small and Open Economies in East Asia 83 1. Introduction 83 2. The Problems with Super-Fixes 84 3. The Flexible Exchange Rate Option Reconsidered 90 4. Concluding Remarks: Intermediate Regimes Revisited 95 Bilbliography 99 III. International Trade Issues in Asia Chapter 5. The Nexus Between Trade Liberalization and Poverty in Asia 111 1. Introduction 111 2. Trade Liberalization and Income Growth 112 3. Trade Liberalization and Poverty 116 4. Rural Sector and Agriculture 121 5. Concluding Remarks 123 Bibliography 124 Chapter 6. India's Decade Long Trade Reforms: How Does it Compare with Its East Asian Neighbours? (with Rahul Sen) 134 1. Introduction 134 2. Evolution of India's Merchandise Trade in the 1990s 136 3. The Flying Geese Pattern: India versus East Asia 138 4- India's Emerging Comparative Advantage in Services Trade 144 5. Concluding Remarks 147 Bibliography 148 Chapter 7. Singapore's Drive to Form Cross-regional Trade Pacts: Rationale and Implications (with Rahul Sen) 166 1. Introduction 166 2. Country Composition of Singapore's Trade, 1995 and 2000/2001 168 3. Why has Singapore Embraced the Bilateral Route? 170 4. Concerns with Bilateralism 173

Contents 5. Concluding Remarks Bibliography Chapter 8. International Trade in Infrastructural Services in East Asia: Telecommunications and Finance 1. Introduction 2. Liberalizing Trade in Services: A Basic Review of Theory 3. The Liberalization of Infrastructural Services in the Asia-5 Economies 4- Liberalizing Trade in Services: The Empirical Evidence 5. Concluding Remarks Bibliography

XI

176 178 189 189 192 194 199 205 206

IV. International Tax Issues in Asia Chapter 9. Economic Globalization and Taxation: With Particular Reference to Southeast Asia (with Mukul Asher) 231 1. Introduction 231 2. International Factor Mobility and Burden of Taxation 231 3. Efficiency and International Taxation 234 4- Tax Competition and FDI 238 5. Globalization, E-commerce and Taxation of the Internet 241 6. Financial Globalization and the Tobin Tax 243 7. Concluding Remarks 245 Bibliography 246 Index

253


3

Chapter I

Economic Globalization and Small and Open Economies: Finance, Trade and Taxation1

1. Introduction T h e term "economic globalization" has been the buzzword of the 1980s and more so the 1990s. Economic globalization, broadly defined as the shrinkage of economic distances (i.e. costs of doing business) between nations, is more accurately seen as a set of processes pertaining to (a) production and trade flows, and (b) finance and international capital flows2. Both aspects of globalization have been aided and abetted by three factors. First are the innovations and advances in transportation, information and communications technologies such as the Internet which have dramatically lowered the costs of doing business across borders (Baldwin and Martin, 1999, Masson, 2001 and World Bank, 2002b). Second is the push by the various international institutions towards global economic liberalization (i.e. reduced policy barriers to trade and investment) through the General Agreement on Tariffs and Trade (GATT), and its successor, the World Trade Organisation (WTO) in the case of world trade in goods and services, and to a lesser extent in the movement of natural persons; and the International Monetary Fund (IMF) in the case of global finance and international capital flows. Third is the shift in perceptions about the appropriate role of government and near global consensus on the need for extensive, albeit judicious, use of market incentives for economic success3. 1

This Chapter draws and extends upon Rajan (2001a) and Bird and Rajan (2001b).

2

There is, of course, another aspect of globalization — globalization of labour. This is discussed in Section 4. 3

Note that the use of markets does not, by any means, imply complete laissez faire. As Dani Rodrik (2000a) has noted: The idea of a mixed economy is possibly the most valuable heritage that the twentieth century bequeaths to the twenty-first in the realm of economic policy ... (W)e enter the twenty-first century with a better understanding of the complementarity between markets and the state — a greater appreciation of the virtues of the mixed economy. That is the good news. The bad

4


The remainder of this Chapter is organized as follows. The next two Sections discuss the two aspects of economic globalization, viz. that of finance and capital flows (Section 2) and production and trade (Section 3). Section 4 discusses whether contemporary economic globalization is a new phenomenon and how much further it can go. Section 5 explores the public finance implications of globalization. Section 6 offers a few concluding remarks on some oft-noted concerns about economic globalization ("globaphobia"). 2. Globalization of Finance and Capital Flows The 1990s have seen accelerated progress towards the liberalization and integration of global financial markets, a process that began in earnest in the 1980s. According to the World Bank data on capital flows, developing economies have enjoyed a surge in capital inflows, with institutional investors (i.e. pension funds, mutual funds, hedge funds and the like) contributing to an all-time high of US$300 billion in long term private inflows in 1997. This was almost seven times the figure in 1990 (Table 1). T h e spate of financial crises in emerging economies in the latter half of the 1990s, the generalized downturn in real economic activity in industrial countries, as well as the bursting of the technology bubble in the US and elsewhere, have worked in tandem to lead to a fall in capital flows to developing countries after peaking in 1997. The World Bank data referred to above excludes short-term flows (especially debt) or asset transactions (such as changes in foreign deposits held by developing country residents). In light of this, Table 2 provides IMF data on capital flows. While the FDI and portfolio data are broadly in line with those of the World Bank, of significance is the component termed "other investment". This category broadly includes short and long term credits (including use of IMF credit) as well as currency and deposits and other accounts receivable and payable. Not surprisingly, it is this component that has shown the greatest degree of variability (Bird and Raj an, 2001a) 4 . news is chat the operational implications of this for the design of development strategy are not that clear. There remains plenty of opportunity for renewed mischief on the policy front.. (T)he state and the market can be combined in different ways. There are many different models of a mixed economy. The major challenge facing developing nations in the first decades of the next century is to fashion their own particular brands of the mixed economy (pp.1 & 3). According to Rodrik, the five essential functions that public institutions must serve for adequate functioning of markets are: protection of property rights, market regulation, macroeconomic stabilization, conflict management, and social insurance. We revisit the issue of social insurance in Section 6. 4

This component turned sharply negative in 1994 and in 1997-1998, periods corresponding to the Mexican-Tequila crisis and the turmoil in East Asia, respectively (see Chapter 2).

Economic Globalization and Small and Open Economies

5

The increase in global foreign currency (forex) transactions has been even more dramatic. Daily global forex trades (i.e. traditional instruments of spots, swaps and forwards) increased from US$18.3 billion in 1977 to nearly US$1.4 trillion by 1998 before falling slightly to US$1.2 trillion in 2001 (BIS, 2002) 5 . To put this growth in perspective, one should note that the trade to forex volume (annualized) ratio has declined markedly from 23.9 percent in 1977 to 0.3 percent in 1998, rising marginally to 0.4 percent in 2001 due to the recent decline in foreign exchange (forex) turnover (Table 3) 6 . Meanwhile, the ratio of official reserves and daily foreign currency turnover declined from 16.2 days in 1977 to just 0.9 days in 1998, rising slightly to 1.4 days in 2001. This suggests that monetary authorities may have become less well equipped to defend currencies in the face of speculative attacks — a point we take up later. The potential benefits due to globalization of finance and capital flows, assuming that the necessary pre-conditions are met, include 7 : a) static resource allocation gains through international specialization in the production of financial services; b) static financial gains through appropriate portfolio diversification internationally; c) dynamic or x-efficiency gains through the introduction of competition in the financial sector; d) gains from intertemporal trade through access to global financial markets; e) absence of rent-seeking and other costs of capital restraints; and f) imposition of market discipline on policy makers by ensuring that profligate policies, such as unsustainable external or fiscal imbalances and debt accumulation, trigger capital outflows and balance of payments/currency crises. Despite the foregoing theoretical advantages, a careful examination of the available empirical literature on the subject suggests much less reason to be sanguine about the benefits of an open capital account (Arteta et al., 2001, 5

Three points ought to be noted. First, to obtain forex volumes, we need to multiply the daily turnover by 250 (trading days). Second, the growth would have been slower if measured in some other major currency (such as the Deutsche mark or Japanese yen), given the depreciation of the US$ between 1989 and 1995. Third, there are a number of other issues relating to inter-temporal comparisons of the survey which have been discussed elsewhere (BIS, 1996 and Felix, 1996). 6

Galati (2001) offers four reasons for the decline in forex turnover between 1998 and 2001. In order of importance they are (a) consolidation in the banking industry; (b) the introduction of the euro; (c) the growing share of electronic broking in the spot interbank market; and (d) consolidation in the corporate sector. 7

For elaborations of these benefits, see Mathieson and Rojas-Suarez (1993). Also see Bayoumi (1998) and Obstfeld (1998) for comprehensive surveys of financial globalization and international capital mobility.

6


Eichengreen, 2002 and Raj an, 2002). Indeed, financial openness has been associated with several episodes of severe financial turbulence in global currency markets. In fact, currency crises seem to have become the norm rather than the exception since 1992. Specifically, in 1992-93, Europe was faced with the very real possibility of a complete collapse of the European Exchange Rate Mechanism (ERM). T h e Italian lira and British pound withdrew from the ERM, three other currencies (viz. the Spanish peseta, Irish pound and Danish krona) were devalued, and there was a substantial widening of the bands within which the currencies could fluctuate. In 1994-95, there was the Mexican currency crisis which saw a steep devaluation of the peso and Mexico on the brink of default. There were also spillover effects on Argentina and Brazil (so-called "Tequila effect"). Between July 1997 and mid-1998, the world experienced the effects of the East Asian crisis, which started somewhat innocuously with a run on the Thai baht, but spread swiftly to a number of other regional currencies, most notably the Indonesian rupiah, Malaysian ringgit, Philippine peso and Korean won (so-called "Tom-Yam effect"). Other large emerging economies such as Russia and Brazil also experienced periods of significant market weakness and required the assistance of the IMF. The Russian ruble was devalued in August 1998 — during a period of exceptional financial market turbulence (BIS, 1999) — while the Brazilian real's peg was eventually broken in January 1999. A number of other smaller emerging economies such as Turkey and Ecuador also experienced currency crises in the 1990s, with Argentina and Venezuela being the most recent victims. While a currency crisis is inevitable if a country has weak fundamentals, the problem arises when an economy suffers from such crises even when the macroeconomic imbalances are not necessarily unsustainable. There is a class of models which allows for multiple equilibria and shows how currency runs may be "self-fulfilling" (Obstfeld, 1996 and Rajan, 2001b). The focus of these models is on the trade-off faced by policy-makers between the benefits of retaining a pegged exchange rate, on the one hand, and the costs of doing so, on the other. This set of models stresses that while speculative attacks are not inevitable (based on underlying bad fundamentals), neither are they arbitrary or random (i.e. unanchored by fundamentals). Rather, there must exist some weaknesses in the economic fundamentals of the country for an attack to occur, as the credibility of the fixed exchange rate regime is less than perfect. Thus, referring to the East Asian crisis of 1997-98, Rodrik (2000a) has noted: One lesson of the crisis was that international capital markets do a poor job of discriminating between good and bad risks. It is hard to believe that there was much collective rationality in investor behaviour during


1

and prior to the crisis: financial markets got it badly wrong either in 1996 when they poured money into the region, or they got it badly wrong in 1997 when they pulled back en masse. The implication is that relying excessively on liquid, short-term capital.is a dangerous strategy (pp. 8-9). As the turmoil in international financial markets in East Asia has receded, it is appropriate that the research focus shifts from short-term crisis management to crisis prevention. Two of the more important policy issues under discussion with regard to the strengthening of the framework for crisis prevention are 8 : the choice of an appropriate exchange rate regime for small and open economies, and the role of and scope for regional financial and monetary cooperation. Section II of this book examines these issues.

3. Globalization of Production and Trade: Agglomeration versus Fragmentation A n important characteristic of the global economy has been the tendency for agglomeration, i.e. the geographical concentration of industries in particular countries and particular regions within a country (Anderson, 2003 and World Bank, 2002b). This phenomenon of "firm-congestion" or bunching together spatially helps explain why regions with similar underlying characteristics sometimes turn out to be very different, i.e. "history matters for economic geography". The new economic geographers and old school development economists have stressed the existence of scale economies (or market size effects and linkages), thick labour markets and pure external economies as reasons for this cumulative causation and specific spatial configurations of production (Hanson, 2000 offers a comprehensive recent literature review). However, these "centripetal forces" could just as easily be rationalized by the Knickerbocker Oligopolistic theory of multinational enterprises (MNEs) which argues that a MNE will tend to enter a market in which a rival has already done so ("follow-the-leader" strategy) or to pre-empt competitors' entry ("first-moveradvantage"). Alternatively, one may explain these "band-wagon" or "herding" effects by arguing that the existence of foreign investors may act as a signal to other potential investors about the extent of investment-conduciveness of the country's overall policy regime. This reduces uncertainty and therefore increases ex-ante (expected) returns. Regardless of this, all three bodies of the literature share a common thread in the sense of explicitly or implicitly assuming strategic complementarity as 8

See Rajan (1999) for a discussion of crisis management issues with reference to the East Asian crisis.

8


defined and discussed by Bulow et al. (1985), i.e. the output expansion of one firm raises anticipated profits of the other. These factors entrench investments in certain regions. The problem with the early literature on agglomeration was the near absence of considerations of factor costs and prices in the analyses. However, following Krugman and Venables (1995) and Krugman (1999), there has been a recognition that, in the presence of fixed or immobile factors (like land), and as long as there is imperfect substitutability between these factors and those which may have a perfectly elastic supply, agglomeration will eventually lead to a rise in production costs. These factor cost appreciations and other "congestion effects" may, at some stage, offset the "concentration effects", hence leading to a dispersion of economic activity to peripheral regions (Hanson, 2000). In other words, dispersion occurs when the centrifugal forces outweigh the centripetal ones. The new economic geography literature has, however, been largely silent on the specifics of dispersion of economic activity. If anything, the dynamics described previously — whereby there will come a time when the centrifugal forces offset centripetal forces — suggests that the longer-run shift of production from the core to the peripheries will be a zero-sum game, with the latter gaining at the expense of the former (Hanson, 2000). To quote Krugman and Venables (1995): (B)oth concerns about uneven development and worries about maintaining First World living standards in the face of Third World competition have some justification. In particular, they seem to correspond to different stages in the process of globalization ... an early stage of growing world inequality ... As transport costs continue to fall ... there eventually comes a second stage of convergence in real incomes, in which the peripheral nations definitely gain and the core may well lose (p. 859). Given this perception, in the face of possible "hollowing out" or de-industrialization due to escalating costs and concomitant diminishing attractiveness, might there not be a case for the core or developed countries to take remedial measures? In particular, a plausible case might exist for the erection/escalation of tariffs and other trade barriers so as to decelerate the centrifugal forces by diminishing the feasibility of moving to the outlying regions and servicing the core through trade. However, this policy conclusion runs contrary to conventional wisdom regarding the benefits of free trade and the general presumption that factor intensities of goods and factor endowments of countries play a significant role in international trade. The implicit assumption in the agglomeration literature is the inability to unbundle products into their parts, components and accessories (PCAs). With major strides over the decades in transportation, coordination and communication technologies, economic globalization provides vastly increased opportunities


9

for the fragmentation of previously integrated goods and activities into their constituent PCAs. This in turn may be spread across countries on the basis of comparative advantage. The importance of such production fragmentation is that it suggests that globalization, by expanding opportunities for international specialization and trade, will benefit all parties involved (i.e. the ones in the "core" as well as those in the "periphery" 9 ). Thus, in the longer-term, globalization and free trade ought to be an unambiguously positive-sum game 10 . This globalization and regionalization of production has in turn been facilitated by MNEs. Indeed, a large part of trade in PCAs is of the intra-firm variety (i.e. involving international affiliates of the same company). The latter in turn constitutes some one third of global trade, while at least 80 percent of all international trade is said to be related to at least one MNE (Kleinert, 2001). Another important dynamic of international trade in the current epoch of globalization is the noteworthy role played by services. Despite the vague statistical description of services, it is noteworthy that international trade in services has outpaced that of merchandise trade over the last decade. Echoing the view of many informed observers, Primo Braga (1996) has declared that the "internationalization of services is viewed as being at the core of economic globalization" (p. 34); while the World Bank (2002a) has proclaimed that "(i)n virtually every country, the performance of the service sectors can make the difference between rapid and sluggish growth" (p. 69). Part III of this book examines various aspects of international trade and development in Asia.

4. First versus Second Waves of Globalization The world economy is no more, and, in some ways, is actually less integrated than it was back in 1913 when cross-border transactions costs had been significantly reduced by the advent of the railroad, steam ships and the telegraph in the 19th century and by the automobile and aeroplane in the early 20th century. However, while

9

The term "production sharing" is used by Yeats (1998), while the term "production fragmentation" is used by Jones and Kierzkowski (2000). Other terms sometimes used in the literature to describe this phenomenon include intra-product specialization" (Arndt, 1996, 1998), "super-specialization" (Arndt, 2001), "disintegration of production" (Feenstra, 1998), "HeckscherOhlin (HO)-plus-production fragmentation" (Knetter and Slaughter, 2000) and "slicing the value chain" (Krugman, 1995). 10

This statement presupposes that the necessary institutional structures are in place to allow a country to exploit the opportunities that are available in the global market place.

10


technological progress continued unabated, the "triple whammy" of World War I (1914 to 1918), the Great Depression (1929 to mid 1930) and World War II (1939 to 1945) effectively halted the trend towards economic globalization. A n index of the intensity of globalization over the last century would reveal a U-shape, with a lengthy trough spanning the period between 1914 and 1950-60. This said, there are some important differences in the characteristics of historical and contemporary globalization — the "first" and "second" waves of globalization (Baldwin and Martin, 1999, Bordo et al., 1999 and World Bank, 2002b) 11 . In the case of the globalization of production and trade, the pre World War I wave largely involved extensive growth, a general increase in the tradability of goods and services. Contemporary globalization, on the other hand, reflects in large part intensive growth, i.e. intra-product specialization (at least in the case of manufactured goods) as well as increased trade in services. There has also been greater involvement of developing countries in world trade in the more recent wave of globalization. With regard to financial integration and international capital flows, while privately traded bonds (for infrastructural and transport projects such as railroads) predominated before World War I, capital flows in the 1990s and beyond have been dominated by equity investments (portfolio and debt), securitized funds and other short term capital flows (Obstfeld, 1998 and Taylor, 1998). Further, while present-day net flows may not have reached the peaks attained pre World War I, gross cross-border capital flows are far greater today than ever before. Just how far has the second wave of globalization in the contemporary era progressed? Intra-country trade between regions still far exceeds inter-country trade, even where much smaller physical distances exist between two countries than between two regions in the same country. A n oft-cited example is the fact that trade between states in the US is on average twenty times more than trade between a Canadian province and a US state (McCallum, 1995). Similarly, Wei (1996) finds that during the period 1982 to 1994 a typical OECD country was on average about two and a half times more likely to buy goods and services from itself than from a trading partner, after controlling for factors such as geographical distance and relative size. Although this "home bias" in trade is tending to decline gradually, with tests of absolute and relative price differentials across countries suggesting growing real sector integration (Knetter and Slaughter, 2000), the process has not yet reached full maturity; there is still a long way to go.

11

The World Bank (2002b) notes that there are three broad periods — "the first wave of globalization" (1870-1914), "the second wave" (1945-80) and the "third wave" or "new wave" (1981 to the present).


11

Similarly, while the mobility of capital has increased greatly, the degree of financial market integration is far from complete. Although tests of capital mobility, such as direct comparisons of on and off shore nominal interest rate differentials of assets of the same type, seem to reveal significant integration, domestic savings and investment correlations remain extremely high (implying that domestic investment is constrained by available national savings). Portfolio choices by the US and other industrial resident investors continue to show a significant bias towards domestic assets as opposed to an internationally diversified portfolio 12 . While savings-investment correlations have been on a declining trend over the last 30 years, it is premature to argue that anything close to full financial integration has been attained. The one area of globalization that has lagged now compared to the 19th century is that of movement of people, especially unskilled ones, across national borders (World Bank, 2002b). While the first wave of globalization was a period of mass migration, these flows remain tightly controlled; social and political compulsions and biases prevent many industrial countries from taking a more laissez faire attitude towards such cross-border flows (Bauer and Zimmermann, 2000 and Simon and Lynch, 1999). Consequently, the global market for unskilled labour remains extremely fragmented. As Streeten (2001) concludes: (T)here is much less international migration than during 1870-1913. Barriers to immigration are higher now than they were then, when passports were unnecessary and people could move freely from one country to another to visit or work..The eighteenth-century French economist Francois Quesnay added to laissez-faire the concept of laissez'passer (unrestricted travel and migration), but this is forgotten today, perhaps because..it..would interfere with..social stability and cohesion, or security, in the countries receiving the migrants ... But., these objections also apply to the free movement of goods and services. In any case, there is an inconsistency. The strict limits on migration have, in turn, built-up migration pressures which have sometimes manifested themselves via illegal immigration (Hatton and Williamson, 2001 and World Bank, 2002b). There is, however, an intensified competition between countries for skilled personnel/"global talent"/"international competence". The economic implications of this "brain drain" — defined loosely as the out-migration of human capital from developing to developed countries — for developing countries are not altogether apparent. 12

In the international finance literature, the former (i.e. high domestic savings-investment correlation) is referred to as the Feldstein-Horioka puzzle. The latter (i.e. lack of international portfolio diversification) is called the "home bias" effect.

12


On the one hand, the developing countries from which the emigrants originate stand to gain through (a) remittances (which in turn add to the country's Gross National Product); (b) the establishment of diasporic business and trade networks; (c) providing a positive signal to others to acquire more human capital and (d) various other externalities from return migrants (something that East Asia including China appears to have benefited from). On the other hand, the emigration of skilled workers could be malignant rather than benign to the poor source countries as they may not be able to recoup the costs of subsidizing higher education (particularly relevant for countries like India), as well as prevent them from attracting more knowledge-intensive industries and building high quality public institutions (Desai et al., 2001). A recent report by the International Labour Organization (ILO) suggests that, on a net basis, the losses to developing countries from the brain drain can be substantial (Lowell and Findlay, 2001 ) 1 3 .

5. Globalization, Public Finances and Income Distribution Economic globalization can be expected to have far-reaching budgetary implications for countries. Tanzi (2000) has used the term "fiscal termites" to depict how globalization and technological changes have been "gnawing away" at the foundations of national tax systems. He identifies eight fiscal termites: E-commerce and transactions; use of E-money; intra-company trade; off-shore financial centres and tax heavens; derivatives and hedge funds; inability to tax financial capital; growing foreign activities; and foreign shopping. Globalization may lead to preferential tax treatment for mobile factors relative to immobile ones — i.e. portfolio investment over physical investment, foreign and large domestic investment over small and medium sized domestic ones, and skilled over unskilled labour. To be sure, the relatively high supply elasticity of mobile factors implies that the burden of tax on these factors may fall primarily on the immobile ones. Indeed, at the extreme, complete factor mobility (i.e. perfect elasticity of supply) may imply that any taxes on mobile factors fall solely on the immobile ones, as mobile factors relocate overseas unless there is corresponding compensation (through subsidies, fall in other costs, etc.). Table 4, borrowed from Hufbauer (2000), succinctly summarizes the effects of globalization on the mobility of various tax base items. Hufbauer's elaboration of the Table is useful and quoted at length below. The technologies underlying greater mobility are familiar ... Wage and salary income will acquire greater mobility in the next thirty years because 13

Commander et al. (2002) reach a similar conclusion. It is in this context that many have suggested the imposition of a "brain drain tax".


13

any work that can be performed on the computer will in time be capable of remote performance: an individual in Bombay can sell her engineering services in Berlin. Physical migration may well remain tightly controlled, perhaps limited to professionals, family reunification, and some guest workers, but mental migration will be practically unlimited. Electronic commerce (e-commerce) will greatly increase the mobility of goods consumption as shoppers search websites for bargains far away, and as goods are delivered by private shippers such as FedEx and UPS. E-commerce will also enhance the mobility of services consumption as households buy education, entertainment, insurance, legal, and accounting services from distant suppliers. Falling airfares will enable households to spend more of their tourist and health dollars in distant locations. Investment income will become highly mobile as pension funds and brokerage firms develop worldwide networks and households seek to diversify their portfolios. Likewise, corporate profits will become even more mobile as dense intra-firm networks of purchases and sales enable multinational enterprises to shift production and distribution to locations with the highest returns, and maintain their financial accounts with a view to minimizing their taxes. Among the top 100 multinational firms, it is commonplace for more than half of sales, assets, and employees to be located outside the home country ... The extent of international operations will only grow (p. 2). The implications of globalization for tax structures are discussed in Section IV of this book. To anticipate the main conclusion, globalization may lead to reduced progressivity (increased inequity) of tax structures. Thus, taxes levied directly on relatively immobile factors would be welfare-enhancing in the sense of having the same incidence as taxes on the mobile factors without necessarily leading to flight of the latter to evade or avoid the burden of the tax. Given the increased mobility of various sources of the tax base, this in turn implies intensified dependence on a narrow tax base consisting of immobile factors such as the less educated workforce and the rural sector. To the extent that these may be the groups most vulnerable to the effects of globalization, Vito Tanzi (1998), former director of the IMF's Fiscal Affairs Division, has noted that "(a)lthough the economics of this conclusion is right, the politics of it is surely worrisome."

6. Concluding Remarks As Alan Greenspan (2001) has correctly noted: the debate surrounding the increasing cross-border integration of markets inevitably ... elicits such strong reaction because it centers on the important question of how economies are organized and, specifically, how individuals deal with one another (p. 1).

14


Similarly, Roach (2001) has observed: Globalization is all about cross-border connectedness. It is also about the inevitable stresses and strains that come about with such connectivity (p. 3). Public protests during recent W T O , IMF, the World Bank and World Economic Forum (WEF) meetings and industrial country summits suggest that the road towards further globalization may be rocky. Indeed, the possibility of a backlash actually stalling the road toward an integrated world economy cannot be entirely discounted. What needs to be done to pre-empt this? Some of the so-called "globaphobia" — demonization of globalization — undoubtedly lacks intellectual basis and must be put down to irrational ideological biases or misinformation (Smadja, 2000) 14 . However, it would be a mistake to arbitrarily dismiss the recent anti-globalization protests and the legitimate social concerns that some protestors might have raised 15 . Arguably, among the most important concerns as an economy liberalizes and integrates with the world economy is the need for adequate social insurance to protect the most vulnerable in society. It is important for policy makers to ensure that the pace of liberalization is controlled and cautious so as to ensure an appropriate fit between marketoriented reforms and existing institutional capabilities (Rodrik, 2000b). While economic globalization provides innumerable opportunities for small and open economies, especially those which emphasize good economic governance, it can and does carry significant risks (Anderson, 2003). In particular, openness raises the sense if not level of vulnerability of small states which have limited domestic markets and are therefore especially susceptible to external shocks (also see Chapter 5). As Rodrik (1999) has observed: While the fear of drastic reduction in income associated with job loss and unemployment is an important component of economic insecurity, another is sheer volatility in the household income stream (p. 12). In view of this increased sense of economic insecurity, a number of informed observers have suggested that, as an economy liberalizes and integrates with the world economy, there may be a need for a more comprehensive social insurance program to protect the most vulnerable in society in the event of economic

14

We restrict ourselves to economic globalization — concerns about cultural dominance and the like are beyond the scope of this discussion. For a discussion of these non-economic issues, see Giddens (1999) andTomlinson (1999). 15

Lai (1999) highlights some of the fears and dangers associated with globalization.


15

downswings. It is almost inevitable that as individuals face greater market risk — which are at least partly an outcome of increasing globalization of economic activities — there will be a yearning for economic security which the government will need to respond to. Rodrik (1997) has underscored the foregoing point better than most. (I)t is not whether you globalize..., it is how you globalize. The world market is a source of disruption and upheaval as much as it an opportunity for profit and economic growth ... It has now become commonplace to point out that market-oriented reforms require social safety nets to prevent people from falling through the cracks ... (T)he provision of social insurance is an important component of market reforms — it cushions the blow on those most severely affected ... and it avoids a backlash against the distributional and social consequences of globalization (pp. 11, 13 and 14). In addition to national policies, international and regional institutions will have key roles to play in coordinating solutions and policy responses to help countries integrating with the world economy manage the tensions and problems that globalization may create, while maximizing their gains. Apart from these legitimate concerns, policy makers also need to be sensitive to and address any possible disconnect between the actual and perceived costs of globalization. Fareed Zakaria (2000) articulates the issues at hand most unequivocally and bears being quoted in full: The advocates of globalization — and I am one of the loudest — have relied too much on economic necessity and too little on persuasion. Why bother patiently explaining the virtues of policies when you can instead threaten a country with the wrath of the markets? Often we simply cheered as countries were forced to abandon foolish policies under the pressure of global capitalism. As a result, we have not yet fashioned a political, cultural, and moral case for globalization, one that resonates with the average citizen. However, powerful it may be, the bond market cannot do this. It is a task for human leadership — for politicians, businessmen, writers, activists and anyone else who believes that globalization has been, on the whole, a force for human progress and liberty (p. 17). In short, constituencies in favor of globalization must continuously and consciously be built 16 . If those who perceive themselves as "losers" from the process continue to become better organized, more articulate and more powerful, gainers may find it increasingly difficult to make significant advances. 16

The Newsweek (December 2000-February 2001), the Economist (September 23, 2000) and the Business Week (November 6, 2000) carry special reports on the issue of economic globalization, anti-global sentiments and possible remedies.

16


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17

Commander, S., M. Kangasniemi and A. Winters (2002). "The Brain Drain: Curse or Boon? A Survey of the Literature", mimeo (May). Desai, M., D. Kapur and J. McHale (2001). "Sharing The Spoils: Taxing International Human Capital Flows", mimeo (September). Eichengreen, B. (2002). "Capital Account Liberalization: What do Cross-Country Studies Tell Us?", World Bank Economic Review, 15, pp. 341-365. Feenstra, R. (1998). "Integration of Trade and Disintegration of Production in the Global Economy", journal of Economic Perspectives, 12, pp. 31-50. Feldstein, M. (2000). "Aspects of Global Economic Integration: Outlook for the Future", Working Paper No. 7899, NBER. Felix, D. (1996). "Statistical Appendix", in M. ul Haq, I. Kaul and I. Grunberg (eds.), The Tobin Tax: Coping with Financial Viability, New York: Oxford University Press. Galati, G. (2001). "Why has Global FX Turnover Declined? Explaining the 2001 Triennial Survey", BIS Quarterly Review, December. Giddins, A. (1999). Runaway World: How Globalization is Reshaping Our Lives, London: Profile Books. Greenspan, A. (2001). "Globalization", speech at the Institute for International Economics' First Annual Stavros S. Niarchos Lecture (October 2001). Hanson, G. (2000). "Scale Economies and the Geographic Concentration of Industry", Working Paper No. 8013, NBER. Hatton, T. and J. Williamson (2001). "Demographic and Economic Pressure on Emigration Out of Africa", Working Paper No. 8124, NBER. Hufbauer, G. (2000). "Tax Policy in a Global Economy: Issues Facing Europe and the United States", mimeo, February. IMF (1998). International Capital Markets Developments, Prospects, and Key Policy Issues, Washington, DC: IMF. IMF (2000). World Economic Outlook, Washington, DC: IMF. IMF (2001). World Economic Outlook, Washington, DC: IMF. IMF (2002). World Economic Outlook, Washington, DC: IMF. Jones, R. and H. Kierzkowski (2000). "Globalization and the Consequences of International Fragmentation", in R. Dornbusch, G. Calvo and M. Obstfeld (eds.), Money, Factor Mobility and Trade: Essays in Honor of Robert A. Mundell, Cambridge, MA: MIT Press.

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Kleinert, J. (2001). "The Role of Multinational Enterprises in Globalization: A n Empirical Overview", Working Paper No. 1069, Kiel Institute of World Economics. Knetter, M. and M. Slaughter (2000). "Measuring Product-Market Integration", M. Blomstrom and L. Goldberg (eds.), Topics in Empirical International Economics: A Festschrift in Honor of Bob Lipsey, Chicago: University of Chicago Press. Krugman, P. (1995). "Growing World Trade: Causes and Consequences", Brookings Papers on Economic Activity, 1, pp. 327-362. Krugman, P. (1999). "The Role of Geography in Development", in J. Stiglitz and B. Pleskovic (eds.), Annual Bank Conference in Development Economics, Washington, DC: World Bank. Krugman, P. and A. Venables (1995). "The Globalization and the Inequality of Nations", Quarterly Journal of Economics, 60, pp. 857-881. Lai, D. (1999). "Globalization: W h a t Does it Mean for Developing and Developed Countries?", in H. Siebert (ed.), Globalization and Labour, Tubingen: Mohr Siebeck. Lowell, B.L. and A.M. Findlay (2001). "Migration of Highly Skilled Persons from Developing Countries Impact and Policy Responses: Draft Synthesis Report", report prepared for the International Labor Organization (June). Masson, P. (2001). "Globalization: Facts and Figures", Policy Discussion Paper No. 0114, IMF. Mathieson, D. and C. Rojas-Suarez (1993). "Liberalization of the Capital Account", Occasional Paper No. 10, IMF. McCallum, B. (1995). "National Borders Matter: Canada-U.S. Regional Trade Patterns", American Economic Review, 85, pp. 615-623. Obstfeld, M. (1996). "Comment (on Currency Crisis)", NBER Macroeconomic

Annual

1996, pp. 393-407. Obstfeld, M. (1998). "The Global Capital Market: Benefactor or Menace?", Journal of Economic Perspectives, 12, pp. 9-30. Primo Braga, C. (1996). "The Impact of the Internationalization of Service on Developing Countries", Finance and Development, March, pp. 34-37. Rajan, R. (1999). "Economic Collapse in Southeast Asia", Policy Study, T h e Lowe Institute of Political Economy, Claremont. Rajan, R. (2001a). "Economic Globalization and Asia: Trade, Finance and Taxation", ASEAN Economic Bulletin, 18, pp. 1-11.


19

Rajan, R. (2001b). "(Ir)relevance of Currency-Crisis Theory to the Devaluation and Collapse of the Thai Baht", Princeton Studies in International Economics No. 88, International Economics Section, Princeton University. Rajan, R. (2002). "International Financial Liberalisation in Developing Countries: Lessons from Recent Experiences", Economic and Political Weekly, 37, July 20-26, pp. 3017-3021. Roach, S. (2001). "Globalization: An Ever Braver New World", Global Economic Forum, Morgan Stanley-Dean Witter, February 20. Rodrik, D. (1997). Has Globalization Gone Too Far?, Washington, DC: Institute for International Economics. Rodrik, D. (1999). "Why is there So Much Insecurity in Latin America/", mimeo (October). Rodrik, D. (2000a). "Can Integration into the World Economy Substitute for a Development Strategy?", mimeo (May). Rodrik, D. (2000b). "Institutions for High-Quality Growth: What They Are and How to Acquire Them", Working Paper No. 7540, NBER. Simon, R. and J. Lynch (1999). "A Comparative Assessment of Public Opinion Toward Immigrants and Immigration Policies", International Migration Review, 33, pp. 455-467. Smadja, C. (2000). "From Diatribe to Dialogue", Newsweek, Special Edition (December 2000-February2001). Streeten, P. (2001). "Integration, Interdependence, and Globalization", Finance and Development, 38, June. Tanzi, V. (1998). "The Impact of Economic Globalization on Taxation", International Bureau of Fiscal Documentation Bulletin, August/September, pp. 338-343. Tanzi, V. (2000). "Globalization, Technological Developments, and the Work of Fiscal Termites", Working Paper No. 00/181, IMF. Taylor, A. (1998). "Argentina and the World Capital Market: Saving, Investment, and International Capital Mobility in the Twentieth Century", journal of Development Economics, 57, pp. 147-184. Tomlinson, J. (1999). Globalization and Culture, Cambridge: Polity Press. Wei, S.J. (1996). "Intra-National versus International Trade: How Stubborn Are Nations in Global Integration?", Working Paper No. 5531, NBER.

20


World Bank (1999). Global Development Finance 1999, New York: Oxford University Press. World Bank (2001). Global Development Finance 2001, New York: Oxford University Press. World Bank (2002a). The World Development Report, New York: Oxford University Press. World Bank (2002b). Globalization, Growth and Poverty: Building an Inclusive World Economy, New York: Oxford University Press. Yeats, A. (1998). "Just How Big is Global Production Sharing?", PoIic;y Research Working Paper No. 1871, The World Bank. Zakaria, F. (2000). "No, Economics Isn't King", Newsweek, Special Edition (December 2000-February 2001), pp. 14-17.

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48

International Capital Flows and Regional Contagion Table 2 Net Capital Flows, 1989-1996 (percent of GDP)

Indonesia: Private Capital Flows Direct investment Portfolio Investment Other Investment Official Flows Change in Reserves3

1991

1992

4.6 1.2 0.0 3.5 1.1 -2.4

2.5 1.2 0.0

1993

Simple Average (1989-96)

1994

1995

1996

3.1 1.2 1.1 0.7 0.9 -1.3

3.9 1.4 0.6 1.9 0.1 0.4

6.2 2.3 0.7 3.1 -0.2 -0.7

6.3 2.8 0.8 2.7 -0.7 -2.3

5.1 1.7 0.5 3.0 0.7 -1.7

15.1 17.4 7.8 8.9 0.0 0.0 6.2 9.7 -0.6 -0.1 -11.3 -17.7

1.5 5.7 0.0 -4.2 0.2 4.3

8.8 4.8 0.0 4.1 -0.1 2.0

9.6 5.1 0.0 4.5 -0.1 -2.5

10.2 7.2 0.0 2.9 0.0 -5.1

5.0 2.0

4.6 1.8 0.3

9.8 1.6 -0.2 8.5 0.2 -4.8

4.1 1.8 0.2 2.1 2.0 -1.8

9.3 0.9 0.6 7.7 0.7 -1.2

11.5 1.6

1.4 1.1 -3.0

Malaysia:

Private Capital Flows Direct investment Portfolio Investment Other Investment Official Flows Change in Reserves3

11.2 8.3 0.0 2.9 0.4 -2.6

Philippines:


1.6 2.0 0.3 0.2 3.3 -2.3

2.0 1.3 0.1 0.6 1.9 -1.5

2.6 1.6 -0.1 1.1 2.3 -1.1

10.7 1.5 0.0 9.2 1.1 -4.3

8.7 1.4 0.5 6.8 0.1 -2.8

8.4 1.1 3.2

0.4 2.5 0.8 -1.9

2.4 1.4 -0.9

Thailand:


4.1 0.2 -3.2

Note: a) Minus sign denotes a rise and vice versa Source: IMF (1999a,b)

8.6 0.7 0.9 7.0 0.1 -3.0

12.7 0.7 1.9 10.00 0.7 -4.4

1.4 8.5 0.1 -4.3

International Capital Flows and Regional Contagion

49

Table 3 Macroeconomic Conditions Leading to Unhedged External Borrowing in East Asia, January 1991-June 1997 (in percent) Country

Indonesia South Korea Malaysia Philippines Thailand

Interest Rate Spread3 (%)

Annual Average Appreciation v/s US dollarb

Exchange Rate Variability0

11.5 4.1 1.6 6.5 4.0

-3.8 -3.2 1.2 0.9 -0.3

0.7 3.4 2.6 3.8 1.2

Notes: a) Local deposit rate less LIBOR (US$) for East Asian economies b)+ implies an appreciation; — implies a depreciation c) Standard deviation of percentage deviation of exchange rate from regression time trend Source: World Bank (1998)

50


Table 4 Nationality of BIS Reporting Banks Providing Loans, 1997-1999 (US dollar millions) End June 1997 Japan

France

Indonesia

23153

4787

5610

4332

4591

58273

Malaysia

10489

2934

5716

2818

2400

28820

Philippines Thailand

Germany

UK

USA

Total

2109

1678

1991

1076

2816

14115

37749

5089

6028

2361

4008

69382

Korea

23732

10070

10794

6064

9964

103432

Asia-5

97232

24558

30139

16651

23779

274022

End December 1997 Japan

France

UK

USA

Total

Indonesia

22018

4773

Germany 6174

4492

4893

58211

Malaysia

8551

2883

7197

2014

1787

27333

Philippines

2624

2165

2999

1607

3225

19715

Thailand

33180

4718

6028

2361

2533

58534

Korea

20278

11135

9616

6924

9531

93364

Asia-5

86651

25674

32014

17398

21969

257157

UK

USA

Total

End June 1998 Germany

Japan

France

Indonesia

19030

4009

7542

3967

3226

50268

Malaysia

7905

2391

5160

1613

1149

23024

Philippines

2308

1780

2161

1775

3025

17803

26120

3943

5286

2088

1757

46801

Thailand Korea

18934

7913

8400

5634

7409

72444

Asia-5

74297

20036

28549

15077

16566

210340

End June 1999 Japan

France

UK

USA

Total

Indonesia

14043

3967

7542

3428

3724

43764

Malaysia

6056

2225

2837

2837

1074

18623

Germany

2263

1996

2689

1760

2912

16521

Thailand

18278

2922

4632

1476

1232

34694

Korea

15018

8752

7605

4685

6420

63482

Asia-5

55658

19862

25305

14186

15362

177084

Philippines

Source: BIS, Consolidated International Banking Statistics, various issues

Table 5 Aggregate Net Capital Flows to the Asia-5 Economies3, 1995-2002 (US dollar billions) Type of Capital Flow

1995

1996

1997

1998

1999

2000

2001b

2002b

Private Flows Equity Investment Direct Portfolio Private Creditors Commercial Banks Others0

93.4 16.1 4.1 12.0 77.2 63.7 13.5

118.5 20.0 4.8 15.2 98.6 69.2 29.4

4.4 6.2 6.8 -0.7 -1.8 -17.6 15.8

-37.3 16.6 13.3 3.3 -53.9

-1.5 35.0 16.1 18.9 -36.5 -32.3 -4.2

16.9 25.4 13.8 11.6

9.3 21.0 9.9 11.1 -11.7 -5.7 -6.0

10.2 11.0 7.5 3.6 -0.8 -2.0 1.1

-48.4 -5.5

-8.4 -12.8 4.4

Notes:

a) Asia-5 economies denote Indonesia, Malaysia, Philippines, Korea and Thailand b) Estimate c) Includes resident net lending, monetary gold and errors and omissions Source: IIF (2001) Table 6 Summary of Economic Fundamentals of Selected Asian Economies Country Rank ngsa

Fundamentals 1

2

3

4

5

6

7

External International Reserves" Current Account/GDPc Debt/GDPd Export Slowdowne Real Exchange Rate: deviation from PPPf

P T T T S

I K P S K

M M I M H

T P M K M

K I S H T

H H H P I

s

Banking Strength Capital Adequacy8 Nonperforming Loans'1 Bank Ratings'

K M I

T T K

I K T

M I P

P P H

H S M

H

Liquidity Mismatches Excess Credit Growth' Short-term external debt/Reserves'1 Broad Money/Reserves1

P T T

M I I

T P P

I K K

S M M

K S S

H H H

Overall Average111

T

I

K

P

M

S

H

Overall based on Thailand Weights"

T

I

K

P

M

s

H

Notes:

a) I—Indonesia, H — Hong Kong, K — South Korea, M — Malaysia, P — Philippines, S — Singapore, T — Thailand. Ordinal ranking in descending order of "bad" fundamentals b) In SDRs, June 1997 c) 1996 d)1997 e) Change (%) In 1996 less the average change (%) previous three years f) June 1997 g) Unclear from source, but probably average of 1996 and 1997 h) 1997 estimates i) May 1996 j) Growth of credit to private sector relative to nominal GDP, 1996 k) June 1997 1) June 1997 m) Equal weights to all fundamentals (including two others included in original sources) n) Greater weights given to fundamentals in which Thailand is weakest Source: Goldstein and Hawkins (1998)

S

s I p

s s

52


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53

Chapter 3

Liquidity Enhancing Measures and Monetary Cooperation in East Asia: Rationale and Progress1

1. Introduction Referring to the East Asian crisis of 1997-98, the International Monetary Fund (IMF) has recently drawn attention to a "new breed of economic crisis" in a "globalized financial market". These new generation models focus on the "capital account" in contrast to the first two model generations that focus on the "current account". In a meeting in 2000 in Tokyo, the Group of Seven (G-7) countries concurred with this analysis. In their declaration entitled "Strengthening the International Financial Architecture", they reportedly noted the need for the IMF to reform itself and its facilities so that "(i)n future the IMF would be better able to cope with capital account crises, such as the Asian crisis which broke just over three years ago" 2 . Dornbusch (2001) describes a capital account or "new-style" crisis as follows: A new-style crisis involves doubt about credit worthiness of the balance sheet of a significant part of the economy — private or public — and the exchange rate ... when there is a question about one, the implied capital flight makes it immediately a question about both ... the central part of the new-style crisis is the focus on balance sheets and capital flight ... Because new-style crises involve the national balance sheet they involve a far more dramatic impact on economic activity than mere current account disturbances..(p. 2). It has become commonplace to interpret the new genre of currency crisis models as being "bank-centered". While this is far too narrow a perspective and does not do adequate justice to the large milieu of new crisis models which emphasize various types of capital flows and dynamics (Rajan, 2001), it is not

1

This Chapter draws on Bird and Rajan (2002), Chang and Rajan (2001) and Rajan (2000, 2002).

2

Quoted in an AFP report "G7 Calls for Major Overhaul of World's Finances" (July 8, 2000).

54


altogether surprising. After all, the strong and positive correlation between banking and currency crises (so-called "twin crises") since the late 1980s and 1990s is a well documented fact, with the causation most often running from banking to currency crises (Kaminsky and Reinhart, 1999). What is more, these twin crises are far more pervasive in developing countries than in developed ones (Glick and Hutchison, 1999 and IMF, 1998). The probability of banking crises themselves occurring seems more likely following financial liberalization, with sharp increases in domestic (bank) lending acting as significant predictors of currency crises. The IMF (1998) has suggested that the greater frequency of banking crises worldwide since the 1980s is "possibly related to the financial sector liberalization that occurred in many countries during this period" (p. 115). Much ink has been spilt over the question of whether the East Asian crisis was due to insolvency or illiquidity. The importance of tackling this question cannot be underestimated, as the consequences for economic policy will vary greatly depending on what the problem is perceived as being. O n the one hand, in the case of a liquidity crisis, some form of coordination (via lender of last resort functionary, moratorium or standstill on debt, etc) will be able to avert sharp real losses. O n the other hand, in cases where banks are insolvent, allowing them to continue operating without restructuring will magnify market distortions and the concomitant fiscal costs of bailout and rehabilitation. Whatever the reasons for the crisis and devaluation, the extent of the postdevaluation economic contraction experienced by many emerging economies is exacerbated by the nominal appreciation of external liabilities which are often foreign currency based and uncovered, slashing the net worth of individuals, corporations and the domestic financial systems at large (World Bank, 2000). This so-called "balance sheet" effect leads to massive collateral damage and outright bankruptcies, which in turn aggravates domestic economic conditions and intensifies capital outflows (Raj an and Shen, 2001). This was certainly the case in East Asia. While managing a conventional current account crisis involves a judicious combination of adjustment and financing, dealing with a capital account crisis principally demands the restoration of "market confidence" and is a much more imprecise and complex undertaking. Accordingly, the emphasis is best placed on crisis prevention as opposed to management or resolution. In this regard, it is crucial that emerging economies augment sound economic policies with appropriate financial safeguards to shield themselves from external shocks and adverse shifts in market confidence. Among the more important means of guarding against capital account shocks are those aimed at international liquidity enhancement. This Chapter examines potential ways of enhancing the availability of liquidity in crisis conditions so as to minimize losses in the event of future crises.

Liquidity Enhancing Measures and Monetary Cooperation in East Asia

55

Liquidity enhancement measures are often seen in terms of unilateral and multilateral actions, the latter invariably involving an expanded role for the IMF. These are discussed in Section 2. As noted in Chapter 2, "contagion" often tends to have a regional as opposed to global dimension. This regional dimension of contagion provides rationale for exploring regional approaches to tackling illiquidity concerns. Section 3 examines and assesses the regional initiatives that are currently underway in Asia, including the Chiang-Mai Initiative (CMI). Section 4 discusses ways of building on the CMI and fortifying steps towards regional monetary cooperation. The final Section offers a summary and a few concluding remarks.

2. Liquidity-Enhancing Measures: Safeguarding against Capital Account Crises 2.1.

Reserve

buildup

Stockpiling of reserves by the East Asian economies in the early 1990s helped somewhat cushion the exchange rate depreciations in 1997—98. Also of importance is the fact that the regional economies began re-accumulating international reserves following the sharp declines in 1997 (so-called "floating with a life-jacket"), implying that the current account surpluses exceeded total capital outflows3. To emphasize the extent to which a policy of reserve accumulation has been embraced by East Asia, note that the region now houses the world's largest holdings of foreign reserves in aggregate. To be sure, global international reserves stood at US$ 2,223 billion in May 2002, a near doubling in nominal terms since early 1994. Developing countries account for around two-thirds of the world's international reserves, with East Asia alone holding 38 percent of the global share in May 2002, up from about 30 percent in 1994 (Aizenman and Marion, 2002). Korea and China stand out as having accumulated reserves particularly aggressively between 1992 and 2001. The preceding highlights a seeming paradox. The regional economies (save Hong Kong and Malaysia) have generally allowed for a relatively greater, albeit modest, degree of variability of their currencies according to market conditions (see Chapter 4). Yet the central banks in developing countries have appeared keen on bolstering reserves to historically high levels 4 .

Another reason for the accumulation of reserves is the "fear of floating" that seems to characterize developing countries (see Chapter 4). 4

Of course, the impact of exchange rate variability on reserve holdings runs both ways. On the one hand, with flexible regimes, the exchange rate acts as a safety valve in response to balance of

56


N o doubt, the replenishment and accumulation of international reserves, on the one hand, and the curbing of imports as well as the lengthening of the average maturity profile of external indebtedness of the regional economies, on the other, have worked in tandem to significantly improve the external positions of the regional economies (Tables 1 and 2). The higher import and external short term debt coverage of reserves has substantially eased the extent of the region's vulnerability to the destabilizing effects of volatile and easily reversible capital flows. However, an important drawback of such a policy of reserve hoarding is that it involves high fiscal costs as the country effectively swaps high yielding domestic assets for lower yielding foreign ones (Bird and Raj an, 2003 and Raj an, Siregar and Bird, 2003) 5 . Since international reserve holdings have been found to be a theoretically and statistically significant determinant of creditworthiness (Bussiere and Mulder, 1999, Haque et al., 1996 and Disyatat, 2001), depleting them as a way of cushioning the effects of capital outflows on the exchange rate may make matters worse by inducing further capital outflows. If capital outflows reflect a perception within private capital markets that a country is illiquid, reducing international reserves and therefore curbing liquidity further is hardly likely to be an effective strategy. In other words, the reversibility that makes reserve depletion credible in the context of trade deficits is often absent in the context of capital outflows.

2.2.

Foreign bank entry and contingent credit lines

In light of the above, it has been suggested that the internationalization of the domestic banking systems in developing countries could be an important additional means of overcoming illiquidity during crises periods. The argument is that a banking system with an internationally diversified asset base is more likely to be stable and less prone to bank runs and outright crises since the domestic payments disequilibria. On the other hand, past exchange rate changes may be an indication of the extent of variability of and susceptibility to external shocks. Insofar as central banks need to hold reserves to counter these external shocks, this suggests the need to hold larger quantities of reserves. 5

There is the additional question of what the appropriate size of reserve holdings is, i.e., against what yardstick should reserve adequacy be measured? The generally accepted rule of thumb that a country needs to hold reserves equivalent to short term debt cover (i.e. debt that actually falls due over the year) is true only in the case where a country is running a current account balance and there are no other liabilities that are easily reversible. The optimal level of reserves depends on a number of factors such as degree of export diversification, size and variability of the current account imbalance, type of exchange rate regime, etc. (Bussiere and Mulder, 1999). A related issue pertains to the appropriate currency composition of reserves (Eichengreen and Mathieson, 2000).

Liquidity Enhancins Measures and Monetary Cooperation in East Asia

57

branches of foreign banks are able to obtain financing from the foreign head office, which could act as a private lender of last resort. In addition, since portfolios of foreign banks are much less concentrated in any single country, particularly in the developing and emerging host ones, they ought to be less susceptible to country-specific crises. Thus, it is often noted that foreign banks in Argentina and Mexico were able to maintain access to offshore financing during the Tequila crisis of 1994 and 1995, while domestic banks were faced with credit squeezes. There are other potential advantages of allowing foreign bank entry — such as lowering overall financial costs structures — which may make it a desirable policy in and of itself6. Regardless of foreign bank entry, countries may find it useful to establish contingent lines of credit with foreign banks and private financial institutions as a means of providing additional international liquidity to deal with sudden capital flow reversals. Indonesia, Argentina, Mexico and South Africa are some examples of countries that have recently arranged such private lines of credit with international banks. More generally, there are a number of problems and limitations of obtaining such credit lines unilaterally and on a private basis rather than regionally or multilaterally via official channels. First, there may be high opportunity costs involved insofar as the individual countries have to commit certain assets/revenue streams as collateral. Second, calling on these lines of credit when needed could lead to a hike in the country's international risk premium. Third, while negotiating lines of credit with a country, the financial institutions could undermine the effectiveness of these commitments and their effective exposures to that country through other channels (through various corporate risk management techniques). Foreign banks themselves could be sources of contagious transmission of crises. For instance, in response to a crisis in one country, multinational banks might attempt to liquidate positions in other regional economies to which they have exposures, i.e. the "credit crunch" or "liquidity" channel discussed in Chapter 2. Fourth, and related to this, if the credit lines are called upon by one country, the international financial institutions may be forced to reduce their exposures in other emerging economies, either to cover losses or in order to reduce portfolio risks and improve the liquidity position ("flight to safety" effects).

6

See Bird and Raj an (2001) and Claessens et al. (1999) for discussions about the potential benefits of foreign bank entry. Of course, as with financial liberalization in general, to foreign bank entry must be undertaken in a careful (gradual?) manner so as to avoid any major disruptions to the domestic financial system by enticing domestic banks to opt for increasingly risky investments. Montreevat and Rajan (2001) discuss Thailand's experience with bank restructuring and foreign bank entry.

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In view of this, Fischer (2001a) has stressed the need for a multilateral response in the form of IMF lending to complement unilateral measures that countries may take towards liquidity enhancement. 23.

Multilateral

Safeguards: Liquidity, Crisis and the IMF

The problem facing the IMF, which has constituted one component of the debate about a new international financial architecture, has been how to provide adequate liquidity to help forestall a crisis in a distressed economy and prevent its spread to other countries where there is reluctance to make concessions in terms of conditionality and reluctance to substantially increase the IMF's lending capacity. The IMF's response has been to create the Contingent Credit Line (CCL). The idea here was to establish a precautionary line of credit for countries with "sound" policies that might be affected by contagion from a crisis and to finance this from outside the IMF's quota-based resources by New Arrangements to Borrow (NAB). The negotiation of conditionality with potential users of the CCL would therefore take place before the country needed to draw on the IMF. But member countries have hitherto been reluctant to negotiate a CCL with the IMF. Consequently the facility has had to be re-evaluated (Rajan, 2003). Its weaknesses have been widely recognized and acknowledged and has undergone some modifications, including a reduction in the relatively high costs of borrowing via this facility and a review of the conditionality involved as part of obtaining the funding (Fischer, 2001a). However, this sort of "tinkering" fails to recognize a more fundamental drawback of such a scheme. Why should countries sacrifice sovereignty over national policy and subject themselves to strict conditionality when all they receive in return is an option on a drawing? Since, in many instances, countries fail to implement conditionality for one reason or another, a situation could arise where a country complies with a significant proportion of conditionality and yet is ineligible to draw in the event of experiencing contagion from a crisis. Of most concern, however, has been the possibility that by negotiating a CCL a country sends out a negative signal to private capital markets that it is vulnerable to a crisis. This may have an adverse effect on capital flows to the country and may contribute to causing the very crisis that the CCL is intended to help avoid. Moreover, there must remain some doubt about whether the facility would be adequately financed. 3. Regional Response to Regional Crisis: The Chiang-Mai Initiative The regional dimension of the 1997-98 East Asian crisis, as well as the perceived inadequacies of the IMF's response to it, has motivated a sub-group of East Asian


59

economies to take some small but important steps towards enhancing regional financial stability and protect themselves against externally induced shocks and liquidity crises. Ito (2002) has suggested there are four reasons for Japan's interest in regional financial cooperation. These reasons appear just as relevant to other countries in the region and warrant highlighting. First, the experience of the Asian currency crisis that was highly contagious has shown that.Asia and Japan have been "on the same boat." Their strong trade and financial linkages mean that one country's financial difficulties affects others quite easily. Preventing a financial crisis in one country, if possible, is of others' interest ... Second, the less-than-perfect performance of (the) IMF in managing various stages of the Asian currency crisis has given an interest in building a regional framework that is substitutable or complement(ary) to (the) IMF ... Third, success in economic and currency integration in Europe shows that it is indeed possible for a region to unify the currency. Of course, there are many steps before monetary union. But, Europe clearly shows a model for a group of advanced and middle-income emerging market economies to integrate real economies and financial markets ... Fourth, there is a fear factor. Asia may be left behind in a rush toward(s) regionalism. The EU is poised to expand to the east and the N A F T A may be expanded to the Free Trade Area of the Americas (FTAA). Fragmented Asia may suffer in any trade negotiations or trade wars as each of the Asian economies may be dwarfed by the expanded Euro Area or the "dollarized" Americas (p. 1). Table 3 summarizes the various regional initiatives in East Asia. While these initiatives towards enhanced regional surveillance are important in their own right — and have been extensively discussed elsewhere (Chang and Rajan, 2001, Manzano, 2001 and Rajan, 2000) — they do not in and of themselves reduce a country's susceptibility to a capital account or new-style crisis which requires access to international credit lines as discussed previously.

3.1.

The Chiang-Mai Initiative

(CMI) is born

Against this background it is important to note that selected East Asian economies have recently agreed to create a network of bilateral currency swaps and repurchase agreements as a "firewall" against future financial crises. This has since come to be termed the Chiang-Mai Initiative (CMI) following an agreement in Chiang Mai, Thailand on May 6, 2000.

60


At a broad level, the CMI is aimed at providing countries facing the possibility of a liquidity shortage with additional short term hard currencies. The CMI extends and expands upon the little known ASEAN Swap Arrangement (ASA) and encompasses all ASEAN countries as well as China, Japan and Korea (i.e. ASEAN Plus Three or APT). The ASA was established in the 1970s to provide short term swap facilities to members facing temporary liquidity or balance of payments problems. In 1977, there were only five ASEAN signatories — Indonesia, Malaysia, Philippines, Singapore and Thailand — each contributing about US$40 million. This facility was increased to US$200 million in 1978. At the Fourth ASEAN Finance Ministers Meeting in Brunei Darussalam (March 24-45, 2000), the Ministers agreed to expand the A S A to include the remaining ASEAN members, Brunei Darussalam, Cambodia, Laos, Myanmar and Vietnam. In keeping with this expansion, the A S A was enlarged to US$1 billion with effect from November 17, 2000. There are also a series of repurchase agreements (repos) that allow ASEAN members with collateral such as US Treasury bills to swap them for hard currency (usually US dollars) and then repurchase them at a later date. The expanded A S A is to be made available for two years and is renewable upon mutual agreement of the members. Each member is allowed to draw a maximum of twice its commitment from the facility for a period of up to six months with the possibility of a further extension of not more than six months. This expansion of the ASA is the first step in putting into effect the CMI which envisages that hard currency lines of credit will be made available to members. In addition to the expansion of the A S A among Southeast Asian countries, the three ASEAN Dialogue partners (China, Japan and Korea) have simultaneously been in discussions aimed at establishing a Bilateral Swap Arrangement (BSA) amongst themselves. Japan has recently signed BSAs totaling US$6 billion with Malaysia, Thailand and Korea, and is planning to add ones with China and the Philippines. BSAs among other members of the APT are expected in the near future. While the maximum amount of withdrawal under each of the BSAs will be determined by negotiations between the two countries concerned, in the spirit of "regional partnership" there is to be full coordination and consultation among all members when deciding on disbursements.

3.2.

The economics of the CMI

While the basic idea behind the CMI is clear, many details still need to be clarified. Journalistic accounts suggest that 10 percent of the funds will be available automatically while the rest will be subject to IMF conditionality.


61

First, the resources need to be capable of being disbursed quickly. Speed is of the essence in a crisis. Second, the credit lines need to be "sufficiently large" to generate confidence in private capital markets and to repel speculative attacks, as well as involve sufficient countries to avoid potential problems of co-variance and to allow the pooling of risks. Third, the rate of interest needs to be "sufficiently high" so as to guard against moral hazard 7 . Countries need to be discouraged from using such credit lines as a matter of course. Fourth, access to such liquidity needs to be separated from the detailed negotiation of conditionality which would prejudice quick dispersal; links to IMF conditionality are therefore a cause of some concern. However, given the part played in the East Asian crisis by weak domestic financial structures and inadequate prudential standards and supervision, there is a strong argument for making access to the credit lines associated with the CMI conditional upon compliance with some minimum set of financial standards. This would encourage countries to push ahead with reforms to their domestic financial systems (see Bird and Rajan, 2002 for a brief progress report on financial restructuring efforts in the region). A credible system of regional swaps based on these principles would have two key attractions. It would enable participants to avoid the severe output losses that are associated with extreme shortages of liquidity (Rajan and Shen, 2001). Based on this, by creating confidence that such extreme shortages will not occur, the incidence of crises could be reduced. Of course, confidence would be undermined if the swap arrangements were used to try and defend disequilibrium real exchange rates. Therefore, the CMI should not be a mechanism for inappropriate currency pegging in the region. The history of bilateral swaps in the context of the Bretton Woods system demonstrates that they are an ineffective means of defending seriously misaligned currencies. A n important next step would therefore be to reinforce and augment the existing bilateral currency swap arrangements under the CMI if it is to be made a credible and effective financing mechanism. The size of currency swap, though large in comparison to some countries' quotas in the IMF (Henning, 2002), remains small in absolute terms. To be sure, currently, the total amount of BSAs covering all 13 East Asian countries is estimated at around US$20 billion, with the maximum amount of money that any individual country can draw varying

7

The need to charge "prohibitively high" interest rates is, of course, the classic rule for a lender of last resort proposed by Walter Bagehot. Park (2001) also discusses the issue of appropriate interest rate for a regional financial facility. Willett (2001) suggests that ex-ante lending facilities should follow a policy of "time escalating interest rates". Admittedly, this does not solve the moral hazard problem at the creditor or investor level. The way to limit such investor moral hazard would be for the private sector to share in the burden of bailouts, i.e. "take a haircut".

62


significantly. Nonetheless, the US$20 billion that is available in aggregate is comparable to the US$17.2 billion that was granted to Thailand itself as part of the IMF program of 1997-98. If the aim of liquidity arrangements is to ensure the availability of large-scale liquidity in crisis periods, the current size and manner in which the CMI is structured precludes it from playing the role satisfactorily.8

4. Beyond the Chiang-Mai Initiative The CMI is noteworthy as the financial commitments involved exceed anything that has taken place before in East Asia. Going forward, if the CMI is to be built upon as a way of providing short term liquidity at the regional level, it would be natural to think about extending the facility to establish a full-fledged regional reserve pooling mechanism or liquidity support program (Henning, 2002). Indeed, if the hitherto decentralized and bilateral swap arrangements are activated collectively, the CMI will go a long way to being a de facto regional pooling arrangement. More to the point, a regional standing reserve pool essentially involves participating central banks being able to access a portion of their regional partners' foreign reserves during times of distress. Many Asian governments have hitherto been unwilling to consider restructuring the CMI to create a more formalized regional structure. This should not come as a surprise. Regional reserve pooling has by no means been an easy issue in practise. For instance, in the case of Europe, despite having established a single regional central bank, the federal structure of the union and very different levels of reserves held by individual countries (central banks) implied that pooling of reserves was done only partially. The fact that the Asian economies maintain the bulk of the world's foreign exchange reserves suggests that (a) there is a definite case of resource misallocation with huge opportunity costs as highlighted previously; and (b) the region has sufficient aggregate reserves to develop a large and credible common reserve pool arrangement. More importantly, the reserves are well distributed between many "strong currency" countries, including Japan, China, Korea and Singapore. This is important, because if a region on balance had relatively more "weak currency" countries than strong ones, sustainability, if not creation of a common reserve pool would certainly come into question. It would be highly unlikely that the few strong currency countries would be willing to allow their reserves to be constantly

8 Henning (2002), Park (2001) and Wang (2003) offer comprehensive descriptions of the CMI and make useful suggestions on how it may be built upon while still maintaining its credit line character.


63

compromised by the weaker currency countries. Conversely, if reserves are well spread out among a number of "strong currency" countries, these countries will be able to work together to require the weak currency ones to implement necessary macroeconomic and structural reforms if they are eligible to draw upon the com' mon pool when needed. (The issue of conditionality and other pre-requisites are discussed in Section 4.2).

4>1- Reserve pooling versus exchange rate The European experience

coordination:

If the CMI does evolve into a regional liquidity facility, it would be natural to ask whether effective financial cooperation can be pursued in the absence of regional exchange rate coordination. Certainly, any explicit form of exchange rate coordination necessitates that a reserve pooling arrangement be in place to jointly manage the regional currency arrangement. But such a strong form of coordination requires much more. Uppermost on the list is the need for close coordination of regional macroeconomic policies, which in turn almost inevitably requires some sort of constraining arrangement to ensure compliance. However, it would be fair to say that the regional countries in Asia do not currently have the consensus or political will necessary to consider establishing a coordinated exchange rate regime in the near future (Eichengreen and Bayoumi, 1999). Indeed, small but strong currency countries like Singapore are unlikely to be willing to forsake the discretion they have over their own macro policy and subordinate themselves to a regional monetary alliance that is untested and where their voice may not be significant. On the other hand, a reserve pooling arrangement requires no such binding constraint on their decision-making until and unless they need to draw on the common pool. A reserve pooling arrangement also offers benefits on its own. Therefore, it can be pursued regardless of any decision pertaining to explicit regional exchange rate coordination' This being said, if a greater degree of exchange rate coordination — in the form of common regional basket pegs or even a collective exchange rate regime or an Asian Monetary system (equivalent to the European Monetary System or EMS) — becomes more practicable over time, it will be necessary to further strengthen the centralized monetary pool (Kusukawa, 1999). Indeed, as envisaged by Williamson (1999), there may be a need to put in place an equivalent to the European Very Short Term Financing Facility (VSTFF) to sustain the regional currency arrangement in the event of speculative attacks. To be sure, under the VSTFF, central banks granted loans to one another at unlimited amounts for 45 days to 3 months. Interest would be paid at prevailing

64


market rates and up to 50 percent could be repaid in the European Currency Unit (ECU) (Henning, 2002). This facility was under the control of the former European Monetary Cooperation Fund (EMCF) which was financed by US dollar deposits of each member states' reserves and the EMCF issued ECU in return 9 . The EMCF's board was composed of governors of participating national central banks and was established to scrutinize European monetary policies, administer the operation of credit facilities, and authorize exchange rate realignments. Apart from the VSTFF, the other financial facilities under the purview of the EMCF were the Short Term Monetary Support (STMS) which was meant for temporary balance of payments problems (loans of about 3 to 9 months) and the Medium Term Financial Assistance (MTFA) which was financed through assigned lending quotas for individual central banks with loans for 2-5 years subject to remedial macroeconomic conditionality. A n important element of the EMS was the creation of the European Currency Unit (ECU) which was to function as the region's unit of account. Official ECUs were issued to member central banks through the EMCF in exchange for 20 percent of their US dollar and gold reserves. The EMCF was dissolved following the formation of the European Monetary Institute (EMI) in January 1994 10 . The EMI took over the tasks of the EFMC while additionally being tasked with strengthening central bank cooperation and monetary policy co-ordination as well as assisting with the preparations needed to establish the European System of Central Banks. The EMI itself went into liquidation with the establishment of the European Central Bank (ECB) in June 1998. Following the dissolution of the ECU with the creation of the euro in 1998, the reserves held by the ECB were transferred back to the regional central banks. More generally, as with the EMS, there needs to be an explicit agreement that regional financing arrangements and interventions will need to be rapidly disbursed, automatic and unlimited. A plausible argument could be made that if speculators are intent on attacking a currency arrangement, no level of reserves will be sufficient to counter this. However, in the presence of strong fundamentals, the availability of a large standing pool of reserves ought to bolster confidence and reduce the probability of an attack in the first instance. Indeed, as

9

The EMS, set up in 1979, consisted of four main components, the ECU, the Exchange Rate Mechanism (ERM), the Financial Support Mechanism (FSM) and the European Monetary Cooperation Fund (EMCF). The EMCF itself was established in 1973 following the Werner Report and after the creation of the "snake in the tunnel". 10 All said, the EMCF possessed little authority in practise, as the regional central bank authorities were unwilling to forsake their macroeconomic autonomy, and its role was largely subordinant to the Council of Ministers of Economics and Finance (ECOFIN).


65

noted previously, it is instructive that international reserves (appropriately scaled) consistently shows up as a leading indicator of currency crises11. Insofar as greater exchange rate coordination facilitates intra-regional over extra-regional trade, the optimal size of reserve holdings of the region may decline as there is a substitution of external trade by domestic trade 12 . In addition to this reduced transactions demand for reserves, the absence of the need to stabilize intra-regional exchange rates with exchange rate coordination also suggests a lower precautionary need for reserves 13 . There is a more subtle issue to note when it comes to the precautionary demand for reserves. Countries hold reserves as a war chest against adverse geopolitical developments and other "non-market considerations" (Reddy, 2002). To the extent that closer monetary integration enhances intraregional security and reduces some of these intraregional geopolitical considerations, the region's aggregate demand for reserves can be expected to decline.

4.2.

Surveillance and policy

conditionality

In the absence of exchange rate coordination, there is the perennial concern that the incentives for participating countries may be blunted. Specifically, some member countries may be less concerned about maintaining unsustainable currency regimes as there may be the expectation of the availability of large-scale regional financial assistance in the event of a speculative attack. Thus, even if there is no explicit exchange rate coordination, it is important to have in place an effective monitoring and surveillance mechanism such that all participating countries can exercise some degree of influence on one another's policies, as well as to highlight or rein in profligate policies. In other words, for a centralized reserve pooling mechanism to operate effectively, it is imperative that an appropriate mechanism be in place to monitor participating countries' policies and

1

' This said, during the days of the EMS, many Western European countries imposed restrictions on capital flows. This may have facilitated the sustainability of the regime, particularly as international capital flows were much less intense since the mid 1990s. 12

Frankel and Rose (2002), Click and Rose (2001) and Rose (2000) estimate gravity models using both cross-sectional and time series data and conclude that a common currency is especially trade stimulating intraregionally. 13

Offsetting these effects, with a full-fledged currency union, there will be an automatic decline in "international reserves" with the re-definition of regional currencies. However, this is of less relevance for Asia (compared to Europe, for instance) as the US dollar is the most important reserve asset in Asia.

66


compliance, with automatic pre-agreed sanctions in place to deal with noncompliance (i.e. conditionality) 14 . The need to ensure "due diligence" in all likelihood requires the establishment of a small, permanent but technically capable secretariat or a monitoring and surveillance institution to coordinate activities/actions and monitor regional and global economic developments and promote regional policy dialogue 15 . The IMF would be expected to be involved in such regional surveillance (most likely with observer-status). However, such regional surveillance is expected to be conducted independently of the surveillance undertaken by the IMF, not unlike the OECD-based surveillance. Dieter (2000) observes: The provision of a public regional liquidity fund ought to be accompanied by two monitoring bodies, a regional monetary committee and a regional banking supervision system. Committing foreign reserves of a country's central bank, even if it is limited to a certain percentage, is not a simple bookkeeper's exercise, but a genuine expression of confidence. In order to further build this mutual trust, the regional monetary committee is of vital importance. Central bankers could meet frequently, e.g. monthly, to discuss developments in the financial sector and in foreign exchange markets ... The establishment of a regional monetary committee would also contribute to the creation of "intra-regional policy networks", which enable policy-makers to deepen their knowledge of their partners in the region. Absent the possibility of policy conditionality being imposed on borrowing countries by such an independent surveillance unit, it is unlikely and inadvisable to institute a reserve pooling arrangement as this could give rise to all sorts of moral hazard problems on the part of the borrower which may promote permissive

14

The tradeoff between automaticity of liquidity availability, on the one hand, and that of ensuring the conditionality is met, on the other, is an issue in need of much more in-depth discussion. 15 In this regard, a natural starting point may be to extend the ASEAN Surveillance Process (ASP) to encompass the North Asian countries. This has already been done with the inclusion of China, Japan and South Korea. A major limitation of the ASP as it is currently structured is that there are no fact-finding missions as with the IMF. Participating governments (finance ministry and central bank officials) offer information to the ASP directly. Thus, to a large extent, the effectiveness of regional surveillance is still highly limited. If the regional pooling arrangement is put in place and operates with a little more independence from the IMF, there may be a need to substantially strengthen regional surveillance. Whether member countries are willing and able to move beyond the current peer review process to more formally engage each other and confront/be ready to be confronted in the event of profligate policies is unclear. Henning (2002) offers a useful discussion on how surveillance among the APT countries might be strengthened.


67

behavior. Indeed, at the extreme, any arrangement that has weak conditionality and enforcement will not be seen as credible by the markets and is not sustainable. In other words, the regional facility may go bankrupt or significantly weaken financially as the strong currency countries may choose to opt out. In the case of an Asian liquidity facility, it would be premature to discuss here the exact type of conditionality or surveillance system that ought to be involved or the enforcement mechanisms and operating procedures that needs to be put in place. Nonetheless, given that the issue of conditionality is of significant importance, we briefly note here the experience of the Latin American Reserve Fund (Fondo Latinoamericano de Reservas or FLAR for short). The FLAR, which is a financial and monetary institution of the Member Countries, evolved from the Andean Reserve Fund (which operated between 1978 and 1991) with a current membership comprising Bolivia, Colombia, Costa Rica, Ecuador, Peru, and Venezuela. The FLAR also offers participating member central banks an opportunity to invest their non-committed international reserves with the regional institution so as to benefit from its investment expertise. The FLAR has provided short and medium term financial assistance to crisishit member countries. In particular, members can avail themselves of a number of different types of loans: loans and guarantees to support balance of payments; Liquidity loans; and Emergency loans 1 6 . The FLAR has maintained its own conditionality which is by and large weaker than that of the IMF (each type of loan comes with slightly different conditionality). Nonetheless, despite its limited size with relatively "weak currency" countries, the FLAR has never experienced any difficulty in recovering its loans. Thus, as long as policy discipline in lending is in place, it is unlikely that the regional Asian facility will go bankrupt.

4.3.

Nexus between monetary regionalism and the IMF

So would a new Asian financial architecture based perhaps on a regional liquidity facility threaten or facilitate international financial stability? Would regional reform be a stepping-stone or a stumbling bloc to international monetary reform? It could be a stumbling bloc if loans from the regional facility carried conditionality that was inconsistent with that coming from the IMF. Moreover, the attitude amongst advanced economies that Asia is looking after its own problems could reduce the urgency with which reform at the international level is pursued. It is therefore important to identify the comparative advantages of regional and 16 In addition, the FLAR offers members loans to support public external debt restructuring and also has an export finance facility.

68


international financial institutions and the division of labour between them (Bird and Rajan, 2002). Boughton (1997) has reminded us: although the intention was that the availability of the Fund's resources should prevent countries from experiencing financial crisis, in practice, the institution has often found itself helping its members cope with crises after they occur (p. 3). Monetary and financial regionalism, as discussed in this Chapter, could help the IMF fulfill its stated aim; it is consistent with the principle of "subsidiarity". Why choose to deal with a problem at the global level when it can be handled adequately and perhaps more effectively at the regional level? Just as multilateral trade liberalization and multilateral trade institutions have been joined by an increasing array of regional trading arrangements, regional financial crises may be better handled by regional arrangements. To the extent that regional arrangements may help reinvigorate interests in strengthening the international financial architecture, they could act as "stepping stones" towards multilateral reforms rather than "stumbling blocs". Regional arrangements ought to promote greater commitment to and national ownership of programs and conditionality, a point that is universally recognized as being of significant importance. Things could be organized along the following lines. O n the basis of work done by the Basel Committee, a regional liquidity facility could stipulate financial standards appropriate in an Asian context. Asian countries could commit themselves to achieve these standards over a specified time frame. Being on course in terms of meeting them could then be a necessary precondition for financial support from the regional facility in the event of contagion from a regional crisis. Beyond the need for the crisis-country to pursue "non-profligate" macroeconomic policies, loans from the regional facility would carry nothing equivalent to IMF structural conditionality and would be available only on a short-term basis, and at a high interest rate to help deal with potential moral hazard problems 17 . The very existence of additional short term liquidity could reduce the incidence of speculation and crisis. Countries with fundamental and longerterm economic problems would still have to turn to the IMF, where they would be exposed to IMF conditionality (discussed further below). By providing an extra incentive for members to reform their domestic financial systems, a process, that may yet not have gone far enough (Bird and Rajan, 2002), the regional monetary facility ("Asian Monetary Fund") could help to prevent

17

This recommendation is in sharp contrast to the manner in which the CMI is currently structured, where 90 percent of the potential drawings under the CMI are contingent on the debtor country having an ongoing IMF program (Henning, 2002). Of course, the assumption here is that an effective regional surveillance mechanism is in place.


69

future crises. By providing an additional source of short-term liquidity it could take financial pressure off the IMF during crisis periods. The IMF would continue to stand ready to assist economies where regional arrangements failed to resolve problems, but, in this event, it might be more reasonable to assume that these problems were not exclusively to do with shortages of liquidity, and this would raise the credibility of IMF conditionality. Elaborating on the issue, Park (2001) notes: There is also the argument that regional financial management could be structured and managed to be complementary to the role of the IMF. For example, an East Asian regional fund could provide additional resources to the IMF while joining forces to work on matters related to the prevention and management of financial crises. A n East Asian monetary fund could also support the work of the IMF by monitoring economic developments in the region and taking part in the IMF's global surveillance activities. The East Asian monetary fund could also be designed initially as a regional lender of the last resort while the IMF assumes the role of prescribing macroeconomic policies to the member countries of the East Asian monetary fund (p. 6). Beyond cooperation in surveillance, the regional facility could work closely with the IMF to develop mechanisms appropriate for Asia to involve the privatesector involvement in crisis resolution and promote "constructive engagement" and constant dialogue among creditors and debtors. In this way a regional facility could contribute to enhanced international financial stability 18 . For all the foregoing reasons, an efficient, regionally based cooperative arrangement for providing liquidity would be consistent with the central elements of the new international financial architecture. It is still possible to think globally and to act regionally19. The IMF would continue to stand ready to assist economies where regional arrangements failed to resolve problems, but in this case, it might be more reasonable to assume that these problems were not exclusively to do with shortages of liquidity, and this would raise the credibility of IMF conditionality 20 .

18

Herming (2002) has suggested a particular division of labour, whereby the A P T countries provide intraregional financing, while the IMF supports the region's surveillance and provides conditionality. 19

Needless to say that in addition to these regional and multilateral liquidity pools, countries are expected to maintain sound debt and reserve management policies to minimize the chances and costs of disorderly exits. 20

As Fischer (2001b) has noted, there are two primary objectives of Fund conditionality viz.: to ensure that IMF resources are used to promote economic reform and adjustment, rather than to postpone it; and to ensure that the borrower is able to repay the loan on the agreed terms, making the resources available to other members who may need them.

70


In other words, the first two "ports of call" in the event of a crisis would be own reserves as well as pooled reserves from the regional monetary facility. IMF funds would be additional to these, but ought to be available on a "stand-by" basis so that markets are clear as to the large size of aggregate reserves available to the countries. In such a case, the obvious question that follows is how would the IMF conditionality relate to regional conditionality? While far greater attention needs to be given to this complex issue than can be offered here, it seems important to sub-divide IMF lending into those pertaining to liquidity based assistance (a la CCLs), on the one hand, and structural adjustment measures, on the other. In the first instance, IMF assistance ought to be available via the CCL-type liquidity facility, in which case, macro and financial conditionality presumably ought to be broadly similar to/consistent with those devised by the regional facility21. In cases where liquidity assistance (both regional and multilateral based) is found to be insufficient, and the problems faced by the country are considered far "graver", the "conventional" IMF structural conditionality would be appropriate — though in this case there is an ongoing and unresolved debate as to what exactly constitutes "appropriate" Fund conditionality (IMF-IEO, 2002).

5. Concluding Remarks With memories of crisis still reasonably fresh, it is perhaps unsurprising that the East Asian countries have exhibited a desire to stock-pile reserves to finance international transactions, meet unexpected difficulties in the balance of payments, and most importantly, as an insurance or a "war chest" against future crises (Bird and Raj an, 2003). However, an important limitation of such a reserve-hoarding policy is that it carries large implicit fiscal costs as the country effectively swaps high yielding domestic assets for lower yielding foreign ones. In view of these high costs, some prominent economists have gone so far as to suggest that developing countries rethink the policy of openness to international capital flows (other than those related to foreign direct investment) (Rodrik, 2000). Assuming though that countries do want to optimize subject to a relatively open capital account, is there any way in which the liquidity yield from holding reserves may be generated without the need for individual countries to continue to accumulate them? Indeed, if capital outflows reflect a perception within private capital markets that a country is illiquid, reducing international reserves and thus curbing liquidity further is hardly likely to be an effective strategy.

21

This is unlike the current situation where IMF liquidity-based conditionality is determined almost unilaterally by the Bretton Woods institution.


71

Therefore, countries will do well to look beyond domestic reserve management to buttress their international liquidity positions if they are to effectively protect themselves from the vagaries of international capital markets. This is where a reserve pooling arrangement comes into question. The potential upside gains of an arrangement of this type can be significant in some instances 22 . What is more, the benefit of reserve pooling is likely to rise substantially when the pool arrangement is undertaken as part of a larger process of monetary and trade integration. All said and done, a significant degree of effort and political will by regional countries is needed in order to create the conditions necessary to ensure that such a facility will function effectively.

Bibliography Aizenman, J. and N. Marion (2002). "The High Demand for International Reserves in the Far East: What's Going On?", Working Paper No. 9266, NBER. Bird, R. and R. Rajan (2001). "Banks, Financial Liberalisation and Financial Crises in Emerging Markets", The World Economy, 24, pp. 889-910. Bird, G. and R. Rajan (2002). "The Evolving Asian Financial Architecture", Princeton Essays in International Economics No. 226, International Economics Section, Princeton University. Bird, G. and R. Rajan (2003). "Too Good to be True?: The Adequacy of International Reserve Holdings in an Era of Capital Account Crises", The World Economy, 26, pp. 873-91. Boughton, J. (1997). "From Suez to Tequila: The Fund as Crisis Manager", Working Paper No. 97190, IMF. Bussiere, M. and C. Mulder (1999). "External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion", Working Paper No. 99/88, IMF. Chang, L.L. and R. Rajan (2001). "The Economics and Politics of Monetary Regionalism in Asia", ASEAN Economic Bulletin, 18, pp. 103-118. Claessens, S., A. Demirguc-Kunt and H. Huizinga (1999). "How does Foreign Entry Affect the Domestic Banking Market?", Working Paper No. 1918, The World Bank.

22

Other benefits of an effective regional liquidity facility, such as having a regional voice on international monetary affairs, are certainly important but not discussed here. See Henning (2002), Bird and Rajan (2002) and Chang and Rajan (2001).

72


Dieter, H. (2000). "Monetary Regionalism: Regional Integration without Financial Crises", Working Paper No. 52/00, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick. Disyatat, P. (2001). "Currency Crises and Foreign Reserves-A Simple Model", Working Paper No. 01/18, IMF. Dornbusch, R. (2001). "A Primer on Emerging Market Crisis", mimeo (January). Eichengreen, B. (2002). "Wither Monetary and Financial Cooperation in Asia?", paper presented at PECC Finance Forum Cooperation (Honolulu, August). Eichengreen, B. and T. Bayoumi (1999). "Is Asia an Optimum Currency Area?, Can it Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations", in S. Collignon and J. Pisani-Ferri (eds.), Exchange Rate Policies in Asian Emerging Countries, London: Routledge Press. Eichengreen, B. and D. Mathieson (2000). "The Currency Composition of Foreign Exchange Reserves: Retrospect and Prospect", mimeo (January). Eichengreen, B. and A. Rose (2001). "To Defend or N o t to Defend? T h a t is the Question", mimeo (February). Fischer, S. (2001a). "Reducing Vulnerabilities: The Role of the Contingent Credit Line", paper presented at the Inter-American Development Bank (Washington, DC, April 25). Fischer, S. (2001b). "Priorities for the IMF", remarks to the Bretton Woods Committee (Washington, DC, April 27). Frankel, J. and A. Rose (2002). "An Estimate of the Effect of Common Currencies on Trade and Income", Quarterly Journal of Economics, 117, pp. 437-466. Glick, R. and M. Hutchison (1999). "Banking and Currency Crises: How Common Are Twins?", Working Paper No. PB99-07, Center for Pacific Basin Monetary and Economic Studies, Federal Reserve Bank of San Francisco. Glick, R. and A. Rose (2002). "Does a Currency Union Affect Trade?: The Time Series Evidence", European Economic Review, 46, pp. 1125-1151. Haque, N., M. Kumar, M. Nelson and D. Mathieson (1996). "The Economic Content of Indicators of Developing Country Creditworthiness", Working Paper No. 96/9, IMF. Henning, R. (2002). East Asian Financial Cooperation after the Chiang Mai Washington DC: Institute for International Economics. IMF (1998). World Economic Outlook 1998, Washington, DC: IMF. IMF (2000). World Economic Outlook 2000, Washington, DC: IMF.

Initiative,


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IMF (2001). World Economic Outlook 2001, Washington, DC: IMF. IMF-IEO (2002). "The Role of the IMF in Recent Capital Account Crises", Issues Paper for an Evaluation by the Independent Evaluation Office (IEO) (June 18). Ito, T. (2002). "Japan's Perspectives on Regional Financial Cooperation", paper presented at the PECC Finance Forum Conference (Honolulu, August 11-13). Kaminsky, G. and C. Reinhart (1999). "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems", American Economic Review, 89, pp. 473-500. Kusukawa, T. (1999). Asian Currency Reform: The Options of a Common Basket Peg, Tokyo: Fuj i Research Institute Corporation. Manzano, G. (2001). "Is there Any Value-added in the ASEAN Surveillance Process?", ASEAN Economic Bulletin, 18, pp. 94-102. Montreevat, S. and R. Raj an (2001). "Banking Crisis, Restructuring and Liberalization in Emerging Economies: A Case Study of Thailand", mimeo (July). Park, Y.C. (2001). "Beyond the Chiang Mai Initiative: Rationale and Need for a Regional Monetary Arrangement in East Asia", mimeo (June). Rajan, R. (2000). "Financial and Macroeconomic Cooperation in ASEAN: Issues and Policy Initiatives", in M. Than (ed.), ASEAN Beyond the Regional Crisis: Challenges and Initiatives, Singapore: Institute of Southeast Asian Studies. Rajan, R. (2001). "(Ir)relevance of Currency Crises Theory to the Devaluation and Collapse of the Thai Baht", Princeton Studies in International Economics No. 88, International Economics Section, Princeton University. Rajan, R. (2003). "Safeguarding Against Capital Account Crises: Unilateral, Regional and Multilateral Options for East Asia", in G. de Brouwer (ed.), Financial Governance in East Asia, London: Routledge, forthcoming. Rajan, R., G. Bird and R. Siregar (2003). "Examining the Case for Reserve Pooling in East Asia", mimeo (January). Rajan, R. and C.H. Shen (2001). "Are Crisis-Induced Devaluations Contractionary?", Discussion Paper No. 0135, Centre for International Economic Studies, University of Adelaide. Reddy, Y.V. (2002). "India's Foreign Exchange Reserves: Policy, Status and Issues", lecture at the National Council of Applied Economic Research (New Delhi, May 10). Rodrik, D. (2000). "Exchange Rate Regimes and Institutional Arrangements in the Shadow of Capital Flows", mimeo (September).

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Rose, A. (2000). "One Money, One Market: Estimating the Effect of Common Currencies on Trade", Economic Policy, 15, pp. 7-46. Wang, Y. (2003). "Instruments and Techniques for Financial Cooperation", in G. de Brouwer (ed.), Financial Governance in East Asia, London: Routledge, forthcoming. Williamson, J. (1999). "The Case for a Common Basket Peg for East Asian Currencies", in S. Collignon and J. Pisani-Ferri (eds.), Exchange Rate Policies in Asian Emerging Countries, London: Routledge Press. Willett, T. (2001). "Restructuring IMF Facilities to Separate Lender of Last Resort and Conditionality Programs: The Meltzer Commission Recommendations as Complements rather than Substitutes", Working Papers in Economics No. 28, Claremont Colleges, California. World Bank (2000). Global Economic Prospects and the Developing Countries, New York: Oxford University Press.

Liquidity Enhancing Measures and Monetary Cooperation in East Asia Table 1 Reserves as a Proportion of Imports (months), GDP (in percent) and Average Amount (US dollar millions), 1992-2001 1992

1995

1998

2001

Indonesia Imports3 GDP Average13

3.0 8 10376.7

2.7 7 13022.5

5.1 19 19020.8

11.0 21.1 27863.5

Malaysia Imports3 GDP Averageb

4.2 30 15082.8

3 27 25063.0

5.1 34 21441.8

4.6 35 28071.3

Philippines Imports3 GDP Average13

2.8 8 3941.9

2.1 9 6199.4

2.6 13 8771.2

5.3 19 12771.5

Singapore Imports3 GDP Average13

5.7 82 38028.3

5.7 82 65798.9

7.3 90 73170.9

7.8 91 75687.8

Thailand Imports3 GDP Average13

4.9 18 19574.5

4.9 22 33455.7

6.2 23 27020.1

6.4 28 31734.4

3.0 35 N/A

3.1 40 53283.5

4.8 55 92826.8

6.8 66 113307

China Imports3 GDP Average11

3.1 4.6 33875.2

5.9 10.7 67595.4

9.5 15.5 145535.8

9.0 15.9 194410.2

Korea Imports3 GDP Average*3

2.2 5.0 15365.3

2.5 4.0 29679.9

5.1 5.0 42351.3

8.2 4.0 97834.1

Japan Imports3 GDP Average11

2.1 2.0 71408.6

3.9 4.0 166451.2

5.0 5.0 213459.8

N/A 8.5 374028.8

Country

Hong Kong Imports3 GDP Average13

Notes: a) Ratio to average monthly imports of merchandise goods b) Average of total foreign exchange reserves minus gold Source: IFS-CD ROM and ADB Database

75

76

Economic Globalization and Asia Table 2 External Debt of the Asia-5 Economies, 1995-2000 (percent of GDP)

Country

1995

1996

1997

1998

1999

2000

Indonesia" Malaysia Philippines Thailand Korea

56.3 37.6 54.9 49.1 26.0

53.4 38.4 55.0 49.8 31.6

63.9 43.8 61.6 62.0 33.4

149.4 58.8 81.7 76.9 46.9

95.5 53.4 75.7 61.4 33.4

93.8 49.3 78.9 51.7 26.5

5.9 7.6 11.3 11.4 9.3

5.7 6.4 7.5 6.8 7.7

of which: Short Term Debt Indonesia" Malaysia Philippines Thailand Korea

8.7 7.2 8.3 24.5 14.6

7.5 9.9 12 20.7 17.9

27.5 11.1 14 13.3 23.1

Notes: a) Data for Indonesia exclude trade credits Source: IMF (2000)

76.4 11.7 15.6 21.0 9.7

t/3

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107



111

Chapter 5

The Nexus between Trade Liberalization and Poverty in Asia1

1. Introduction Among the most important concerns as an economy liberalizes and integrates with the world economy is the need to protect the most vulnerable in society and ensure that their well-being improves over time. But what is the link between economic globalization and poverty? 2 The issue is far from straightforward. A t the risk of generalizing, there is limited evidence to suggest that globalization of finance and capital flows (other than foreign direct investment) has had a discernible positive impact on growth, let alone poverty reduction (Cobham, 2001). Indeed, all that can be said with certainty is that if international financial liberalization does not take place in a well-sequenced and timed manner it could lead to episodes of severe financial instability and distress (see Chapter 1 and Bird and Rajan, 2001 ) 3 . Baldacci et al. (2002) confirm that financial crises negatively impact income distribution and poverty, and the adverse effects are stronger in countries that have a relatively more skewed income distribution (also see Winters, 2001 and World Bank, 2000). One aspect of globalization that would undoubtedly reduce poverty worldwide would be by allowing greater mobility across national borders of unskilled labour. However, social and political compulsions and biases prevent many industrial countries from taking a more laissez faire attitude towards such crossborder flows. While there is an ongoing contest between countries for skilled labour or "global talent", the economic implications of this "brain drain" for developing countries appear ambiguous in theory and negative in practice (see Chapter 1 for an elaboration).

1

This Chapter extends upon Rajan (2002b) and Rajan and Bird (2002).

2

No attempt is made here to define "poverty" or to discuss how it is measured. See Kanbur and Squire (1999) for a detailed discussion on this. Also see Bhalla (2002). 3

See Rajan (2002a) for a recent discussion of international financial liberalization and its various definitions.

112


This leaves the third aspect of globalization, viz. trade and production. Watkins (2002) makes the following pertinent observation: Openness — along with associated free market reforms — holds the key to making globalization work for the poor ... International trade has the potential to act as a powerful catalyst for poverty reduction, as the experience of East Asia demonstrates. It can provide poor countries and people with access to the markets, technologies, and ideas needed to sustain higher and more equitable patterns of growth ... But if globaphobia is unjustified, so too is "globaphilia" — an affliction, widespread ... in Washington, that holds that increased integration through trade and openness is an almost automatic passport to more rapid growth and poverty reduction (p. 1). What is the nexus between trade liberalization and poverty? This is the key question of this Chapter with particular reference to Asia. The remainder of this Chapter is organized around three main sections. Recognizing that growth is a necessary condition for a sustained reduction in poverty, the next section discusses the analytical and empirical links between trade and growth. Growth is by no means a sufficient condition for poverty reduction. Therefore, Section 3 focuses on the issue of trade, income distribution and poverty. What needs to be done to ensure that growth will not bypass the poor in developing countries? Section 4 briefly delves into the complementary policies that need to be undertaken if significant inroads are to be made in reducing poverty. These two sections by and large concentrate on merchandise, and — to a lesser extent — agricultural trade. The final section concludes the Chapter. A n Annex on the effects of trade protection follows the main text.

2. Trade Liberalization and Income Growth 2 . 1 . What does the literature

conclude?

Trade liberalization ought to provide the usual Harberger Triangle welfare gains by reducing, if not entirely eliminating, the wedge between domestic and foreign prices. Assuming demand elasticity = s and tariff rate or tariff equivalent = t, the size of the welfare loss, in a partial equilibrium analysis (i.e. the Harberger Triangle), is simply te 2 /2. So, if the tariff equivalent is ten percent and the elasticity of demand is one, the welfare loss is just half of one percent (of consumer expenditure). Most empirical studies measuring these welfare losses find them to be about this level (Baldwin, 1992). Does this imply that trade protectionism is not "significantly" harmful? The answer is no for at least three reasons.

The Nexus between Trade Liberalization and Poverty in Asia

113

One, Tullock (1967) has noted that even in a static setting, the welfare costs of protectionism may actually be much larger once the costs of rent-seeking activities and other pre-existing distortions are taken into account (Annex 1). Thus, removal of such distortions could significantly boost income. Two, once again in a static sense, Romer (1994) has argued strongly that the non-rivalry of many goods (characterized by large fixed costs and constant marginal costs) which enter as inputs (like blueprints) implies that if such goods are impeded, there could be potentially large losses to the economy (as much as 10-12 percent of GDP). Three, there could be a host of other dynamic gains to be had from trade and the introduction of competition in terms of scale economies, technological innovations, learning-by-doing effects, etc., which in turn lead to sustained rates of growth (not just one-off increases in income levels) (Grossman and Helpman, 1991 and Srinivasan, 2001). However, there are also endogenous growth models that suggest that trade might be growth-stunting (Grossman and Helpman, 1991 and Srinivasan, 2001). This may occur if the forces of dynamic comparative advantage push an economy away from the direction of activities that stimulate long run growth. Thus, as Rodriguez and Rodrik (2000) note: there should be no theoretical presumption in favour of finding [an] unambiguous negative relationship between trade barriers and growth rates in the types of cross-national data typically analyzed. Accordingly, as with most things, the nexus between trade and growth can only be settled empirically. It is fair to say that the bulk of the empirical literature using cross-country data has found international trade in goods to be growth inducing 4 . There are, however, two important problems with most existing studies. First, while the studies may have unearthed a positive association between trade and growth, most are unable to conclude anything about causality per se. Does openness lead to growth; does growth lead to openness (for instance, the richer a country gets, the more likely it is to dismantle trade barriers); or are both caused by a third factor (i.e. are trade and income growth both endogenous)? Rodrik (2000b) for one holds the view that both are caused by the quality of institutions. Harrison (1996) concludes that the results of previous studies on the direction of causality between openness and growth are "mixed", with causality being bi-directional.

4

Recent studies that have found a positive association between openness and trade include Coe et al. (1997), Dollar (1992), Edwards (1993, 1998), Roemer and Gugerty (1997) and Sachs and Warner (1995), and most recently, Bhalla (2002), Dollar and Kraay (2001b) and Morrissey et al. (2002).

114


In an important study, Frankel and Romer (1999) attempt to decipher the causation between trade and growth. The authors undertake a cross-sectional study involving 100 countries during the period since 1960. They deal with the potential endogeneity problem of the trade variable by instrumenting it with a set of variables usually used in the estimation of the gravity model for trade flows. While results vary on the basis of the specific data set and equations used, they generally suggest that openness does have a statistically and economically significant effect on growth 5 . Second, even if the causality from trade to growth is accepted, the FrankelRomer study, like all others, is subject to an important criticism in that it links growth with trade outcome measures (export, imports) rather than trade policy measures (like tariffs and nontariff barriers). This point was first clearly made by Moon (1997), but more recently and forcefully by Dani Rodrik (for instance, see Rodriguez and Rodrik, 2000 and Rodrik, 2000b). As Rodrik (2000b) notes: Saying that participation in world trade is good for a country is as meaningful as saying that upgrading technological capabilities is good for growth ... The tools at the disposal of governments are tariff and non-tariff barriers, not imports or exports ... (T)ariff measures are a reasonable proxy for trade restrictions ... (T)he relevant question for policy-makers is not whether trade per se is good or bad ... but what the correct sequencing of policies is and how much priority deep trade liberalization should receive early in the reform process..(pp. 1-3). In other words, while there does exist a link between de facto trade openness and growth, one cannot say for sure that there is a nexus between trade liberalization per se and growth, as a host of macroeconomic and external factors have not been properly controlled for. It is also extremely difficult to sort out the effects of trade liberalization from other domestic policy options, particularly as countries that undergo trade reforms do so as part of an overall growth-enhancing policy package. Increased openness may be the result of trade liberalization per se, or because of other nontrade policy actions or some combination of the two 6 . Indeed, the recent World Bank (2002) report entitled Globalization, Growth and Poverty, which attempts to offer evidence of the benefits of being a "globalizer", implicitly recognizes that there may not be a direct link between trade policy

5

Dollar and Kraay (2001b) also make an attempt to control for reverse causation from income growth to changes in trade shares. 6

Rodriguez and Rodrik (2000) go on to assert "the search for such a relationship is futile".


115

measures and outcomes. As the report states: We label the top third "more globalized"..(countries) ... without... (in) ... any sense implying that they adopted pro-trade policies. The rise in trade may have been due to other policies or even to pure chance ... (In fact) ... (w)hether there is a casual connection from opening up trade to faster growth is not the issue (pp. 34-6).

2.2.

Implications for policy: Focus on growth1

W h a t does all of this imply for policy? T h e link between growth and trade openness per se as opposed to growth and trade liberalization suggests (a) that governments should aim to enhance their effective degree of trade integration with the rest of the world, and (b) trade liberalization per se may not be sufficient to achieve this. "Opening doors" (in a well-sequenced manner) and "getting the prices right" are clearly necessary but insufficient to ensure an outward oriented policy is successful in terms of promoting export-led growth. At the least, for trade liberalization to translate into de facto openness and growth it is imperative that appropriate macroeconomic and exchange rate policies also be in place. In other words, to be successful, trade reforms must be part of a logically consistent package of sound macroeconomic policies and structural reforms. Sharer (2001) makes a broadly similar point in his review of Africa's prospects in the global trading system: The causes of Africa's weak trade performance are complex ... A country's ability to improve its trade performance in the short run is determined mainly by its macroeconomic and structural policies. Trade and growth prospects are enhanced by a macroeconomic framework that emphasizes appropriate fiscal and monetary policies conducive to price stability, saving and investment, and a sustainable external current account position. These factors are critical in maintaining a stable economic environment and, thus, in encouraging productive activities. FDI and Export Platforms: Beyond disciplined macro policies, most developing countries that have been successful global exporters have also found it necessary to encourage the inflow of export-oriented FDI which is able to exploit the country's comparative advantage and plug into export markets (McMillan et al., 1999). FDI, particularly when it involves multinational enterprises (MNEs), brings in capital, technical know-how, organizational, managerial and marketing Section 3 discusses the issue of income distribution and poverty more specifically.

116


practices and global production networks, helping accelerate the process of economic development in host countries.

3. Trade Liberalization and Poverty Even if trade openness (as opposed to just liberalization) is linked to more rapid growth, this does not necessarily imply it is an effective instrument in reducing poverty. For instance, if a growth strategy based on trade openness leads to a significant worsening of income inequality of households at the bottom of the income strata, it may not make any discernible in-roads in alleviating poverty. In such circumstances it would be necessary for outward orientation to promote growth at a "sufficiently rapid" pace for the poor to have any chance of benefiting via "trickle down" effects. However, the political sustainability of such inequitable growth is doubtful; the distributional character of economic growth matters as much as the rate of growth. But does outward orientation lead to "equitable" growth? 3 . 1 . Trade 3.1.1.

theories

Stolper-Samuelson (SS) model

What does theory tell us about the functional distribution of outward-oriented growth? Starting with the workhouse 2 x 2 x 2 (two-factor, two-goods and twocountries) Stolper-Samuelson (SS) model, theory suggests that international trade will lead to a rise in the relative returns of the abundant factor; unskilled labour in the case of developing countries (assuming no market distortions). Thus, according to conventional theory, the poor (unskilled labour) will be the largest beneficiaries of trade liberalization, i.e. openness in developing countries ought to be "pro-poor" in addition to being "pro-growth". Similarly, in the ageold Arthur Lewis (1954) dualistic paradigm with surplus labour reserves (elastic labor supply), trade and growth ought to be employment-intensive, thus benefiting the poor. Findlay (1995) has combined the insights from the conventional SS model with the Lewis framework to show how trade in a labour surplus economy can lead to a virtuous cycle of employment, capital accumulation and growth. This seems consistent with the East Asian experiences in the 1970s to mid 1990s. 3.1.2.

Specific factors model

A n important assumption of the SS model is that all factors are freely mobile between sectors within a country. This is, however, a heroic assumption in anything but the long run.


117

Consider the simplest case of two factors (Labour and Capital) and two industries ("Export industry" and "Import industry"). Assume the country in question is relatively labour abundant and the Export Industry is labour intensive. In the short run, assume all factors are immobile. Free trade leads to a rise (fall) in the price of the labour intensive Export (Import) industry. Thus, the real returns to labour and capital in the Export industry rise, while they fall in the case of the Import industry. In the medium run, assume labour is mobile across sectors but capital remains immobile. Labour moves from the Import to the Export industry such that wages are equalized across sectors. Whether labour ends up benefiting in real terms depends on its consumption basket. Returns to capital in the Export industry unambiguously improve, and those to the Import industry unambiguously worsen. In the long run, all factors are mobile and real wages in both sectors rise, while real returns to capital decline a la Stolper-Samuelson (see Table 1).

3.13.

Summing up

What does the preceding discussion imply? One, there is every possibility that unskilled labour in some sectors may experience a worsening of income distribution in the immediate to short run. Two, even in the long run, when all factors are fully mobile, the simple SS model does not offer definitive conclusions if one of more assumptions are relaxed (see Table 2 and Davis, 1996). This is especially so if there are significant labour market distortions leading to an ex-ante bias towards the capital and skill-intensive sectors (discussed in Section 3.2). Similarly, in the case of the Lewis model, if the reserve army of labour is delinked from the growth enclaves (e.g. rural versus urban segmentation, for instance), growth might bypass one segment of the poor 8 . Three, the growth effects of trade openness are not instantaneous; they take time to eventuate. For instance, controlling for other factors, Greenaway et al. (2002) find a "J-curve" association between per capita income and various measures of trade liberalization. In other words, while trade liberalization may be growth-stimulating in the medium and long runs, it may initially be growthretarding. This is so as the import competing industries contract in the short run, while it may take time for the exportables sector to react to the positive stimulus.

8

More specifically, with such segmented labour markets, adjustment will be reflected in increases in real wages and not employment. One can identify four sectors of the labour market in developing countries: formal urban, formal rural, informal urban, and informal rural.

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All these suggest that while trade openness (as opposed to just trade liberalization) is important in raising "all boats" over time, the link between trade openness and poverty is much less clear in the short run. What do the data tell us? Empirical studies have by and large found that growth has not given rise to more unequal income distribution (Dollar and Kraay, 2001a, Morrissey et a l , 2002, Roemer and Gugerty, 1997 and World Bank, 2000). Thus, as Dollar and Kraay (2002) note, "(t)he combination of increases in growth and little systematic change in inequality in the globalizes has considerably boosted efforts to reduce poverty". In other words, the Kuznets Curve hypothesis (which purports the existence of a U-shaped nexus between income and inequality) does not appear to be empirically valid. Measures of income distribution have generally been stable over time within countries 9 ; there appears to be as much tendency for income inequality to worsen slightly as there is for it to improve (Fields, 1989) 10 . Ghura et al. (2002) have recently estimated the elasticity of income on the poor with respect to average income and find that economic growth raises the incomes of the poor but by less than one-to-one. This said, the evidence is far from unequivocal (for instance, see Bhalla, 2002 and Timmer, 1997), especially once country-specific circumstances are considered.

3.2.

Labour market rigidities: Particular reference to India

Table 3 offers an indication of patterns of income inequality changes in 73 countries between the 1960s and 1990s based on the World Income Inequality Database (Cornia and Court, 2001 ) n . While outward oriented growth in a number of countries in Asia such as Malaysia and the Philippines appear to have been matched by decreasing inequality (though both remain relatively inequitable societies), others like China, Korea and Thailand have experienced a worsening of inequities over time.

9

While the conventional Kuznets hypothesis linked inequality with income levels, there has more recently been an attempt to relate inequality with income growth. Neither the level nor the growth versions of Kuznets hypothesis seem to be empirically valid in general. Even if there were a link, the issue of causation would be relevant, as high levels of inequality could well depress growth (Alesina and Perotti, 1996 and Morrissey et al., 2002). 10

It is, of course, plausible that poverty may worsen even if some measures of income inequality do not change — e.g. lower and upper middle income households improve significantly while the poorest households see a worsening of income. 11

The World Income Inequality Database (WIID) may be accessed from the UNU-WIDER website: http://www.wider.unu.edu/wiid/wiid.htm.


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While Table 3 suggests that inequality in India has remained unchanged between 1960s and 1990s, more recent evidence indicates that inequalities in the country have been rising since the initiation of the economic liberalization since mid 1991 (Ahluwalia, 2000, Deaton and Dreze, 2002 and Jha, 2002). While liberalization has been important in promoting mid-skill level software exports, the reforms in India do not appear to have generated significant employment in the export-oriented, labour intensive manufacturing industries. This compares unfavourably to the experiences of the East Asian economies in the 1980s and 1990s which have emerged as important global players in labour-intensive manufacturing (Chapter 6). Apparently they have not been able to "pull up" the poor from poverty (Jha, 2002). Thus, Deaton and Dreze (2002) conclude: Most indicators have continued to improve in the nineties, but social progress has followed very diverse patterns, ranging from accelerated progress in some fields to slowdown and even regression in others. We find no support for sweeping claims that the nineties have been a period of "unprecedented improvement" or "widespread impoverishment" (p. 3729). Contrary to Datt (1995) and a number of other critics, the reforms in India per se are not ex-ante biased towards the capital and skill-intensive sectors and thus "anti-poor". Rather, they have become so ex-post mainly because of draconian labour laws and resulting labour market distortions and rigidities. From a policy angle, it is imperative that distortions that bias domestic relative factor prices against unskilled and semi-skilled labour inputs are eliminated. More flexible functioning of the labour market and greater emphasis on cordial tripartite relations between labour-management-government are needed if a country is to be competitive as a location for labour-intensive investments and the reforms are to be "friendly" to unskilled labour and thus "pro-poor" over time. Given the acute difficulties that governments often face in curbing labour union "militancy" and labour market distortions at a national level, institutional innovations such as export platforms that are generally free from such competitivenesshindering constraints and high tariffs, gain greater relevance (Kundra, 2001 and Naik, 2002). Radelet (1999) stresses the importance of export platforms (such as export processing zones or EPZs, bonded warehouses, duty exemption systems, duty drawback systems, duty rebate systems, and other kinds of facilities) as being instrumental in promoting manufactured exports in developing countries in the early stages of liberalization. The key aspect of such export platforms is that they allow exporters to import capital and intermediate goods on duty-free terms. These platforms are meant to shield exporters from the distortions in the rest of the economy like high tariffs and unwieldy and corrupt bureaucracies and other factors that might

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adversely impact international competitiveness. In addition, becoming a successful exporter of parts, components and accessories (PCAs) trade requires that the country be able to freely import intermediate goods 12 . EPZs (or export platforms more generally) are by no means fool-proof methods for promoting investment, exports and growth. While some Southeast Asian economies, China and Mauritius are often held up as examples in which FDI and EPZs have transformed the economy, they have been dismal failures in many other countries. Radelet (1999) discusses the characteristics of successful export platforms and concludes that such platforms are most effective when they are well managed with minimal red tape including streamlined and predictable customs procedures. Competition between various export platforms may be helpful, and they should be built in appropriate locations and provide reliable infrastructure and utilities if the necessary investment and export responses are to eventuate. Subramaniam and Roy (2001) emphasize the importance of strong institutions and governance structures as being prerequisites for successful export platforms. — These are probably pre-requisites for successful development in general. — Strong political push and administrative support are also important considerations that determine the success of such platforms (Kundra, 2001). It is important to stress that export platforms are meant to be temporary solutions to overcome distortions that afflict the rest of the economy. A n oftnoted criticism of such export platforms is that they could lead to uneven or enclave type development. However, persistent enclave development is really a reflection of the heavy distortions in and unattractiveness of the rest of the domestic economy, as opposed to a drawback of export platforms per se. If anything, such export platforms ought to have important learning effects for the rest of the economy.

4. Rural Sector and Agriculture The foregoing discussion is admittedly more relevant to trade in manufactures (and services) than to agricultural goods and other primary commodities. However, as Martin (2001) has documented, many developing countries —including relatively

12 Radelet (1999) and Rodrik (1995) in fact note that the greatest benefits of an outward oriented strategy is the ability to import important intermediate capital goods needed to facilitate an investment boom which in turn stimulates exports. While many observers have assumed that export booms stimulated the East Asian growth in the 1980s and 1990s, Rodrik argues that the causation has run from imports to investment (which incorporate new technologies) and then exports.


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poor ones in Southern Africa — have seen a significant increase in their respective shares of manufacture exports. As he notes: This change has profound implications. Not only does it greatly diminish concerns about potential declines in the terms of trade, but it also puts much greater pressure on domestic policy-makers to maintain a relatively open regime that will allow imports of intermediate and capital goods, and support production of manufactured goods for exports (p. 27). The preceding notwithstanding, a large proportion of the populace in developing countries is still closely tied to the rural sector and in agriculture, and this is where the bulk of the poverty is concentrated. Accordingly, this sector cannot be ignored if significant inroads are to be made in reducing poverty and raising living standards in developing countries 1 3 . Ravallion and Datt (1996) have found that direct targeting of rural poverty in India will generate benefits to the urban poor, though not vice versa (this could be because of the capital intensive bias of the urban sector noted in Section 3.2, thus its expansion in the presence of existing distortions provides little benefit by way of low-skilled employment growth). T h e authors further suggest that growth in the rural sector has an equalizing income effect in the urban sector, while expansion of the urban sector actually exacerbates overall income inequalities (also see Datt and Ravallion, 2002). In view of this, steps are needed to improve the productivity of the rural sector. Specific actions are needed to ameliorate basic infrastructural services such as roads, irrigation, power and basic public health measures (sanitation and sewerage, supply of clean drinking water, etc). Virmani (2002) makes a particularly strong case for such rural infrastructure to be classified as "public goods" and ought therefore to be provided by the government 14 . In addition, various regulations which hinder productivity improvements, such as price controls, licensing requirements and trade restrictions need to be revoked. Innovative methods of providing rural credit finance (micro finance) are also of importance. It is instructive to note that the pro-poor effects of East Asian growth pre-1997 were due to an astute combination of outward orientation along with complementary policies in agriculture (including land reforms) and

13 14

This agriculture versus industry debate is, of course, an age-old one.

However, in reality many public goods in developing countries tend to be fairly "costly" to the end user (i.e. rural poor), either because the poor are not able to access the services easily (due to lack of geographical proximity), or because middle-men/service providers attempt to extract informal payments to provide the service.

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widespread basic education (Birdsall et al., 1995) 15 . Indeed, Cornia and Court (2001) refer to land concentration, urban bias and inequality in education as "traditional causes" of inequality. There is a complex nexus between illiteracy, openness and agriculture 16 . Specifically, while the simple two factor SS model non-agricultural commodities may well benefit low skill urban labour, it may do little to benefit the "completely" unskilled labour and thus the most poor in society in the rural areas. While this further suggests the need to improve basic literacy rates in the rural areas and to facilitate the extent of inter-regional labour mobility (Sachs et al., 2002) 17 , the importance of working towards liberalizing trade in agriculture is critical. In relation to this, industrial country protectionism and market access impediments in the agriculture sector are extremely detrimental to developing countries. The World Bank President, James Wolfensohn, is exactly correct when he notes the following of industrial countries and leaders: If we care about the poorest developing countries, a special focus is needed on agricultural trade liberalization. They depend far more heavily than the better-off developing countries on agriculture for their GDP and exports ... It makes no sense to exhort poor countries to compete and pay their way in the world while we simultaneously deny them the means to do so, by restricting their market access in areas such as agriculture where they have a comparative advantage..We must work flexibly and creatively towards a world trading system that really makes a difference for developing countries..In order to have a balanced and inclusive world trade system, we need to pay special attention to developing countries' current problems with the design and implementation of the rules of the game in international trade (Wolfensohn, 2000).

15

While stressing the importance of land reforms, Cornia and Court (2001) note: Many land reform efforts in the past have been badly planned and implemented without paying much attention to the incentives of all actors involved and to the functioning of the input and credit markets (p. 27).

Banerjee (1999) offers a timely reminder that such redistribution policies cost money and expend valuable administrative and political capital. 16

An "adequate" level of education of the populace and "reasonable" infrastructure are also required if a country is to fully benefit from FDI (Borenzstein et al, 1998). 17 Steps to improve rural infrastructure and the overall productivity of rural workers will not only facilitate agriculture production, but could also make the rural areas more appealing for low-skill intensive manufacturing and related services.


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5. Concluding Remarks James Wolfensohn has summarized the facts and figures on what he refers to as "the crisis of poverty" facing the world in the 21st century. As he notes: With respect to income poverty, we can see two trends over the past decade. In percentage terms, the picture looks positive. The proportion of the population of developing and transition economies living on less than $1 a day fell from 28% in 1987 to 24% in 1998. Excluding China, the reduction is rather less — from 29% to 26% in those same years. But a growing world population has delivered a stark challenge. The actual number of people living in dire poverty has remained roughly constant, at about 1.2 billion. Excluding China, the number has actually risen, from just under 880 million to over 980 million. In addition, the total number of people living on under $2 a day is now estimated at nearly 3 billion, approaching half the world's population (Wolfensohn, 2000). It goes without saying that the permanent eradication of poverty ought to be a country's and, indeed, the international community's overarching objective. The issue of poverty is multidimensional and exceedingly complex. To understand its causes, it is essential to study the underlying economic and social circumstances and processes (World Bank, 2000) 1 8 . This Chapter has made no attempt to provide a detailed discussion of the causes and consequences of poverty. Rather, the aim here has been much more modest, viz. to discuss some of the links between trade and poverty at a rather broad level, as well as to suggest ways of ensuring that trade liberalization benefits the poor. Trade and openness remain engines of growth and important instruments of development. Inward looking, statist development strategies are not sensible policy options. It is a fact that countries that have experienced rapid growth and have managed to make significant inroads into alleviating poverty have been those that have integrated with the global economy in a market-consistent manner. However, the weight of evidence suggests that it would be simple-minded to think that trade liberalization per se is able to generate trade and income growth on a sustained basis, let alone alleviate poverty. Trade liberalization must be accompanied by a milieu of other policies to ensure that a country is successful in integrating more intensively with the world in a manner that is favourable to growth and poverty reduction. These include — but by no means are limited to — sound macroeconomic policies, strong institutions, and a favourable investment

18

Cassen (2002) notes that income — or lack of it — is just one aspect of poverty. He examines a broad range of indicators to obtain a clearer understanding of how the "well-being" of the poor in India has changed in the 1990s.

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climate including removing regulations that restrict the degree of flexibility of domestic labour market operation (which may in turn prevent the realization of gains from comparative advantage). More open economies are invariably more susceptible to external shocks and disturbances. Indeed, Ghura et al. (2002) find that the poor are particularly vulnerable to adverse movements in the price of tradables. Thus, while openness and complementary policies could reduce absolute poverty, they may increase the probability of a household falling into poverty in the event of a sharp adverse shock (also see Stiglitz, 1998). In order to counter this possibility, at least two sets of government policies need to be in place. First, in a dynamic environment, policies must be focused on continued basic re-training and re-tooling of individuals so that they are be able to adapt to shifting comparative advantage. Policies in the short and medium terms should also focus on facilitating inter-sectoral mobility of labour and capital so as to ensure that resources can be shifted frictionlessly in response to changing demand conditions. Second, there is a need to establish adequate social safety nets to protect the least well off and mechanisms to compensate "losers" (Ravallion, 1999, 2002). Needless to say, while the need for well-designed social safety nets to mitigate the possible harmful effects — at least in the "short term" — on the poor is particularly relevant, it is important to try and ensure that these social policies do not hinder or delay the process of reforms. These safety nets are meant to supplement and not supplant growth-oriented structural reforms. It is also important that the budgetary costs of these programs be quantified and well targeted, as there is always the danger that the programs may be captured by vested interests.


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The Nexus between Trade Liberalization and Poverty In Asia

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Watkins, K. (2002). "Making Globalization Work for the Poor", Finance and Development, 39, March. Winters, A. (2001). "Trade and Poverty: Is There a Connection?", in Trade, Income Disparity and Poverty, Lausanne: WTO. World Bank (1999). Poverty Trends and Voices of the Poor, Washington, DC: World Bank. World Bank (2000). World Development Report: Attacking Poverty, New York: Oxford University Press. World Bank (2002). Globalization, Growth and Poverty: Building an Inclusive World Economy, New York: Oxford University Press. Wolfensohn, J. (2000). "Remarks at the Tenth Ministerial Meeting of UNCTAD Rethinking Development — Challenges and Opportunities", remarks at the Tenth Ministerial Meeting of UNCTAD (Bangkok, February 16).

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Annex 1 Costs of Protectionism This Annex is a simple partial equilibrium illustration of the welfare costs of protectionism (or conversely, the welfare benefits from liberalization). Assume that a country is small, i.e. a price taker in world markets. Referring to Figure 1 below, in autarky, the country produces qa at a price p a . Assume that the foreign price level is p w < p a . Assume that the country imposes a per unit tariff on imports (t). Let p t = pw (1 + t) < p a , i-e. the tariffs are not prohibitive. The result of this trade policy is as follows: At price p t , domestic production is qj' and consumption is at q,}. The excess of consumption over domestic production (q c t ~qa t ) is made up by imports. What is the welfare impact of this tariff relative to free trade? Consumers clearly lose, with the loss given by the area DACE. Producers gain by the amount DXZE while the government gains tariff revenues of XABY. The difference between the consumer loss and the producer/ government gains is given by the two triangles XYZ and ABC or areas (i) and (iii). These are referred to as the Harberger triangles. In a classic piece, Tullock (1967) argued that some part of the government revenue (area (ii)) would be used on unproductive activities such as salaries of customs officials. Similarly, producers may engage in unproductive lobbying activity and expend resources to capture part of the producer surplus given by the quadrilateral (iv). Thus, while it is conventionally argued that the welfare costs of protectionism are the triangles (i) and (iii), with areas (ii) and (iv) being mere redistributive transfers from consumers to the government and producers, so respectively, in actual fact these are not just transfers as resources are expended for unproductive activities (i.e. they are "social losses"). Price ($)

quantity (q)


Table 1 Functional Income Distribution of Trade Liberalization Over Time Short run (Immobile Factors) Export Industry

Import Industry

Workers

Gain

Lose

Capitalist-owners

Gain

Lose

Medium run (only Capital Immobile) Export Industry

Import Industry

Workers

?

?

Capitalist-owners

Gain

Lose

Long run (all Factors Mobile) Export Industry

Import Industry

Workers

Gain

Gain

Capitalist-owners

Lose

Lose

131

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Table 2 Why the Stolper-Samuelson (SS) Theorem may be Limited Help for Analyzing Poverty The functional distribution of income is not the same as the personal distribution of income: T h e income of a given household is only indirectly linked to the returns to various factors of production. It depends on their ownership of the various factors, which is usually very difficult to ascertain empirically. Dimensionality: T h e very powerful SS result holds only in a model with 2 factors and 2 goods. Once we move beyond this, the results are much weaker. In an n x n model each factor has an "enemy" — a good whose price increases definitely hurt the factor — but not necessarily a "friend". In non-square (i.e. m x n) models, with different numbers of factors and goods, unambiguous results are even scarcer. Diversified equilibrium: T o be sure of SS effects, the country must be producing all goods, both before and after the price change in question. If we distinguish many different goods at different levels of sophistication, this is unlikely. If countries do n o t produce all goods, the basic mechanism can break down, and perverse results are possible. Differentiated goods: SS is based on a model in which goods are homogeneous across foreign and domestic suppliers. Many argue that goods are better thought of as differentiated, in which case the critical issue is how closely domestic varieties are substitutable for the foreign varieties whose prices have changed. If the answer is "rather little", the prices of domestic varieties will be only slightly affected by trade shocks but there will be little quantity response to the price increase for the imported variety, so the terms of trade losses from the price increase will be correspondingly unmitigated. Constant returns to scale (CRS) and smooth substitution between factors: If industries are subject to economies of scale, their responses to price shocks will tend to be larger than a CRS approach suggests. Also, under such circumstances it is possible for all factors to gain or lose together, which weakens t h e inter-factor rivalry aspect of SS. Similarly, if technology is endogenous, or if labour can be substituted for other factors only in discreet steps, there may be discontinuities in the way factor prices respond to shocks. Perfectly competitive goods and factor markets: These are required for the direct and simple transmission of goods price shocks into factor price effects. Once there are economic rents in the system, transmission becomes more complex and difficult to predict. Non-traded goods: If some goods are non-traded, their prices are no longer determined by world prices plus tariffs, but by the need to clear the domestic market. They will accommodate shocks through both price and quantity responses, rather than just the latter as for traded goods in a small country. This will tend to attenuate the rate at which tradable goods price shocks are translated into changes in the relative demands for different factors. Reference set of relative factor abundance: Davis (1996) shows that countries that may be labour-abundant in a global sense may yet experience a worsening of income if it is capitalabundant in a regional or local sense.

Source: Adoption and extension of Winters (2001)


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Table 3 Income Inequality Changes in 73 Countries from the 1960s to 1990s Inequality Rising

Developing Countries

Transitional Countries

Total

12: Australia, Canada, 15: Argentina, Chile, China, Columbia, Denmark, Finland, Costa Rica, Guatemala, Italy, Japan, Netherlands, New Hong Kong, Mexico, Pakistan, Panama, Zealand, Spain, South Africa, Sweden, UK, USA Sri Lanka, Taiwan, Thailand, Venezuela

21: Armenia, Azerbaijan, Bulgaria, Croatia, Czech Rep. Estonia, Georgia Hungary, Kazakhstan, Kyrgyztan, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Slovakia, Slovenia, Ukraine, Yugoslavia

48

Developed Countries

Constant

3: Austria, Belgium, Germany

12: Bangladesh Brazil, Cote d'lvoire Dominican Rep, El Salvador, India, Indonesia, Puerto Rico, Senegal Singapore, Tanzania, Turkey

1. Belarus

16

Declining

2: France, Norway

7: Bahamas, Honduras, Jamaica, South Korea, Malaysia, Philippines, Tunisia

0

9

All

17

34

22

73

Source: Cornia and Court (2001)

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Chapter 6

India's Decade Long Trade Reforms: How Does It Compare with Its East Asian Neighbours? 1

1. Introduction The strategic objective of Indian policy-makers at the outset of independence was the creation of a self-reliant economy and the reduction of the high levels of poverty that existed, all within a democratic political framework. In order to achieve these objectives, the authorities steadfastly pursued a Socialist strategy of state-directed, heavy industry based industrialization complemented by an acrossthe-board import substitution policy, financial repression and complex industrial requirements. Notwithstanding some notable successes, the highly statist and interventionist development policies adhered to during this period of insulation led to a severely distorted production structure (Raj an and Marwah, 1998). While growth did pick up in the latter half of the 1970s, the Indian economy was generally mired in a vicious circle of low productivity/product obsolescence and slow growth. Not only was the performance of the Indian economy well below the targets set by the planning authorities, the country was left lagging in terms of economic growth and development relative to its East Asian neighbours such as China and South Korea which had broadly similar levels of per capita income at the time of India's independence (Kelkar, 2001). Jagdish Bhagwati (1992) rationalizes India's development failure as follows: I would divide them into three major groups: extensive bureaucratic controls over production, investment and trade; inward-looking trade and foreign investment policies; and conventional confines of public utilities and infrastructure. The former two adversely affected the private sector's efficiency. T h e last, with the inefficient functioning of public sector enterprises, impaired additionally the public sector enterprises' contribution to the economy. Together, the three sets of policy decisions broadly set strict limits to what India could get out of its investment (p. 13). 'This Chapter was co-authored with Rahul Sen and is an update and revision of Rajan and Sen (2002).

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Although some tentative steps were taken in 1985 to liberalize and unshackle the economy by delicensing a few industries, these partial and rather ad hoc measures contributed to the creation of severe and unsustainable macroeconomic imbalances in the Indian economy, particularly with regard to escalating fiscal deficits (Joshi and Little, 1996). The imbalances corresponded to a period of severe political instability and uncertainty following three successive minority governments during 1989-91. While the fragilities in the Indian economy were largely homemade, the shock of the 1990 Gulf war was the single factor which "broke the camel's back", as India was brought to the brink of an international default, something that had never occurred in its post-independence history. Faced with a severe balance of payments crisis — foreign exchange reserves plummeted to US$1 billion in late June 1991 — barely sufficient to cover a fortnight worth of imports, India entered into an IMF structural adjustment program (Cerra and Saxena, 2000). In addition to the conventional expenditure switching and reducing policies, as part of the IMF agreement, a range of far-reaching economic policy reforms was launched in July 1991 in the external, industrial, financial and public sectors (Desai, 1999 and Srinivasan, 1996). With regard to the trade reforms specifically, while India continues to have one of the world's most restrictive external sectors, significant progress has been made in recent years towards a compression and simplification of tariff structures. India's tariff structure has become more uniform across goods, as observed by a decline in the dispersion of tariff rates over 1990-98 (Table 1). India aims to have in place a tariff structure similar to the middle-income Developing East Asian (DEA) economies in the next 5-11 years. Noteworthy steps have also been taken to reduce nontariff barriers (NTBs) and eliminate quantitative restrictions (quotas and import licensing requirements), particularly on intermediate and capital goods (IMF, 1998, 2002). These reforms have coincided with positive developments at the macroeconomic level. The Indian economy recovered smartly from the crisis, real GDP growing at an annual average rate of 6.4 percent between 1992 and 1998 (Table 2) 2 . Not only was this a marked improvement from India's own past, it was the second highest rate of growth in the world behind China. Of equal importance is the quality of growth. As Desai (2000) has noted, "the Indian economy appears to be ... sound ... Something has changed; we are no longer in the boom-and-bust mode of the 1960s, 1970s or 1980s" (p. 4). This in turn may be partly attributable to the fact that post-1991 growth was driven principally by an expansion of private

2

The IMF (1998) and Kalirajan (2001) have detailed India's trade and investment policy reforms over the last decade.

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investments while national savings simultaneously rose, thus ensuring that there was no significant pressure on the balance of payments position (compared to the consumption-led growth of the mid to late 1980s). This Chapter concentrates on the impact of India's trade reforms in the 1990s on its international trade linkages with the rest of the world. The next Section documents the extent to which India's engagement with the global trading system has increased. Section 3 goes on to analyze shifts in India's export patterns over the past two decades and compares it to that of East Asia which has long been characterized as having followed a "flying geese pattern" (FGP) of production and trade. The FGP, due to Japanese economist Akamatsu Kaname, has been used to describe the shifting pattern or spatial reorganization of international production and comparative advantage across East Asian countries (see Kojima, 2000). Data limitations invariably limit focus of the empirical analysis in Sections 2 and 3 to merchandise trade. However, as part of India's newfound global orientation, trade in services has taken on a key role, constituting over a quarter of India's total exports in 1999/2000 (IMF, 2002 and Raipuria, 2001). Within the services sector, the Information and Communications Technologies (ICT) sector is of particular relevance. This sector is seen as a means of "leapfrogging" the stages of trade and development that is characteristic of the FGP pattern, and is the focus of Section 4. The final Section concludes the Chapter.

2. Evolution of India's Merchandise Trade in the 1990s 2 . 1 . Trade reforms to date It is instructive to note that India's trade liberalization efforts can be broadly divided into two periods. The first half of the 1990s (from 1991 to 1996) was a period of intense liberalization as tariffs fell dramatically. The second half of the 1990s can at best be characterized as a period of consolidation of but definite deceleration in the pace of tariff compression in general; the average tariff level remained largely unchanged. In fact, while the simple average tariffs remained more or less constant, there was a slight increase in the trade-weighted tariffs from a low of 25 percent in 1996 to 30 percent by 2000. The Indian rupee was allowed to float in March 1992, and currency convertibility on the current account was introduced in August 1994 3 . One needs to be cognizant of the fact that the reform efforts in India are fairly recent and an ongoing process; the full effects will therefore take time to come 3

It is by no means suggested that such nominal tariffs are a complete measure of the degree of a country's openness (see Panagariya, 1999 and Pritchett, 1996).


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into fruition. Nonetheless, it is fair to ask if and to what extent the decade long reforms have been successful in integrating India with the global market economy. Table 3 summarizes the key indicators of India's external sector, while Table 4 compares India's indicators to the major DEA economies for the period 1980-98. Figure 1 charts movements in India's share of global trade. The following general observations may be delineated on the basis of available data 4 . First, India has been able to gradually increase its share in global merchandise trade and exports from 0.58 percent and 0.44 percent in 1980 to 0.74 percent and 0.69 percent, respectively in 1999. While this increase may not appear particularly striking at first, it is, considering that India's share in world merchandise trade was more or less on a declining trend during the early 1990s. Between 1990 and 1999, India's merchandise trade and exports grew at an annual compound average of 8.2 percent and 9.0 percent, respectively. Since this growth was matched by an expansion of the overall economy, India's level of de facto openness, as proxied by the trade to GDP ratio, has remained more or less constant over the past few years at 0.25 (though this was almost 70 percent higher than that in 1980). These improvements notwithstanding, India has continued to lag behind the DEA economies 5 . For instance, India's exports to GDP ratio was the lowest among all the countries considered here between 1980 and 1989, and this remained so during the post-reform period. India's share of manufactured exports in total exports during the 1980-89 period was higher than all the DEA economies except Korea, but by 1990-98, all of them except Indonesia and the Philippines surpassed India in diversifying their export baskets towards manufactured goods (World Bank, 2000). Second, an analysis of India's composition of exports over 1988-90 to 1998-2000 (Table 5) reveals that while India's export dependence on primary products, as indicated by its average share in India's total merchandise exports, declined over the period (from 24 percent in 1988-90 to about 20 percent in 1998-2000), that on manufactured products increased slightly (from 71 percent in 1988-90 to 77 percent by 1998-2000). W i t h regard to the manufactured exports during the 1998-2000 period, the largest share of exports consisted of Handicrafts, primarily Gems and Jewellery (18.0 percent), Engineering goods (14.0 percent), Readymade Garments (12.3 percent), Textile Yarn Fabrics

4

The IMF (1998) and Kalirajan (2001) have detailed India's trade and investment policy reforms over the last decade, while Forbes (2001) provides a useful discussion of the practical implications of these reforms for businesses operating in or planning to operate in India. 5

Except for China, the other East Asian countries were significantly affected by the financial crisis of 1997-98.

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(11.6 percent) and Chemicals and Allied products (8.8 percent). This product composition remained almost unchanged over the past decade or more 6 . 3. The Flying Geese Pattern: India versus East Asia While there has been an increase, albeit modest, in the degree of India's global economic integration since the initiation of the reforms, it is important to understand the reasons behind this. Accordingly, we examine shifts in India's comparative advantage in merchandise trade. As before, it is insightful to have a yardstick of comparison. We therefore place India's export experience in an East Asian context. The shifting composition of trade, and the catching up of the East Asian countries, has often been described as following the flying geese pattern (FGP) (see Feenstra and Rose, 2000 for a recent empirical confirmation of this phenomenon). According to the FGP, economies are arranged in a descending order of their stages of industrialization so that countries participate in the international division of labour at different stages in the product cycle in accordance with their comparative advantage. In other words, the traditional Heckscher-Ohlin approach is extended and given a dynamic nature. Specifically, it has become legion to think of international production and trade in East Asia in terms of Japan as the most advanced economy producing and exporting new and higher value added goods before others in the region. Japan in turn has been tailed closely by the four economies, Hong Kong, Korea, Singapore and Taiwan, collectively referred to as the "Four Tigers". Then come the other crisis-hit economies (Malaysia, Thailand and Indonesia or MIT economies), and behind them, China and other emerging regional Southeast Asian countries such as Cambodia, Lao and Vietnam. 3.1.

Methodology

In order to proceed with the empirical analysis, we make use of the conventional concept of Revealed Comparative Advantage (RCA) introduced by Balassa (1965) and extended upon by Balassa and Noland (1989). According to Balassa, since £>re-trade relative prices are unobservable, analysis of trade patterns often needs to depend on post-trade data; the pattern of international trade broadly

6

It is interesting to note here that among these top products in India's manufacturing export basket, almost all have involved some amount of foreign investment, except for Gems and Jewellery. Incidentally, Engineering goods and Chemicals and Allied industries were opened to foreign investment since 1970s, while ready-made garments and textiles was opened to foreign investment during the early 1990s (Sharma, 2000).


139

reflects relative costs and differences in non-price factors. The most commonly used ex-post trade index is the export index of R C A (XRCA). The XRCA index is simply the ratio of the share of country i in world exports of commodity k to its share of total commodity exports. This index is represented as XRCA = (Xj7X£,)/(Xi/XJ, where X^ = exports by country i of commodity k; Xjj, = world exports of commodity Jc; X; = total exports of country i; and Xw = total world exports. The weighted average of XRCAs of all commodities equals one. A n individual XRCA index value greater than one indicates an ex-post or a revealed comparative advantage in the good, and if less than one, it indicates a comparative disadvantage. A major limitation of this index is that at any point in time it takes into account only one side of the trade flows, i.e. exports or imports. Nonetheless, this index has been widely used to explain the export performance and similarity of trade patterns among the East Asian countries (for instance, see Chow, 1990 and Rana, 1990). We analyze the shifting pattern of trade between India and its East Asian neighbours using a slightly modified version of XRCA. Following Laursen (1998), we rely on the Export Revealed Symmetric Comparative Advantage (XRSCA) index, wherein the conventional XRCA index is modified to make it symmetric. The modified XRCA takes on values between 1 (highest comparative advantage and degree of specialization) and — 1 (no specialization) 7 . T h e XRSCA is defined as follows: XRSCA = ( X R C A - 1 ) / ( X R C A + 1 ) . A positive value of XRSCA indicates the presence of specialization in that particular product category and therefore a high degree of de facto comparative advantage in this area. We examine shifts in comparative advantage in selected product groups of manufactured exports according to the factor intensities classification developed by Garnaut and Anderson (1980) 8 . The authors classify product groups of trade in manufactured goods into four main categories depending on whether labour or capital (either physical or human capital) is used more intensively in production of those commodities 9 . As noted, the XRSCAs are estimated for India and the selected DEA economies to enable a cross-country comparison of shifting comparative advantage

7

Unlike the conventional XRCA, the XRSCA index can also be used in econometric analysis to understand the pattern of change in specialization of exports in a particular commodity category as the error terms of XRCAs are normally distributed. 8 9

See Annex 1 for details on the classification.

T h i s classification covers the SITC categories 5 to 8 at the 3-digit level. This classification is still fairly aggregated since it does not differentiate between unskilled labour intensive and capital/technology intensive activities at further disaggregated (SITC 5 digit) commodity levels, i.e. parts and components and accessories (PCAs) of manufactured products.

140


in manufactured goods. The shifting pattern of product specialization is then investigated using the XRSCA series for these countries in order to relate the observed changes to those predicted by the FGP of international production and trade. The indices are worked out for the years 1982, 1987, 1992, 1996, 1997 and 1998. The data source for all countries is the UN International Trade Statistics Yearbook. 3.2.

Results

Tables 6 and 7 respectively present the estimated XRSCAs for each commodity group, along with their shares in each country's total exports as well as in world exports. The results reveal that India continues to specialize heavily in unskilled labour intensive (ULI) manufacturing goods, especially in textiles and textile yarns and in clothing and accessories, as observed by the increase of XRSCA indices in this category from 0.34 to 0.56 between 1982 and 1996. The share of ULI goods in India's total exports nearly doubled during this period from 17.5 percent in 1982 to 33 percent in 1997, while the indices relating to the total world exports of ULI goods also showed a marginal increase from 1.1 percent in 1982 to 1.5 percent by 1997. However, India's level of specialization in this category has actually declined since 1996. Among other categories, India's XRCA indices in Physical Capital Intensive (PCI) goods have shown some degree of improvement over the same period, while more differentiated and sophisticated Technology Intensive (TI) and Human Capital Intensive (HCI) goods have not experienced any discernible improvement (their XRSCA values actually declined in 1996). The share of TI goods in India's exports nearly doubled over this period, though its share in world exports saw a negligible increase from 0.14 percent to 0.17 percent. Therefore, although in relative terms there has been a positive shift in the composition of its exports towards TI goods during the reform period, India has not been able to attain international competitiveness in this category despite a decade of liberalization. In contrast, the majority of the DEA economies focused their export thrust towards technology intensive goods over time with rising per capita incomes, consistent with the prediction of the FGP hypothesis. More evidence of this is given by the increases in East Asia's XRSCAs in TI goods and changes in signs from negative to positive over 1982-98. Malaysia, the Philippines and Korea attained comparative advantage in TI goods by the beginning of the 1990s, while China attained this status in 1998. Other than China and Indonesia, the shares of TI goods in total exports of all other East Asian developing countries were more than half of their respective exports by 1998. The shares increased four to

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five fold for most of these countries over the 1982-98 period. A notable aspect of East Asia's export dynamism is that the share of all these countries' exports in world exports increased significantly (by more than double or triple) over this period. Telecommunication equipment, Electrical Machinery and parts, and more recently, Electronic products, viz. Data Processing Machines, have been the major items of export among TI goods. All the DEA economies other than Malaysia were specialized in unskilled labour intensive (ULI) goods during this period. The Philippines and Korea have been distinctly moving away from this area of export specialization, as observed by a decline in the absolute values of their XRSCAs from 1997. Their shares in world exports of ULI goods and in their total exports have also declined during this period. Only China and Indonesia still remain heavily specialized in ULI goods. Among other categories, Physical Capital Intensive (PCI) goods have also managed to increase their shares in East Asia's exports over time, though Korea is the only country that attained an outright comparative advantage in this area. Human Capital Intensive (HCI) goods declined in their comparative advantage for most of these countries, with the exceptions of Korea and Indonesia which attained comparative advantage in this category by 1998. Comparing shifts in India's export patterns to those of East Asia, it is clear that India's XRSCA value in this category is comparable to that of Indonesia and Korea in 1998. China had a higher level of export specialization in this category than did India, with 56 percent of its exports taking the form of ULI goods. A t the same time, while the East Asian developing countries including China deveL oped a significant comparative advantage in TI goods in the 1990s, India has been unable to do so. The DEA economies have, almost without exception, also improved on their ex-post comparative advantage in HCI goods, indicating a con' stant shift in the composition of these countries' exports over time. Thus, while Korea was at a higher level of specialization in ULI goods in 1982 compared to that of India during the same period, it managed to halve it by 1998; in contrast, India experienced a slight increase. A further interesting observation is that in 1982 India was at the same level of specialization in TI goods as the Philippines and China were in 1987. However, while the Philippines attained comparative advantage in this category of exports by the mid-1990s and China did so in 1998, India has failed to experience even a marginal improvement in the existing level of specialization in TI goods. Even Indonesia, which was negligibly specialized in this category in 1982 and had lower XRCAs and XRSCAs compared to India, increased it significantly by 1996. To complement the foregoing analysis, we have computed the rank correk' tion of XRSCAs of India (products being ranked in each country in descending order of XRSCA values) as well as the selected DEA economies over five different

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sub-periods between 1982 and 1997. The results are presented in Table 8 10 . The rank correlation of XRSCAs among the different periods in a country indicates the degree of export specialization/de-specialization (i.e. extent of export product dynamism) over time. A positive rank correlation value of unity indicates no change in specialization. Values close to zero indicate a discernible change in the rankings of the XRSCA index values, denoting the presence of export dynamism. The results indicate that over the decade of 1987-97, changes in the degree of export specialization experienced by India were lower than each of its East Asian neighbours, and there was no discernable change in this trend in the post reform period. Thus, over a fifteen-year period of 1982-97, the rank correlation of India's XRSCAs exceeded those of the DEA economies, indicating that India's export structure was relatively much less dynamic. Table 9 shows the results of pair-wise correlation of export structures of the four-product groups (for which XRSCAs are computed) between India and the individual DEA economies for 1987 (five years before reforms) and 1997 (five years after reforms). In 1987, India's export structure for these products was similar to that of China (a correlation of 0.96), followed by Indonesia (0.82) and Korea (0.79). However, the degree of correlation declined substantially by 1997, with India's export structures in these four product categories of manufacturing goods being closest to that of Indonesia (0.76) followed by China (0.68). 3.3.

Summary and Caveats

The preceding empirical results, while expectedly mixed at times, do by and large indicate that reforms initiated in 1991 have shown some positive signs in terms of more rapid growth in India's merchandise trade and rising share in world exports, as well as in infusing greater dynamism into the country's overall export structure 11 . Notwithstanding an improvement in the country's overall export performance since the reforms, India continues to lag far behind most of its East Asian neighbours. The latter have been successful in diversifying and upgrading their exports towards high growth-oriented, technology intensive and knowledge-based products in the manufacturing sector. The fact that India had a head start in the industrialization process over most of the DEA economies in the 1950s puts in perspective the extent to which the heavily protectionist regime has held India

10 11

Specifically, Table 8 summarizes the rank correlations and not the product rankings.

Empirical analysis suggests that a real depreciation of the Indian rupee as well as a general boom in world trade are important explanatory factors of India's post-reform export spurt (Brahmbhatt et al., 1996 and Sharma, 2000).

India's Decade Lon$ Trade Reforms

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back. India's insular policy precluded it from harvesting the benefits that were reaped by other DEA economies from actively engaging in the international division of labour 12 . Despite the recent reforms, India's level of overall integration in the global trading system in merchandise trade remains rather low. The foregoing results, while revealing, must be interpreted with some degree of caution. As indicated, the XRSCAs have been computed at the 3-digit product level which does not adequately differentiate between the final good and its parts, components and accessories (PCAs) 1 3 . Accordingly, the distinction between technology intensity and labour intensity becomes blurred at times. For instance, Electronic goods exports are considered to be technology or capital intensive according to the Garnaut and Anderson (1980) classification, whereas within this product group, production and exports of its PCAs may vary in factor intensities, with some being relatively labour intensive. This is likely to be particularly relevant for XRSCAs computed for manufactured exports of DEA economies in the SITC 7 category (Machinery and Transport equipment) since PCAs in East Asia constitute about one-fifth of the region's manufacturing exports (Ng and Yeats, 2001) 14 . What explains this pattern of trade in East Asia, and why is India not observed to be following the FGP? As noted, Japan has been a major player in expanding East Asian trade and upgrading the region's industrial structures via the infusion of FDI. In other words, East Asian trade has been largely investment-driven (Athukorala and Hill, 1998 and Fung et al., 2002). Japanese FDI to East Asia really took off following the sharp appreciation of the yen after the Plaza Accord of September 1985. Inflows essentially took place in three sequential but overlapping stages. Investments were initially made in the newly industrialized economies (NIEs) like Korea, Hong Kong, Singapore and Taiwan during 1986-89. Labour-intensive Japanese investments then began to be diverted to Southeast Asian countries (Malaysia, Indonesia and Thailand or MIT specifically) from 1988 to the early 1990s, attracted by the low wage levels and rapid growth of the region. As the NIEs themselves moved to more capital

It is ironical that India was one of the 23 original signatories to the General Agreement on Tariffs and Trade ( G A T T ) in 1947. 13 Such differentiation may be better done at the SITC 4 and 5 categories. Ng and Yeats (2001) show that within the SITC 7 category, at least 60 individual product groups consisting solely of PCAs on manufactured equipment can be identified. Chapter 1 offers a number of references on the theory of trade in PCAs. 14

Ng and Yeats (2001, Table 2) observe that apart from exports, nearly three-fourths of East Asian imports of telecommunication equipment (SITC 76) and a half of Office machinery (SITC 75) were PCAs for further assembly.

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and skill intensive stages of production, NIE firms also began using the MIT countries as export platforms for labour intensive PCAs, as observed earlier. Since the early 1990s, investments in China from Japan and other NIEs have grown dramatically (Fung et al., 2002) 15 . In contrast, Japan has been an insignificant source of FDI to India. For instance, between 1998 and 2001, India accounted for a paltry 3 percent of Japan's total number of projects in Asia and less than 1 percent in value terms (data from the Ministry of Finance, Japan). India, being a latecomer to the international stage, clearly missed the boat in terms of being part of this regional division of labour in manufactured PCAs.

4. India's Emerging Comparative Advantage in Services Trade India has fared much better in the area of services trade, particularly new and dynamic sectors like information and communication technology (ICT). The services sector in India has outperformed merchandise trade, especially over the post-reform period. Thus, while merchandise and services trade expanded at almost the same rate between 1980 and 1989 (9 percent), the average annual growth of services trade over the 1990-98 period was about 15 percent (Raj an and Sen, 2002). India's services trade grew by nearly double that of merchandise trade during the 1992-98 sub-period itself. India's share in Asia's exports of commercial services (as defined by the W T O ) increased from 3.5 to 5.8 percent between 1990 and 2000 (WTO, 2001, Table 111.79). The ICT services sector comprises IT related and enabled services, viz. those involving trade in and use of computer software, hardware and the like, as well as services involving communications technology, viz. the Internet, E-commerce and the telecommunications sector. This category of services spans a wide range of activities and primarily involves the extensive use of knowledge and information as a vital input in the factor of production, combining the latest developments in electronic and communications technology. While ICT services were viewed as being nontradable just a few years ago, they have in fact been the main thrust of rapid expansion of services trade in India, accounting for nearly 58 percent of service exports and about 16 percent of total exports in 1998 (Table 10). Their share in India's services export was almost

15

In fact, the Southeast Asian policy-makers have expressed concerns about what they perceive as a diversion of investments from their countries to China (Wu et al., 2002). Their response has been to hasten the implementation of the ASEAN Free Trade Agreement (AFTA), as well as take early steps to create an ASEAN-China Free Trade Agreement.

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double that in 1995 16 . In comparison to the DEA economies in 1997, before the regional financial crisis of 1997-98 began, the share of ICT exports (to total services exports) in India was higher than that of China, Indonesia and Korea. During the crisis year of 1998, India had the second highest share in ICT service exports after the Philippines, and was the only country apart from Indonesia which experienced an increase in the share of ICT goods. The development of the ICT industry in India has been primarily attributable to the software and product services segments which posted an average revenue growth of about 50 to 60 percent annually during the 1990s; from a mere US$20 million 10 years ago to US$5.6 billion in 1999-2000. Growth of software development has been overwhelmingly market-driven, as opposed to being government-led; government intervention has been minimal ("hands off) and largely reactionary. Its expansion has been propelled by an increasing international demand for such skills, mainly from the US market, on the one hand, and India's nurturing of a pool of skilled IT professionals, on the other 17 . The Indian software industry employs some 160,000 professionals and contributes around 10 percent of India's total merchandise exports. However, despite this rapid growth, India's share of the total global software market is still a mere 1-2 percent 18 . The fact that India's share of the total global software market is currently miniscule, suggests there may be significant scope for future expansion. In view of this, the Indian government has identified the software industry as a major export and growth thrust area. A comparison of the major potential factors influencing the development of ICT-enabled services reveals that India ranks favourably in comparison to some leading DEA economies, with a clear advantage in terms of workforce availability and skills, and also in terms of a cosmopolitan work culture (NASSCOM, 2001). Some segments of ICT-enabling services (such as back-office operations, remote maintenance, medical transcription, call centers, content development and remote maintenance) have been important sources of employment generation in India.

16

Using the XRSCA index for services, Sen (2002, Table 8) estimated that India gained a significant comparative advantage in ICT-enabled services over 1990-99 as shown by a marked movement towards a positive XRSCA from 0.10 to 0.18. 17

India possesses the world's second largest pool of scientific manpower that is also English speaking (see Arora and Athreya, 2001, Bajpai, 2001, Miller, 2001 and Tschang, 2001). 18

See uiww.hyderabad.com/news/200W322/newsl8.htm. However, India's share in other submarkets is above 10 percent. For instance, India commands an 18 percent market share in the global customized software market.

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Despite the foregoing advantages, there can be no room for complacency. Over the years, the growth in the computer software sector has been much more rapid and steady than that of the hardware sector. The development of the hardware sector has been held back by severe and longstanding bottlenecks in infrastructure and supporting facilities (discussed in Brahmbhatt et al., 1996), and a rather unattractive tax regime. The DEA economies including China have outperformed India in this area 19 . Lai (2001) has suggested that "the hardware sector is thoroughly demoralized in India... India needs a positive agenda rather than merely adopting a laissez faire policy ... in IT manufacturing" (p. 116). In addition, the diffusion rates across the population have been much slower in India compared to its East Asian counterparts. Thus, while the use of mobile phones, facsimile machines, cable television sets and Internet services in India increased significantly during 1995-97 compared to earlier periods, their utilization rates still lagged far behind the DEA economies (Miller, 2001 and Table 11). In part, India has lagged because of a late recognition of the potential in this sector and a lack of proper policy and institutional framework to encourage the usage of ICT in India in the beginning of the 1990s 20 . To conclude, the development of India's ICT sector in general has brought substantive advantages to the country over and above direct employment creation and being an additional source of export earnings. As Miller (2001) has noted: The fact that India is demonstrably competitive internationally in the production of sophisticated software brings other advantages to the country. Indian technological sophistication, though still narrowly defined, has begun to alter international perception of the country. Instead of viewing India as a country burdened by decades of heavy-handed government regulation of the economy, foreigners now view the country somewhat more favourably... (p. 21) 21 .

19 This being said, this component of trade is reflected in merchandise trade statistics and has already been discussed in Section 2. 20

This is admittedly a double-edged sword because, as noted, absence of government regulations is what facilitated the development of this area in the first instance. The key is to ensure that government initiatives are constructive rather than onerous and stifling. Admittedly, as with many other developing countries, India's track record as far as this is concerned leaves a lot to be desired. Hitherto, government failures in India appear to have far outweighed market failures. 21

Former US Treasury Secretary, Paul O'Neil, noted on a recent visit to India — "It is the corner of technological progress and modernity. It is also a land still burdened by massive poverty" (O'Neil, 2002).

India's Decade Lons Trade Reforms

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5. Concluding Remarks India has made some important strides since the initiation of the reform program in 1991 and has been one of the fastest growing economies in the world in recent times. Given that the liberalization program in India has been evolutionary (with inevitable hiccups and backtracking in the interim) rather than revolutionary, a decade offers too few degrees of freedom to pass definitive judgment on the longer-term prospects of the Indian economy. Nonetheless, considering that India faced virtual bankruptcy in mid-1991, its economic performance since then has been laudable and rather under-appreciated. On the positive side, all indicators reveal that the reduction of the antiexport bias has allowed the Indian economy to attain an unprecedented degree of integration with the global economy in the 1990s. India has developed a significant comparative advantage in services trade, especially in ICT related and enabled services, which offer significant opportunities for the economy to leapfrog the development stages and "catch up" with the fast growing DEA economies. In reference to this, Bajpai (2001) has noted: Inspired by the success of Singapore, several developing countries consider IT as a unique opportunity to leapfrog whole stages of industrial development. Having missed the first two industrial revolutions, they are eager not to miss the third one — the making of the knowledge economy (p. 13). On the negative side, India remains highly inward looking in comparison to China and its other East Asian neighbours which engaged with the multilateral trading system and laid out the welcome mat for FDI much earlier (since the late 1970s and early 1980s) 22 . Accordingly, India has largely been left out of the global division of labour, particularly with regard to parts, components and accessories (PCAs) production. Poor quality public infrastructure, inflexible labour laws, barriers to entry and exit, and a milieu of other administrative and institutional burdens that contribute to a sluggish environment, have impeded investments in the manufactured sector, thus contributing to India's comparatively modest trade performance in this area. The policy framework related to attracting

22

The former Governor of India's central bank (Reserve Bank of India), Bimal Jalan, recently noted: Despite all the talk, we are nowhere even close to being globalized in terms of any commonly used indicator of globalization. In fact, we are still one of the least globalized among major countries — however, we look at it (Jalan, 2002).

148


and implementing FDI proposals in India also needs to be more stable, consistent and supporting if the country is to fully realize its considerable latent investment and overall economic potential.

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Fung, K.C., H. Iizaka and A. Siu (2002). "Japanese Foreign Direct Investment in China and Other Asian Countries", mimeo (October). Garnaut, R. and K. Anderson (1980). "ASEAN Export Specialization and the Evolution of Comparative Advantage in the Western Pacific Region", in R. Garnaut (ed.), ASEAN in a Changing Pacific and World Economy, Canberra: ANU Press. IMF (1998). "India: Recent Economic Developments", Staff Country Report No. 98/120, IMF. IMF (2002). World Economic Outlook, Washington, DC: IMF. IMF. International Financial Statistics, various issues. Jalan, B. (2002). "Address by the Reserve Bank Governor at the Thirty Six Convocation of the Indian Statistical Institute" (Kolkata, January 15). Joshi, V. and I.M.D. Little (1996). "Macroeconomic Management in Indian 1964-94", in V.N. Balasubramanyam and D. Greenaway (eds.), Trade and Development: Essays in Honor ofjagdish Bhagwati, London: MacMillan Press. Kalirajan, K. (2001). "The Impact of a Decade of India's Trade Reforms", paper presented at conference on a Decade of Reforms in India (Australia National University, Canberra, November 20-21). Kelkar, V.L. (2001). "India's Reform Agenda: Micro, Meso and Macro Economic Reforms", Fourth Annual Fellows Lecture 2001, Centre for the Advanced Study of India, University of Pennsylvania. Kojima, K. (2000). "The 'Flying Geese' Model of Asian Economic Development: Origin, Theoretical Extensions, and Regional Policy Implications", Journal of Asian Economics, 11, pp. 375-401. Lai, K. (2001). "Institutional Environment and the Development of Information and Communication Technology in India", The Information Society, 17, pp. 105-117. Laursen, K. (1998). "Revealed Comparative Advantage and the Alternatives as Measures of Specialization", Working Paper No. 98-30, Copenhagen Business School, Denmark (DRUID). Miller, R. (2001). "Leapfrogging? India's Information Technology Industry and the Internet", Discussion Paper No. 42, International Finance Corporation. National Association of Software and Services Companies (NASSCOM) (2001). Available at http://www.nasscom.org.

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Ng, F. and A. Yeats (2001). "Production Sharing in East Asia: Who Does What for Whom, and Why?", in L. Cheng and H. Kierzkowski (eds.), Global Production and Trade in East Asia, Dordrecht: Kluwer Academic Publishers. O'Neil, P.H. (2002). "Excerpts from US Treasury Secretary's Remarks to the Confederation of Indian Industry and American Chamber of Commerce in New Delhi on November 22", The Indian Express, November 25. Panagariya, A. (1999). "Trade Policy in South Asia: Recent Liberalisation and Future Agenda", The World Economy, 22, pp. 353-378. Pritchett, L. (1996). "Measuring Outward Orientation in LDCs: Can It be Done?", journal of Development Economics, 49, pp. 307-335. Raipuria, K. (2001). '"Knowledge Bowl' Yet to Yield Major Gains", Economic and Political Weekly, 35, pp. 3351-3352. Raj an, R. and S. Marwah (1998). "Confronting Contradictions in the Indian Economy: An Evaluation of the Past — Policies for Future Investment and Growth", in F. Columbus (ed.), Asian Economic and Political Issues, Commack, New York: Nova Science Publishers. Rajan, R. and R. Sen (2002). "Trade Reforms in India Ten Years On: How Has It Fared Compared to Its East Asian Neighbours?", Discussion Paper No. 0147, Centre for International Economic Studies, University of Adelaide. Rana, P. (1990). "Shifting Comparative Advantage among Asian and Pacific Countries", The International Trade Journal, 4, pp. 243-258. Reserve Bank of India. Handbook of Statistics on the Indian Economy, various issues. Sen, R. (2002). "Singapore in the Global Trading System: Strengthening Linkages Beyond the Southeast Asian Region", paper presented at the Institute of Policy Studies Symposium on Sustaining Competitiveness in the Singapore Economy (Singapore, July 26-27). Sharma, K. (2000). "Export Growth in India: Has FDI Played a Role?", Discussion Paper No. 816, Economic Growth Center, Yale University. Srinivasan, T.N. (1996). "Indian Economic Reforms: Background, Rationale, and Future Prospects", mimeo (September). Tschang, T. (2001). "The Basic Characteristics of Skills and Organizational Capabilities in the Indian Software Industry", Working Paper No. 13, Asian Development Bank Institute. United Nations (UN). International Trade Statistics Yearbook, various issues.


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World Bank (2000). World Development Indicators, New York: Oxford University Press. World Bank (2001). Global Economic Prospects, New York: Oxford University Press. World Trade Organization (WTO) (2001). International Trade Statistics 2001, Geneva: WTO. Wu, F., T.S. Pao, H.S. Yeo and K.K. Phua (2002). "Foreign Direct Investment to China and Southeast Asia: Has ASEAN Been Losing Put?", Economic Survey of Singapore Third Quarter 2002, Ministry of Trade and Industry.

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Annex 1 Classification of Commodities of Manufactured Exports according to Relative Factor Intensities SITC Rev.2

Product description

SITC Rev.2

and category

category

category

65 651

Product description and category

Unskilled labour intensive

Technology intensive

(ULI) goods

(TI) goods

Textile yarn, n.e.s

54

Medicinal and pharmacy products

Textile yarn

56

Fertilisers, manufactures

652

Cotton fabrics, woven

57

Explosives and pyrotechnic

653

Fabrics, woven of manmade fibres

58

Artificial resins and plastic materials

654

Other textile fibres

59

Chemical material and products

657

Special textile fabrics

752

Automatic data processing machines

664

Glass

759

Parts, n.e.s of and Accessories

665

Glassware

76

Telecommunication equipment

666

Pottery

81

Sanitary, plumb fixtures

77-775

Electrical machinery and Parts thereof

87

Professional, scientific, and controlling instruments

82

Furniture and parts

83 84

Travel goods Apparel and clothing accessories

85

Footwear

51

Organic chemicals

Miscellaneous- jewellery, art antiques

52

Inorganic chemicals

Baby carriages, toy

67

Iron and Steel

68

N o n ferrous metals

71

Power generating machinery

89-896-897 894

Human capital intensive (HCI) goods

88-885

Photographic apparatus-watch clock Physical capital intensive (PCI) goods

55

Essential oils

72

Machinery specialized

62

Rubber manufactures

73

Metalworking machinery

64

Paper, paperboard

74

General industrial machinery and equipment, n.e.s

69

Metal manufactures n.e.s

775

Household electric and non-electric Equipment

78 79

Road vehicles Other transport equipment

885

Watches and clocks

896-897

Works of art + jewellery

Source: Garnant and Anderson (1980)

751

Office machines

India's Decade Ions Trade Reforms

153

Table 1 Dispersion of Average Tariff Rates of Selected DEA Economies, 1990-1998a

India Thailand Indonesia China Philippines

1990-94

1995-98

39.4 25.0 16.1 29.9 28.2

12.7 8.9 16.6 13.0 10.2

Note: a) Measured by the standard deviation Source: World Bank (2001, Table 2.1)

00 ON

1*

ON

O OO ON

Q

X r) 2

3 ^ o

U

3 OJ &H 4-)

OO ON

ON ON

0 0.34 XRSCA 0 XRSCA 0 -0.82 XRSCA 0 0.67 XRSCA 0 Malaysia -0.56 XRSCA 0 Philippines 0.24 XRSCA 0 0 0 0 0 0 0 Inida XRSCA < 0 XRSCA >0 China XRSCA 0 Inodnesia XRSCA < 0 XRSCA > 0 Korea XRSCA w oct 0.82 Korea ow 6.62 48.31 oct 0.31 Malaysia ow 3.79 s« 1.62 Philippines ^>w 13.33 s Physical Capital Intensive j;oods 0.13 India ow 4.01 ^>Ct China NA Ow NA Set Indonesia ow 0.14 1.90 ^ct Korea 0.79 ow 11.80 ^ct 0.52 Malaysia ^w 12.91 ^ct 0.19 Philippines s 3.10 s Technology Intensive good s India Sw Set

China

Sw ^ct

Indonesia

ow bct

Korea

ow *ct

0.14 3.04 NA NA 0.07 0.63 1.41 12.22

1987

1992

1996

1997

1998

1.15 32.50 4.98 31.20 0.40 7.05 7.99 49.65 0.41 6.90 1.16

1.12 31.40 8.42 51.00 1.69 25.76 6.49 41.29 0.83 10.61 1.36 18.61

1.40 31.39 10.13 45.26 1.63 22.77 5.80 28.86 1.04 9.65 1.54 20.35

1.50 32.82 11.95 52.76 1.15 19.76 3.22 19.13 0.96 8.91 0.77 10.02

28.34 11.96 56.12 1.02 33.27 2.96 26.93 0.89 11.00 0.87 11.46

0.25 9.00 1.05 8.20 0.16 3.10 1.52 15.20 0.38 6.30 0.17 3.04

0.31 9.19 1.75 10.51 0.23 4.26 1.76 15.6

0.37 10.27 2.08 11.67 0.20 4.48 1.93 14.57 0.76 12.14 0.07 1.15

0.35 8.90 2.05 12.43 0.24 10.13 2.04 23.93 0.75 11.88 0.06 0.96

0.13 5.09

0.17 6.76

1.37 11.60 0.20 4.29 3.09 23.65

2.34 17.96

0.18 6.88 2.73

0.17 5.90 3.11 26.48 0.32 18.82 3.33 54.92

14.24

0.12 5.07 0.56 5.50 0.14 3.93 1.14 11.60 0.21 5.52 0.35 6.77

0.12 4.79 0.51 4.70 0.03 0.88 2.51 17.82

0.54 6.5 0.15 2.59

0.41 9.85 3.97 30.11

21.37 0.37 11.24 3.53 37.25

1.450

India's Decade ions Trade Reforms

161

Table 7 (continued) Countries Malaysia

ow Set

Philippines

sw sct

1982

1987

1992

1996

1997

1998

0.81 13.96

0.96 23.50 0.20 3.61

2.15 37.97 0.91 17.22

2.05 32.94 2.42 55.10

3.26 53.47 1.66 38.40

3.14 69.95 2.52

0.13 5.48 0.81 7.90

0.28

0.04 1.23 2.00 18.90

0.24 9.62 1.16 9.90 0.17 3.59 1.97 18.60

0.24 6.92 2.02 13.83 0.43 20.25 2.82 37.35

0.14 3.63 0.09 1.80

0.44 7.89 0.10 2.03

0.28 8.24 1.93 11.56 0.29 6.77 2.93 23.59 0.45 5.66 0.12 2.83

0.27 3.17

Human Capita Intensive goods 0.29 India t>w 8.23 ^ct NA China ow NA ^ct 0.03 Indonesia ow 0.37 Set Korea 1.89 ow 24.00 bct 0.08 ow Malaysia 1.80 *ct ow Philippines 0.07 1.16 bct

8.24 1.70 10.18 0.33 6.14 3.06 22.60 0.47 5.76 0.16 2.88

Source: Computed from the UN International Trade Statistics, various issues

59.74

0.44 7.85 0.05 1.57

162


Table 8 Changes in Degree of Export Specialization of India and the DEA Economies3, 1982-1997 Period

India

China

Korea

Malaysia

Indonesia

Philippines

1987-92 1992-97 1987-97 1982-97

0.84 0.94 0.82 0.75

0.87 0.95 0.78 NA

0.82 0.55 0.43 0.41

0.68

0.78 0.88 0.68 0.39

0.75

0.64 0.45 0.34

0.74 0.47 0.46

Note: a) Computed by Spearman's Rank Correlation measures (adjusted for common ranks) Source: Computed from the UN international Trade Statistics Yearbook, various issues

Table 9 Correlation of Export Structures in Manufactured Goods between India and the DEA Economies, 1987-1998

1987 1997 1998

China

Korea

Malaysia

Indonesia

Philippines

0.96 0.68 0.63

0.79 0.39 0.36

0.17 0.01 0.00

0.82 0.76 0.77

0.42 0.07 0.04

Source: Computed from the UN international Trade Statistics Yearbook, various issues

163


Table 10 Indicators of Diffusion of ICT and Related Services in India and the DEA Economies (per 1000 persons), 1992-1997 1992

Cable TV subscribers Fax machines Internet hosts Mobile phones Personal computers Radios Telephone mainlines Television sets

0.0 0.0 0.0 0.0 0.5 96.5 7.7 39.6


21.1 0.1 0.0 0.1 0.9 332.9 9.7 190.1


0.0 6.8 0.0 6.2 56.8 1,005.2 354.2 208.6


0.0 0.2 0.0 0.2 2.0 149.4 9.0 76.1

1995 India 17.2 0.1 0.0 0.1 1.3 119.7 12.9 61.4 China 28.4 0.2 0.0 2.9 2.3 331.1 33.0 243.5 Korea 156.4 8.9 6.5 36.4 107.7 1,020.0 412.4 321.9 Indonesia 0.0 0.4 0.1 1.1 5.0 151.5 16.9 113.0

1997

18.8 0.2 0.0 0.9 2.1

1992-95

1992-97

12.2

121.4 18.6 69.1

9.1 0.1 0.0 0.0 0.8 105.0 10.1 51.4

0.1 0.0 0.2 1.2 110.4 12.4 56.4

40.0 1.6 0.2 10.6 6.0 333.3 56.2 271.8

24.9 0.1 0.0 1.2 1.5 332.6 19.9 217.5

29.2 0.6 0.1 3.5 2.6 332.5 30.0 233.2

145.2 0.0 28.8 149.6 150.7 1,032.8 444.0 342.4

94.0 8.0 2.6 18.6 79.8 1,009.3 383.5 272.9

111.2 5.3 9.0 49.0 100.3 1,017.0 401.4 294.8

0.0 0.9 0.5 4.5 7.9 156.4 24.7 134.1

0.0 0.3 0.0 0.5

0.0 0.5 0.2 1.6 4.7 152.7 15.8 106.2

3.4 150.8 12.2 94.3

164


Table 10 continued 1992


0.0 2.5 0.0 10.7 21.9 426.4 111.5 149.3


0.0 03 0.0 0.9 5.2 143.5

1995

10.4 78.4

1997

1992-95

1992-97

Malaysia 0.0 5.0 2.0 50.0 37.3 432.6 165.7 169.1

5.2 6.9 18.7 92.3 46.1 419.9 194.9 166.1

0.0 3.3 0.7 26.9 29.4 430.6 137.1 159.3

1.4 4.3 5.6 45.3 34.2 427.1 153.6 161.5

Philippines 5.8 0.7 0.3 7.2 9.6 145.7 20.5 104.9

6.9 0.0 0.6 18.0 13.4 158.8 28.7 107.7

3.7 0.5 0.1 3.1 7.3 144.5 15.2 96.9

4.7 0.3 0.2 7.3 9.0 149.0 19.1 100.4

Table 11 Communications, Computer, etc. [ICT] (percent of Service Exports, BoP) in India and the DEA Economies, 1980-1998

China Korea Indonesia Malaysia Philippines

1980

1989

1990

1995

1997

1998

NA 23.6 NA 29.8 63.6

22.8 27.7 10.3 24.5 77.6

20.2 34.2 10.7 25.3 77.6

27.2

38.0 39.6 4.2 55.1 82.0

35.7 33.5 5.0 NA 76.4

Source: World Bank (2000)

36.4 4.4 44.5 84.3


165

0.80 0.750 70.

* / * ^ ^ *

0 65 % 0.600 55

*s

0.500 45 0.40.

^ys k.

A

/ ^ ^

^^^

^

• 1980

1989

1990

1992

1995

1997

1998

Year Share in World Exports

Share in World Trade

Note: Includes merchandise trade only Source: World Bank (2000) Figure 1 India'a Global Trade Linkages, 1980-1999

1999

166

Chapter 7

Singapore's Drive to Form Cross-regional Trade Pacts: Rationale and Implications 1

1. Introduction The Singapore economy has experienced one of the highest rates of growth in the world over the past three decades, its Gross Domestic Product (GDP) appreciating at an annual average rate of about 8 percent during the period 1980-2000 (Table 1). The growth has in turn propelled Singapore's average real per capita income from US$3,365 in 1965 to over US$28,000, which is one of the highest in the world, surpassing most developed countries (Rajan, 2003). A key element of Singapore's hitherto successful growth strategy has undoubtedly been its outward orientation, particularly its openness to international trade and investment flows. Accordingly, Singapore has been a leading advocate of global trade liberalization and the free flow of goods and services across international borders. Indeed, despite its microscopic physical size, the World Trade Organisation ( W T O ) has ranked Singapore as the tenth largest merchandise trading nation in the world and among the top twenty in crossborder trade in commercial services (Tables 2 and 3). In nominal terms, Singapore's total merchandise trade (exports plus imports) has risen six fold from US$40 billion in 1980 to almost US$250 billion in 2000, an annual average growth of 9.6 percent (Figure 1). Over the entire period, Singapore's merchandise trade (exports plus imports) declined on a year-on-year basis in only three years, viz. the recession of 1985 and 1986 and then in 1998 during the global electronics downturn and the ensuing East Asian financial crisis. Although Singapore recovered smartly from the crisis, it has recently been the victim of the downturn in the global electronics cycle as well as the general deterioration in the external environment (particularly the sharp slowdown in the US and continued recession in Japan). Thus, Singapore's overall merchandise

'This Chapter is co-authored with Rahul Sen and draws on Rajan and Sen (2002) as well as on a longer monograph by the authors (Rajan, Sen and Siregar, 2001).

Singapore's Drive to Form Cross-Regional Trade Pacts

167

trade declined by 3.8 percent in 2001 compared to the previous year (Department of Statistics Singapore, 2002). The dynamics of export growth largely parallel those of merchandise trade — robust growth between 1980 and 2000 (10.3 percent annual average), with year-on-year declines in the mid 1980s and late 1990s, and most markedly in 2001. Singapore's Deputy Prime Minister, Lee Hsien Loong, recently made the following observation about the Singapore economy and the external environment it currently faces: Singapore has reached a turning point. For more than two decades until the Asian Crisis in 1997, Singapore enjoyed sustained high growth. Southeast Asia was doing well, foreign investments grew year by year, and our exports expanded. We upgraded our economy, and transformed the lives of Singaporeans in less than a generation ... But the last five years have shown clearly that this phase is over. T h e Asian Crisis plunged Southeast Asia into political and economic uncertainties. The US recession marked the end of the long boom, and the start of a new period of slower growth. After September 11th last year..(2001).., the discovery of terrorist groups in Southeast Asia linked to Al Qaeda brought new worries that will stay with us for many years. Our world has changed profoundly, and we must change with it (Lee, 2002, p. 1). It is against this — rather bleak — external setting and the recent disappointing trade performance that Singapore has aggressively sourced preferential accords with a number of its trading partners in an effort to remain a global trade and investment hub. Singapore has already established bilateral trade pacts with New Zealand, Japan, and the European Free Trade Area (EFTA), which consists of Iceland, Liechtenstein, Norway, and Switzerland. It has also completed negotiations with Australia and the United States (US), and is also in the process of negotiating FTAs with Canada, India, Jordan, Mexico, South Korea and Sri Lanka. Talks on a tripartite trade arrangement involving New Zealand and Chile have also been launched. This Chapter examines the reasons for and against Singapore's attraction to the "new regionalism" in general and cross-regional bilateral FTAs (bilateralism

2

Three caveats should be noted here. One, the term "regionalism" is not meant to have any geographic connotation, referring to any trade initiatives that are not multilateral in nature. Rather than "new regionalism", some prefer to use the term "second regionalism" in contrast to the "first regionalism" of the 1950s and 1960s which involved mainly South-South economic integration, i.e. FTAs

168


for short) in particular 2 . The remainder of this Chapter is organized as follows. By way of background, the next Section examines the country composition of Singapore's external trade. Data limitations restrict the analysis in this Section to merchandise trade. Section 3 highlights the motivations behind Singapore's urge to form a series of bilateral trade pacts in general, and with the two economic super-powers, the US and Japan, in particular. This is followed by a discussion of the drawbacks and potential concerns of such a bilateral/preferential trade strategy in Section 4. The final Section concludes the Chapter with a brief discussion of the nexus between new regionalism and multilateralism. Are the two antagonistic or are there inherent synergies between them?

2. Country Composition of Singapore's Trade, 1995 and 2000/2001 It would be useful to briefly examine the geographical distribution of Singapore's trade. Figures 2a and 2b offer a snapshot of Singapore's total exports to its major trading partners in 1995 and 2001. Neighbouring Malaysia is currently the single largest export destination, accounting for nearly a fifth of Singapore's total exports, followed closely by the US (15.4 percent) and the East Asian economies including Hong Kong (8.9 percent), Japan (7.7 percent) and Thailand (4.4 percent). Overall, in 2001, more than half of Singapore's total exports were destined for the ASEAN-plus-Three (or A P T ) economies (i.e. ASEAN plus Japan, China, and Korea) and the US. The shares of most of Singapore's major trading partners in their total exports declined in 2001 compared to 1995, with the notable exceptions of Australia, China, India and Korea (the first three were negligibly impacted by the 1997-98 East Asian crisis). Specifically, Singapore's exports to the large Asian economies of China and India grew at average rates of 19 and 12 percent, respectively during the period, which was significantly higher than the growth of the city-state's exports to its top five established trading partners. China increased its share in Singapore's exports from 2.3 percent to 4-4 percent during this period, the largest increase in export shares of the city-state's

among developing economies as part of import substitution development strategies (Lawrence, 1999 and Rajan, 1995). Two, Jagdish Bhagwati notes that the term "preferential trade arrangement" (PTA) is a more apt description for such trade pacts. As he declares of such trade arrangements (Bhagwati, 1995), they are: "two-faced: they embody both free trade and protection. Economists interested in the quality of public policy discourse should perhaps take a pledge henceforth to rename free trade areas as "preferential" trade areas" (p. 2). Three, we use the terms free or preferential trade "agreements", "arrangements", "pacts" and "accords" interchangeably in this paper.


169

major trading partners. At a subregional level, apart from the Philippines, the share of major ASEAN countries in Singapore's exports declined between 1995 and 2001 for reasons noted in the Introductory Section. The preceding analysis does not distinguish the entrepot component of exports (re-exports) from the value-added component (domestic exports). Re-exports have, on average, constituted between 40 and 60 percent of Singapore's total exports with the exception of the North American countries (viz. US, Canada) and some East Asian ones (Japan, China and Hong Kong). Considering only domestic exports, we note that in 2001, the US remained Singapore's top export market (in value-added terms), accounting for nearly a fifth of Singapore's domestic exports, followed by the East Asian economies, Malaysia (12.9 percent), Japan (8.9 percent), Hong Kong (8.7 percent) and Thailand (3.5 percent). Overall, as in the case of total exports, more than half of Singapore's total domestic exports went to the APT economies and the US (Figures 3a and 3b). Figures 4a and 4b present Singapore's total imports from its major trading partners and regional groupings for the 1995 and 2000. Japan has been the single largest source of imports, accounting for 17.2 percent of Singapore's total imports in 2000 (though down from 21.2 percent in 1995). The city state's other important import sources are Malaysia (17.0 percent), the US (15.0 percent) and other East Asian economies, including China (5.3 percent) and Thailand (4.3 percent). Overall, about two-thirds of Singapore's total imports were sourced from the APT grouping plus the US. Singapore has been running persistent bilateral deficits with Japan which have been increasing both in magnitude as well in terms of Singapore's total trade with Japan, especially during the period 1985-94. The deficit was around US$ 6.7 billion in 2001, constituting about 26 percent of Singapore's bilateral trade with Japan. In contrast, Singapore has recorded a persistent and growing bilateral trade balance with the US since the mid 1980s, amounting to about US$0.3 billion in 2001, though these surpluses are a relatively low share of overall Singapore-US trade. Continual trade deficits with Japan might partly be a reflection of the inability of foreign (including Singapore) exporters to penetrate the Japanese market due to the maintenance of both official and (especially) unofficial non-tariff barriers (NTBs) (Lawrence, 1987). Indeed, these barriers have in turn often led to the accusation that Japan "imports too little" from its trading partners (Takeuchi, 1989), with a survey of Singapore exporters in the late 1980s revealing them to be "generally overawed by the Japanese closed market image (Lim, 1988, p. 100). In the context of a Singapore-Japan FTA, this factor could be of potential importance, as a bilateral FTA ought to provide Singapore open (and preferential) access to the Japanese market.

170


3. Why Has Singapore Embraced the Bilateral Route? Singapore's choice of trading partners to form trade pacts can be broadly divided into three groups. The first group of countries, which includes the US and Japan, are major established trading partners. Proposed bilateral trade accords by Singapore with these two economies are best seen as a formalization of the de facto extensive and deep linkages that are already in existence. While the US has signed a series of bilateral FTAs with Canada, Israel, Mexico and Jordan, the Singapore-US FTA is the first such one that the US has signed with an Asian economy. It has also been suggested that Singapore's bilateral trade accords with the US and New Zealand, along with anticipated ones with Australia and Chile, may lead to a Pacific-5 or P-5 FTA, which itself could be a precursor to an APEC-wide FTA. As noted, Singapore is in the process of negotiating deals with Canada and Mexico, the two other members of the North American Free Trade Area (NAFTA). Could this be a first step in Singapore's eventual accession into that alliance? A possible Singapore-Japan FTA is interpreted by some as an important signal of Japan's weakening adherence to non-discriminatory multilateralism, not unlike the shift in the trade policy stance by the US in the 1980s which led to the global proliferation of regional blocs (Rajan and Sen, 2003). While Singapore's FTA with the US is seen as strengthening trans-pacific links, that with Japan is seen as bolstering ties between Northeast and Southeast Asia. While the focus of this Chapter is on Singapore's perspective, it is worth noting that the larger countries are willing to negotiate trade pacts with Singapore despite its already liberal trade policy for two main reasons. One, Singapore's services sector remains relatively more protectionist than its manufacturing sector. Thus, countries like the US are keen on using the bilateral trade pact to open up Singapore's service sector further. Two, given Singapore's small size and absence of an agricultural sector of any significance, countries like Japan are keen on using negotiations with the city-state as a "practice ground" before they initiate negotiations with other countries with whom there may be more complex and sensitive issues to deal with. The second group of countries includes Australia, Korea, New Zealand, the EFTA countries, and the like, who do not account for more than 5 percent of Singapore's total exports, domestic exports, or total imports. The aim here is to seek out new markets in view of the seeming loss of growth momentum in Singapore's immediate neighbours as well as to diversify the city-state's external economic linkages. The third group includes the emerging economic giants of China and India which offer significant medium and longer-term opportunities for Singapore


171

businesses. The aim of trade agreements with these two countries is to develop "special relationships" and for Singapore businesses to gain first-mover advantage into these large markets (Sen, 2002). Effectively, the city-state is trying to expand its hinterland from the immediate Southeast Asian region to encompass the larger Asian region to include these two emerging giant countries. As Singapore's Deputy Prime Minister, Lee Hsien Loong, has noted: Given the prosperity of China and India, Singapore has been extending its hinterland beyond the traditional areas in Southeast Asia, to service a wider area defined by a radius of 7 hours' flying time from Singapore. This brings China, India and even Australia within Singapore's catchment. Jet travel and modern telecommunications makes this feasible. Many companies are already setting up headquarters in Singapore to do this (Lee, 2002, p. 3). With regard to Singapore's immediate neighbourhood, valid concerns have been expressed that Southeast Asia has lost the dynamism and drive towards trade and investment liberalization and integration (which entails much more than intraregional tariff elimination) that it had pre-crisis, and is seen by extra regional foreign investors as the "less attractive cousin" of Northeast Asia (Business Times, Singapore, December 11, 2000). It is important for Singapore that investors not perceive it as being in the same boat as the rest of the region, i.e. Singapore needs to remain on the radar screen of world investors even if Southeast Asia as a whole may not be (Lee, 2002). Conversely, it is plausible that Singapore could act as the "flag-bearer" for the region in that its trade initiatives could help maintain global interest and draw extra-regional investments into Singapore and the Southeast Asian region as a whole as the crisis-hit economies gradually rebuild their economic and financial structures. The surge of recent FTA initiatives by Singapore may also be a means of building political momentum for other ASEAN/APEC member economies to hasten the process of regional and unilateral liberalization. 3 More generally, FT As appear to be increasingly regarded by policy-makers as effective and expeditious instruments for achieving trade liberalization among "like minded" trading partners (Schiff et al., 2000). Formation of bilateral FTAs among such partners is also seen as a means of overcoming the so-called "convoy problem", whereby the "least willing member" ("foot-dragger") holds the pace of trade integration back. Alternatively, as is sometimes said, "those who can run faster should run faster and ought not to not be held back by those who choose 3

This is commonly referred to as "competitive liberalization", whereby modest liberalization induces broader liberalization.

172


not to run or do so at a snail's pace". While the argument that regional trade pacts are easier to negotiate and can be concluded at a faster pace than global negotiations may not hold true as a general rule (Baldwin, 1997 and Bhagwati, 1995), it does seem to be relevant in the case of Singapore which sets strict deadlines for completion of discussions. (This, however, may come with its own problems; see Section 4). Another "first-mover advantage" in establishing FTAs with a host of different countries early on takes the shape of a "hub" of overlapping arrangements (Wonnacott and Lutz, 1989). Producers in the hub enjoy cost advantages vis-a-vis producers in the "spokes", being able to obtain more of their intermediate goods at lower prices. Further, since exports originating from Singapore are given preferential access to a number of other markets (with which Singapore has trade accords), this may encourage the transshipment of goods through Singapore ports, hence fortifying its already dominant role as an entrepot point. Of course, it is for this very reason that FTAs stipulate special provisions or Rules of Origin (ROOs) which are meant to prevent goods being re-exported from/circumvented through the lower tariff country to the higher tariff one (i.e. trade deflection). However, this in turn may lead to a shift of export platforms from other regional developing economies to Singapore in order to gain duty-free market access. Care must be taken though to ensure that ROOs are not manipulated in such a way that partners gain de facto protection for their goods in the Singapore market (see Section 4) 4 . Trade accords, particularly the recent ones Singapore is involved in, go well beyond just merchandise trade liberalization and also encompass liberalization of services trade and other trade facilitation measures which lead to "deep integration" among partners (Lawrence, 1999). These measures include investment protection and liberalization, harmonization and mutual recognition of standards and certification, protection of intellectual property rights, opening of government procurement markets, streamlining and harmonization of customs procedures, and development of dispute settlement procedures. These FTAs are therefore more appropriately referred to as Trade and Investment Facilitation Agreements (TIFAs). Such FTAs could act as a "testing ground or pilot project for exploring complex trade issues" and may help establish some sort of precedent or benchmark for trade negotiations involving a larger number of countries, including one at the multilateral level (Sager, 1997, p. 242). Simultaneously, to the extent that contracting parties to an FTA agree to move beyond their respective W T O 4

Even if ROOs are in place, there could be "indirect trade deflection", as low-tariff member could meet its requirements for a product from the non-members and export a corresponding amount of its own production to the members of the trade alliance (Robson, 1998).


173

commitments, there may be a demonstration effect that motivates future rounds of broader multilateral negotiations under the auspices of the W T O 5 . Thus, one hears policy-makers in the region often refer to their proposed RTAs as being "state of the art", "trail-blazing", or "WTO-Plus". Singapore's drive towards FTAs is not solely economic by any means. FTAs could also serve as a vehicle by which Singapore draws attention to itself and enhances the city-state's political recognition and profile with the integrating partners and carves out a pivotal role for itself in regional and multilateral trade fora6.

4. Concerns with Bilateralism It is commonly noted that since Singapore has one of the most liberal trade and investment regimes in the world with near zero tariff rates on most goods (and limited non-tariff barriers), this implies that the scope for trade diversion — replacement of lower cost suppliers from non-member countries — from Singapore's vantage point is quite small 5 . Nonetheless, it would be wrong-headed to conclude that there are no ill-effects whatsoever. What are some potential concerns of Singapore's recent eagerness to form FTAs? The proliferation of a number of overlapping or intersecting FTAs raises many technical problems with respect to the implementation of ROOs. Even with a single FTA, a concern is that ROOs with a particular country, say the US, may be sufficiently prohibitive so as to induce Singapore exporters to source their inputs from the U S than some other developing country in Asia (such as Korea, for instance). In other words, the US exports its external tariffs to Singapore. This appears to have been the case with NAFTA, where the U S negotiated a R O O on Mexican assemblers of automobiles. ROOs also give rise to significant costs due to the need for administrative surveillance and implementation. In practice, ROOs are particularly complex — they are almost two hundred pages in the case of N A F T A and eighty pages of small print in the case of the EU's agreement with Poland — as they have to take into account tariffs on imported intermediate goods used in products produced within the FTA. The book-keeping and related costs escalate sharply as production gets more integrated internationally (so-called "spaghetti bowl" phenomenon) and countries get involved with an increasing number of separate but 5

This could be due to the fact that in spite of non-preferential liberalization in services providing larger welfare gains than the preferential route, more efficient bargaining among members and achieving greater regulatory cooperation is possible through plurilateral arrangements rather than the multilateral one (Mattoo and Fink, 2002). 6

Koh (2000) makes this point convincingly in the context of the Singapore-US FTA.

174


overlapping FTAs. This is especially so as there may not be uniformity in the computation of regional content requirements. Accordingly, Krueger (1997) strongly favours a Customs Union or C U (where members have common external tariffs) over FTAs. Note that absent ROOs, an FTA is a de facto C U with a common external tariff (CET) equivalent to that of the lowest tariff prevailing in any of the member countries. If unconstrained, this reduces the effective tariff of every member to that of the lowest tariff rate plus the transportation cost involved in indirect importing (real resource cost). With prohibitive ROOs, an FTA becomes a C U where an external tariff is the highest that prevails among members. A major disadvantage of CUs is that they require greater degree of policy coordination and collective decision-making and budgetary mechanisms to distribute the tariff revenue between members 7 . Apart from the issue of ROOs, a large number of FTAs may leave investors confused as to which rules, obligations and incentives correspond to which partner. This is in contradiction to one of the main aims of RTAs, viz. to enhance transparency and reduce transactions costs so as to facilitate cross-border business activities. Worse still, there is the possibility that membership in multiple trade accords may create "obligations made in one that contradict those made by others" (Schiff et al., 2000). Bergsten (2000) highlights this point in the context of compatibility of sub regional arrangements with the APEC's goal of regionwide trade liberalization (i.e. the Bogor declaration of free and open trade by 2010/2020). As he notes of the blueprint on the Singapore-Japan proposed FTA: it states that Japan is unwilling to liberalize agricultural trade, even in a deal with Singapore where there is no agricultural trade. In other words, they do not accept the principle. They can argue, as this blueprint does, that it is perfectly compatible with the W T O . The W T O says you must substantially cover all trade. If there is no agricultural trade, you do not have to include it to meet the W T O test. But the APEC test, which was hammered out after much debate in both Bogor and Osaka, states that trade liberalisation must be comprehensive — no sectors can be excluded. APEC was consciously being W T O + and the Japan-Singapore agreement,

7

Schiff et al. (2000), who argue chat a "central issue for countries planning to integrate their trade is whether to choose and FTA or CU", discuss the issues in some detail. Wonnacott (1996) has suggested a hybrid scheme, i.e. an FTA but without ROOs in two sets of products: one where the members agree upon CETs, and the other where all members have low tariffs. Schiff et al. (2000) discuss these and other proposals. Panagariya (1999) notes that ROOs could either exacerbate or moderate welfare-reducing trade diversion.


175

if that study result becomes the actual outcome, would violate its precepts ... Moreover, the report says nothing about completion by 2010. That deadline is a commitment for countries in the APEC context ... Japan and Singapore should be asked how their new agreement is compatible with APEC (p.5). Singapore appears to be willing and able to negotiate FTAs with unparalleled rapidity. However, this swiftness apparently hinges on the Republic's readiness to accept a number of conditions in the context of the bilateral accords set forth by the larger partners, such as labour and environmental standards, in the case of the FTA with the U S (said to be modelled after the US-Jordan agreement), or exclusion of agriculture in the case of the FTA proposals with Japan (as noted by Bergsten above). While acceptance of these conditions may not be problematic in the case of Singapore (given its high environmental standards and negligible agricultural sector and no farm lobby to speak of), if they are eventually included in the agreements, the city-state is not necessarily helping the cause of less well off developing countries in multilateral negotiations at large 8 . Further, if Singapore unilaterally signs on to such non-trade linkages, might that not preclude ASEAN from taking a common and credible stand on these and other issues given the fact that the regional alliance famously follows a policy of consensus? In addition, the presence of such linkages could imply that Singapore-based FTAs may be an inappropriate model for future trade arrangements and could make the Singapore-based FTAs de facto exclusionary to other ASEAN members. This is despite repeated "assurances" by Singapore policy-makers that the FTAs are no t exclusive and are open to accession by any country which agrees to the terms of the agreement 9 . Indeed, referring to the US-Singapore trade agreement, Singapore's Minister of Trade and Industry, George Yeo, reportedly remarked:

Bhagwati's (1995) discussion of the US FTA strategy during NAFTA negotiations is prescient: NAFTA's passage..was subject to Mexico's acceptance of supplemental agreements on environmental and labour standards ... (W)hy should such agreements be a precondition for freer trade?..(The) US was a superpower bargaining one-on-one with a vastly inferior power. In turn, those supplemental agreements have encouraged the environmental and labour lobbies to argue that because NAFTA required them, so must the WTO ... In short, NAFTA has made the WTO's business more complex, not less..(T)he United States can first force Mexico to buckle under to those demands and then tell Chile and others, "This is how NAFTA is, so you must accept these 'nontrade' terms and conditions if you wish to come on board." ... (T)hat 'Takethem-one-by-one' strategy works so much better than trying to impose extraneous, indeed harmful, conditions through multilateral trade negotiations where all countries facing such demands negotiate together and have more bargaining power (pp. 12-3).

176


We have set high standards..I'm doubtful other countries can come up with these standards, because their economies are not as advanced as ours, but in any case, it should be something they should strive to achieve (quoted in Lien, 2002b). The issue of expansion or amalgamation of existing FTAs is an important outstanding issue that has not been paid sufficient attention to by enthusiasts of such preferential agreements.

5. Concluding Remarks While Singapore's new commercial trade strategy was initially greeted with much skepticism and even irritation by some of its Southeast Asian neighbours, their view has since softened significantly. Indeed, countries such as Thailand and the Philippines are now looking to emulate the Singapore strategy10. In addition, a case might be made that Singapore's go-it-alone approach helped push ASEAN to seriously explore the possibility of an ASEAN-China FTA and even those with Japan and India (Lee, 2002). In addition, the US President George W. Bush launched the Enterprise for ASEAN Initiative (EAI) during the APEC Summit in October 2002 to strengthen bilateral trade linkages with ASEAN. While details of the EAI remain unclear, the proposal essentially offers ASEAN countries the opportunity to sign bilateral trade pacts with the US as long as they are members of the W T O (implying that Cambodia, Laos and Vietnam may remain ineligible for the time being). While the EAI is viewed as a means of eventually networking Southeast Asia with the US seamlessly, the initiative appears to have less to do with economics than it does with symbolism regarding the commitment of the US to the Southeast Asian region at a time of global security and political tensions (Lien, 2002a). Academic and policy interest in bilateral and plurilateral trade arrangements has been preoccupied with the question as to whether they are "stumbling" or "building" blocs towards multilateral liberalization. The analytical literature is inconclusive (Winters, 1999), and the empirical literature far too unreliable to

9

Wonnacott (1996) cautions that while spokes are certainly worse off in a hub-and-spoke regime compared to a "full" or complete FTA, it is unclear as to whether hubs are better or worse off. This is so, because while the collective income of a hub-and-spoke arrangement tends to be smaller (given the inefficiencies caused by overlapping FTAs), the share of benefits accruing to the hub is larger than a full FTA. As is often said, hubs and spokes arrangements "combine regional integration with the hub and disintegration among spokes". 10

Other countries in the larger Asian region such as China, India, Japan and Korea have also embraced the bilateralism route.


177

make any definitive judgments. RTAs may be stumbling blocs if preferential access gained by some reduces the motivation or incentive to liberalize multilaterally 11 . Related to this, countries that are members of FTAs may take the view "(i)f we do not get what we want in the..multilateral..negotiating agenda, why should be worry? We have our own FTA. That is where the action is!" (Crawford and Laird, 2001, p.207). Such an attitude would undoubtedly weaken the multilateral trading system and may even pose an outright threat to multilateralism. It is clear that the Singapore policymakers are of the opinion that FTAs are building blocs and complementary to rules-based multilateralism. To their credit, Singapore leaders have made a concerted effort to reaffirm the primacy of the multilateral trading system. For instance, the Singapore Prime Minister Goh Chok Tong has reportedly noted: FTAs should not be pursued at the expense of the multilateral trading system. We must continue to invest efforts towards the launch of a New Round (of multilateral trade negotiations), to ensure that the gap between FTAs and the W T O does not grow so wide that it becomes irreconcilable (Business Times, Singapore, December 5, 2000) 12 Similarly, the city-state's Deputy Prime Minister recently observed: To secure our overseas markets, our basic approach has been multilateral — to rely on the framework of the World Trade Organisation ( W T O ) to ensure a level playing field and protect the interests of a very small player. Singapore will contribute actively to the Doha Development Agenda, because multilateral trade liberalisation will continue to be the cornerstone of our trade policy. However, the failure of the Seattle W T O meeting in 1999 highlighted clearly the limitations and risks of a purely multilateral approach. After Seattle, many countries, including Singapore, reassessed their positions, and decided that it would be wise to complement the multilateral approach with a strategy of bilateral Free Trade Agreements (FTAs) with key trading partners (Lee, 2002, p. 2). 11

After all, the WTO recently warned in its Annual Report (2001b) that the cumulative impacts of all the various FTAs that have proliferated worldwide "posed a systemic risk to the rules-based multilateral trading system". I2 Schiff et al. (2000) evaluate the practical implications of the Article and its provisions and make recommendations for altering the provisions to render them more effective. There exists an "Enabling Clause" introduced in 1979 (Decision on "Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries") that further relaxes the above provisions.

178


The recent failure of the Doha Round will no doubt further fuel belief in and support for the FTA strategy. O n e way to ensure that preferential arrangements are consistent with multilateralism is for them to be accompanied by a sunset clause which would require, over time, that signatories to the agreement offer bilateral or regional concessions to all non-members on the basis of Most Favoured Nation (MFN) status. In other words, concessions offered by one country to another member should be presented unconditionally to all other W T O members within a pre-specified timeframe. As Panagariya (1999) notes, this would be the "best dynamic time path to bring..(FTAs)..up to multilateral free trade" (also see Srinivasan, 1998). While the foregoing is ideally something that should be written into the W T O Articles of Agreement, Singapore could take the lead in this regard and insist its inclusion in trade accords to which it is a signatory. Singapore ought also to stand firm on requiring that its FTAs be comprehensive in coverage, not allowing omission of sectors even in areas that may not be of economic significance to the city-state (agriculture being a case in point). In this way, FTAs can truly be WTO-compatible. Conversely, exclusion of specific sectors in FTAs only perpetuates the problems that exist with multilateral trade liberalization.

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IMF. Direction of Trade Statistics Yearbook, various issues. Koh, T. (2000). "US-S'pore FTA: It's Good for More Than Just the Two", The Straits Times, Singapore, December 7. Krueger, A. (1997). "Problems with Overlapping Free Trade Area", in T. Ito and A. Krueger (eds.), Regionalism versus Multilateral Trade Arrangements, Chicago: University of Chicago Press. Lai, D. (1993). "Trade Blocs and Multilateral Free Trade", Journal of Common Market Studies, 31, pp. 349-358. Lawrence, R. (1987). "Imports in Japan: Closed Markets or Minds?", Brookings Papers on Economic Activity, 2, pp. 517-558. Lawrence, R. (1999). "Regionalism, Multilateralism, and Deeper Integration: Changing Paradigms for Developing Countries", in M. Mendoza, P. Low and B. Kotschwar (eds.), Trade Rules in the Making: Challenges in Regional and Multilateral Negotiations, Washington, DC: Brookings Institution Press. Lee, H.L. (2002). "Remaking Singapore for a Different World", speech at the Institute for International Economics (Washington, DC, November 13). Lien, J. (2002a). "Bush Targets FTAs with More ASEAN Nations", Business Times, Singapore, October 28. Lien, J. (2002b). "Singapore Could Seal FTAs with Australia, US Next Month", Business Times, Singapore, October 29. Lim, H. (1988). "Singapore-Japan Trade Frictions", in ASEAN-Japan Relationship Towards the 21st Century, Japanese University Graduates Association of Singapore, pp. 91-121. Mattoo, A. and C. Fink (2002). "Regional Agreements and Trade in Services: Policy Issues", Policy Research Working Paper No. 2852, The World Bank. Panagariya, A. (1999). "The Regionalism Debate: An Overview", The World Economy, 22, pp. 477-512. Raj an, R. (1995). "Regional Economic Cooperation Involving Developing Countries in the Post-Cold War World: Lessons from the Asia Pacific", Development and International Cooperation, 10, pp. 383-404. Rajan, R. (2003). "Sustaining Competitiveness in the New Global Economy: Introduction and Overview", in R. Rajan (ed.), Sustaining Competitiveness in the New Global Economy: A Case Study of Singapore, Cheltenham: Edward Elgar.

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Rajan, R. and R. Sen (2002). "Singapore's New Commercial Trade Strategy: Examining the Pros and Cons of Bilateralism", in Chang L.L. (ed.), Singapore Perspectives 2002, Singapore: Times Academic Press. Rajan, R. and R. Sen (2003). "The Japan-Singapore 'New Age' Economic Partnership Agreement: Background, Motivation and Implications", in Trading Arrangements in the Pacific Rim, New York: Oceana Publications. Rajan, R., R. Sen and R. Siregar (2001). Singapore's Attraction to Free Trade Areas: Bilateral Trade Relations with japan and the US, Singapore: Institute of Southeast Asian Studies. Robson, P. (1998). The Economics of International Integration, London: Routledge. Sager, M. (1997). "Regional Trade Agreements: Their Role and the Economic Impact on Trade Flows", The World Economy, 20, pp. 239-252. Schiff et al. (2000). Trade Blocs, Washington, DC: The World Bank. Sen, R. (2002). "Singapore in the Global Trading System: Strengthening Linkages Beyond the Southeast Asian Region", paper presented at the Institute of Policy Studies Symposium on "Sustaining Competitiveness in the Singapore Economy" (Singapore, July 26-27). Singapore Trade Development Board (2001). Review of First-Half 2001 Trade Performance and Outlook for Second-Half 2001 (www.tdb.gov.sg/gss/sl-briefs/2001/review2001.pdf). Singapore Trade Development Board. Singapore Trade Statistics, various issues. Srinivasan, T.N. (1998). "Regionalism and the WTO: Is Nondiscrimination Passe?", in A. Krueger (ed.), The WTO as an International Organisation, Chicago: The University of Chicago Press. Takeuchi, K. (1989). "Does Japan Import Less than it Should?: A Review of the Econometric Literature", Asian Economic Journal, 3, pp. 138-170. Winters, A. (1999). "Regionalism Versus Multilateralism", in R. Baldwin, D. Cohen, A. Sapir and A. Venables (eds.), Market Integration, Regionalism and the Global Economy, Cambridge, UK: Centre for Economic Policy Research. Wonnacott, P. (1996). "Beyond NAFTA — The Design of a Free Trade Agreement of the Americas", The Economics of Preferential Trade Agreements, Washington, DC: AEI Press.

Slnsapore's Drive to Form Cross-Regional Trade Pacts

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Wonnacott, R. and M. Lutz (1989). "Is there a Case for Free Trade Areas/", in J. Schott (ed.), Free Trade Areas and US Trade Policy, Washington, DC: Institute for International Economics. World Trade Organisation (WTO) (2001a). International Trade Statistics 2001, Geneva: WTO. World Trade Organisation (WTO) (2001b). Annual Report of the Director-General 2001, Geneva: WTO.

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Economic Globalization and Asia Table 1 Growth Performance of Singapore and Selected East Asian Economies, 1981-2002 (GDP growth, percent per annum) Average

Average

1981-90

1991-95

1996

1997

Singapore

7.3

8.7

7.5

8.0

Malaysia

6.0

8.7

8.6

Thailand

7.9

8.4

Indonesia

5.4

Korea Japan

1999

2000

200 l a

2002a

1.5

5.9

9.9

-2.9

1.2

7.7

-6.8

6.1

8.3

0.3

2.5

5.5

-0.4

-8.0

4.2

4.4

1.5

2.0

7.8

8.0

4.6

-13.7

0.8

4.8

3.2

3.5

9.1

7.5

7.1

5.5

-5.5

10.9

8.8

2.6

3.2

4.0

1.4

3.3

1.9

-1.1

0.7

2.2

-0.4

-1.0

Notes: a) Estimate Source: IMF, World Economic Outlook, various issues

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^

Sou

d d « OJ D D £ O

c^l

itzerla

embourg ng Ko

& X w d T3

<s p

ON

m

NO

O

CO

t--

NO

^1-

o o

ro

m

OO

-*T

OO

NO

r-i

ON

r^ o

^t" c-J

O


O

°o S ON

x

O UJ

9

p «

a o P3

o

•4"

^r

,_,

ON

1

Upper midd e income

•>)-

South Asia

OO

Low & middle inc ome

o r~) 1 1

Least develo ped count ries (UN class ificati on)

^_, 00

High incom

O

(4 00

t/3

ra — 2 c > m« U-i rg SG

*

P

3 O CO

1

s

"§

PQ

c

International Trade in Infrastructural Services in East Asia

46.0

ON

32.6

NO

52.4 62.1 m

37.9 r*J

47.0

^

41.0

NO

41.4

^1-

40.9

r-j

48.0

o

16.8

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42.7

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o* o PQ

17.6

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o

PQ

21.1

215

216

Economic Globalization and Asia Table 5 Classifying Barriers to Trade in Banking and Telecommunication Services

Barriers to establisment

Banking

Non-discriminatory barriers to market access Are there restrictions on the number of bank licenses?

Discriminatory deviations from national treatment Are there restrictions on the number of foreign bank licenses? Are there restrictions on foreign equity investments or requirements for foreigners to enter through a joint venture with a domestic bank? Are there restrictions on the permanent movement of people?

Telecommunications

One measure of restriction is actual number of competitors in fixed and mobile markets. Is there an enforced monopoly, partial competition or full competition in various fixed line markets and mobile market? W h a t percentage of the incumbent fixed or mobile operator is privatized?

W h a t percentage of foreign investment is allowed in competitive carriers?

Barriers to ongoing operation

Are there general restrictions on raising funds, lending, providing other lines of business, or expanding the number of banking outlets?

Are foreign banks restricted in raising funds, lending, providing other lines of business, or expanding the number of banking outlets? Are there restrictions on the proportion of foreigners on the board of directors? Are there restrictions on the temporary movement of people?

Telecommunications

Are there restrictions on leased lines or private networks? Are there restrictions on third party resale? Are there restrictions on connection of leased lines and private networks to the public switched telephone network?

Are there restrictions on callback services?

Source: Dee, Hanslow and Phamduc (2001)

Table 6 Restrictiveness Indices for Telecommunications Services'

Economy Argentina Australia

Establishment 0.12 0.04

Domestic ongoing operations

Total 3

0.17 0.00

0.29 0.04

Establishment

Foreign ongoing operations

Total 3

0.12 0.04

0.17 0.00

0.29 0.04

Austria

0.13

0.00

0.13

0.13

0.00

0.13

Belgium

0.03

0.07

0.10

0.13

0.07

0.20

Brazil

0.17

0.03

0.21

0.28

0.03

0.31 0.44

Canada

0.04

0.10

0.14

0.14

0.30

Chile

0.02

0.07

0.09

0.02

0.07

0.09

Colombia

0.10

0.10

0.20

0.16

0.30

0.46

Denmark

0.03

0.00

0.03

0.03

0.00

0.03

Finland

0.00

0.00

0.00

0.00

0.00

0.00

France

0.05

0.00

0.05

0.21

0.00

0.21

Germany

0.05

0.00

0.05

0.05

0.00

0.05

Greece

0.16

0.10

0.26

0.16

0.30

0.46

Hong Kong

0.11

0.10

0.21

0.11

0.10

0.21

India

0.19

0.20

0.39

0.29

0.40

0.69

Indonesia

0.14

0.20

0.34

0.27

0.40

0.67

Ireland

0.19

0.00

0.19

0.35

0.00

0.35

Italy

0.14

0.00

0.14

0.14

0.00

0.14

Japan

0.04

0.00

0.04

0.04

0.00

0.04

Korea

0.15

0.20

0.35

0.28

0.40

0.68

Luxembourg

0.17

0.00

0.17

0.17

0.00

0.17

Malaysia

0.04

0.20

0.24

0.18

0.40

0.58

Mexico

0.03

0.20

0.23

0.13

0.40

0.53

Netherlands

0.03

0.00

0.03

0.03

0.00

0.03

New Zealand

0.03

0.00

0.03

0.03

0.00

0.03

Philippines

0.00

0.13

0.13

0.12

0.33

0.45

Portugal

0.11

0.20

0.31

0.11

0.40

0.51

Singapore

0.21

0.13

0.34

0.31

0.13

0.44

South Africa

0.19

0.20

0.39

0.19

0.40

0.59

Spain

0.18

0.03

0.21

0.18

0.23

0.41

Sweden

0.10

0.00

0.10

0.10

0.00

0.10

Switzerland

0.20

0.00

0.20

0.20

0.00

0.20

Thailand

0.23

0.20

0.43

0.39

0.40

0.79

Turkey

0.27

0.20

0.47

0.40

0.40

0.80

United Kingdom

0.00

0.00

0.00

0.00

0.00

0.00

United States

0.00

0.03

0.03

0.00

0.03

0.03

Uruguay

0.22

0.13

0.35

0.22

0.33

0.55

Venezuela

0.16

0.20

0.36

0.16

0.40

0.56

Notes: a) Figures may not add up to total due to rounding off error b) The restrictiveness index scores range from 0 to 1. The higher the score, the greater are the restrictions for an economy Source: Findlay and McGuire (2001)

Table 7 Price Effect Measures for Telecommunications Services

Economy Argentina Australia Austria Belgium Brazil Canada Chile Colombia Denmark Finland France Germany Greece Hong Kong Indonesia Ireland Italy Japan Korea Luxembourg Malaysia Mexico Netherlands New Zealand Philippines Portugal Singapore South Africa Spain Sweden Switzerland Thailand Turkey United Kingdom United States Uruguay Venezuela

Establishment 1.60 0.31 0.85 0.22 3.19 0.30 0.40 5.28 0.20 0.00 0.34 0.32 1.58 0.65 29.66 1.46 1.00 0.26 1.83 0.65 1.23 0.81 0.20 0.27 0.00 1.35 1.28 6.65 1.71 0.65 1.23 15.88 11.20 0.00 0.00 4.74 4.21

Domestic ongoing operations 2.22 0.00 0.00 0.44 0.61 0.76 1.28 5.28 0.00 0.00 0.00 0.00 0.98 0.61 41.04 0.00 0.00 0.00 2.47 0.00 5.50 5.43 0.00 0.00 21.43 2.45 0.82 7.12 0.32 0.00 0.00 14.01 8.40 0.00 0.20 2.87 5.37

Total3

Foreign ongoing Establishment operations Total3

3.81 0.31 0.85 0.65 3.81 1.07 1.68 10.55 0.20 0.00 0.34 0.32 2.56 1.26 70.70 1.46 1.00 0.26 4.30 0.65 6.73 6.24 0.20 0.27 21.43 3.80 2.10 13.77 2.03 0.65 1.23 29.90 19.59 0.00 0.20 7.61 9.57

Note: a) Figures may not add up to one due to rounding off error Source: Findlay and McGuire (2001)

1.60 0.31 0.85 0.87 5.07 1.08 0.40 8.44 0.20 0.00 1.43 0.32 1.58 0.65 56.34 2.67 1.00 0.26 3.49 0.65 5.08 3.58 0.20 0.27 19.28 1.35 1.90 6.65 1.71 0.65 1.23 27.09 16.74 0.00 0.00 4.74 4.21

2.22 0.00 0.00 0.44 0.61 2.29 1.28 15.83 0.00 0.00 0.00 0.00 2.94 0.61 82.08 0.00 0.00 0.00 4.95 0.00 11.00 10.85 0.00 0.00 53.57 4.90 0.82 14.24 2.22 0.00 0.00 28.03 16.79 0.00 0.20 7.18 10.73

3.81 0.31 0.85 1.31 5.68 3.37 1.68 24.27 0.20 0.00 1.43 0.32 4.52 1.26 138.41 2.67 1.00 0.26 8.43 0.65 16.08 14.43 0.20 0.27 72.85 6.25 2.72 20.89 3.93 0.65 1.23 55.12 33.53 0.00 0.20 11.92 14.94

Table 8 Restrictiveness Indices for Financial Services

Economy Argentina Australia Austria Belgium Brazil Canada Chile Colombia Denmark Finland France Germany Greece Hong Kong India Indonesia Ireland Italy Japan Korea Luxembourg Malaysia Mexico Netherlands New Zealand Philippines Portugal Singapore South Africa Spain Sweden Switzerland Thailand Turkey United Kingdom United States Uruguay Venezuela

Establishment 0.00 0.00 0.00 0.00 0.00 0.00 0.19 0.05 0.00 0.00 0.00 0.00 0.00 0.00 0.05 0.00 0.00 0.00 0.00 0.00 0.00 0.19 0.00 0.00 0.00 0.10 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.05 0.00 0.00 0.14 0.00

Domestic ongoing operations

Total3

Establishment

0.00 0.00 0.00 0.00 0.01 0.00 0.10 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.01 0.00 0.29 0.05 0.00 0.00 0.00 0.00 0.00

0.04 0.00 0.07 0.00 0.00 0.13 0.19 0.00 0.08 0.00 0.00 0.00 0.05 0.00 0.11 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.04 0.05 0.07 0.00 0.00 0.13 0.19 0.00 0.27 0.00 0.00 0.00

0.03 0.09 0.03 0.03 0.39 0.03 0.27 0.08 0.03 0.03 0.03 0.03 0.03 0.03 0.31 0.37 0.03 0.03 0.03 0.21 0.03 0.38 0.13 0.03 0.03 0.37 0.03 0.13 0.03 0.03 0.03 0.03

0.14 0.00 0.11 0.00 0.00 0.00 0.00 0.00 0.05 0.00 0.00 0.14 0.00

0.24 0.27 0.03 0.03 0.18 0.07

Foreign ongoing operations Total3 0.04 0.03 0.04 0.04 0.12 0.04 0.13 0.15 0.04 0.04 0.04 0.04 0.04 0.07 0.29 0.18 0.04 0.04 0.17 0.22 0.04 0.26 0.04 0.04 0.03 0.16 0.04 0.25 0.16 0.04 0.04 0.05 0.15 0.10 0.04 0.04 0.29 0.10

0.07 0.12 0.07 0.07 0.51 0.07 0.40 0.23 0.07 0.07 0.07 0.07 0.07 0.09 0.60 0.55 0.07 0.07 0.19 0.43 0.07 0.65 0.17 0.07 0.06 0.53 0.07 0.37 0.19 0.07 0.07 0.08 0.39 0.37 0.07 0.06 0.46 0.17

Notes: a) Figures may not add up to total due to rounding off error b) The restrictiveness index scores range from 0 to 1. The higher the score, the greater are the restrictions for an economy Source: Findlay and McGuire (2001)

Table 9 Price Effect Measures for Banking Services

Economy Argentina Australia Austria Belgium Brazil Canada Chile Colombia Denmark Finland France Germany Greece Hong Kong India Indonesia Ireland Italy Japan Korea Luxembourg Malaysia Mexico Netherlands New Zealand Philippines Portugal Singapore South Africa Spain Sweden Switzerland Thailand Turkey United Kingdom United States Uruguay Venezuela

Establishment 0.00 0.00 0.00 0.00 0.00 0.00 15.47 3.54 0.00 0.00 0.00 0.00 0.00 0.00 3.54 0.00 0.00 0.00 0.00 0.00 0.00 15.38 0.00 0.00 0.00 7.32 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.54 0.00 0.00 11.00 0.00

Domestic ongoing operations 0.00 0.00 0.00 0.00 0.87 0.00 7.73 0.00 0.00 0.00 0.00 0.00 0.00 2.65 0.00 5.35 0.00 0.00 10.03 14.93 0.00 6.73 0.00 0.00 0.00 3.66 0.00 8.15 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total3

Foreign ongoing Establishment operations Total3

0.00 0.00 0.00 0.00 0.87 0.00 23.20 3.54 0.00 0.00 0.00 0.00 0.00 2.65 3.54 5.35 0.00 0.00 10.03 14.93 0.00 22.11 0.00 0.00 0.00 10.99 0.00 8.15 0.00 0.00 0.00 0.00 0.00 3.54 0.00 0.00 11.00 0.00

Note: a) Figures may not add up to one due to rounding off error Source: Findlay and McGuire (2001)

2.53 7.08 2.52 2.52 35.06 2.53 22.74 6.47 2.52 2.52 2.52 2.52 2.52 1.97 28.58 32.91 2.52 2.52 2.05 18.15 2.52 35.92 10.48 2.52 2.52 33.28 2.52 10.69 2.64 2.52 2.52

2.81 2.22 2.80 2.80 10.50 2.81 11.26 11.88 2.80 2.80 2.80 2.80 2.80 4.94 26.50 16.42 2.80 2.80 13.22 18.58 2.80 24.69 2.92 2.80 2.18 14.08 2.80 20.76 12.27 2.80 2.80

2.24 20.56 23.12 2.52 1.95 15.35 5.35

3.71 12.50 8.43 2.80 2.80 24.99 8.09

5.34 9.31 5.32 5.32 45.56 5.34 34.00 18.35 5.32 5.32 5.32 5.32 5.32 6.91 55.08 49.33 5.32 5.32 15.26 36.73 5.32 60.61 13.40 5.32 4.69 47.36 5.32 31.45 14.90 5.32 5.32 5.95 33.06 31.54 5.32 4.75 40.34 13.44

International Trade In Infrastructural Services in East Asia

221

Table 10 Summary of Specific GATS Commitments in Telecommunications Services

X

i.

J-

k.

1.

m.

n.

01.

X

X X X

X X X

X

X

X

X

X

X

X

X X X

X X X

X X

X

X X X

X X

X

X

X X

X

X

X

X

X X

59

55

51 57

48 46

65

57

46

b.

c.

d.

e.

China X Indonesia X Korea X

X X X

X X X

X X

X X

X

X

Malaysia Thailand

X X

X

X

X X

X X

X X

Total

69 63

64 59

47

59

Key: a. Voice Telephone Services b. Packet-Switched Data Transmission Services c. Circuit-Switched Data Transmission Services d. Telex Services e. Telegraph Services f. Facsimile Services g. Private Leased Circuit Services h. Electronic Mail i. Voice Mail j . On-line Information and Data Base Retrieval k. Electronic Data Interchange (EDI) 1. Enhanced/Value-Added Facsimile Services m. Code and Protocol Conversion n. On-line Information and/or data processing 01. Terrestrial-based mobile 02. Satellite-based mobile 03. Other, other Source: WTO (1998b)

02. 03.

TO

f.

h.

a.

X 45 43

7—(

OJ

>

o

1.6

3

Not Competitive

> 50%

1.6

1

Not Competitive

< 50%

Economic Globalization and Asia: Essays on Finance, Trade and Taxation

Mediaeval Trade and Finance

Mediaeval Trade and Finance

Globalization for Development: Trade, Finance, Aid, Migration and Policy

Globalization and Agricultural Trade Policy

Essays on Philosophy and Economic Methodology

Globalization and National Economic Welfare

Globalization and Utopia: Critical Essays

Regionalism, Trade And Economic Development in the Asia-Pacific Region

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Asia-pacific Trade and Investment Review, 2008 (Economic and Social Commission for Asia and the Pacific)

Globalization and progressive economic policy

Trade Policy and Economic Welfare

Growth, Trade and Economic Institutions

Finance, intermediaries, and economic development

Finance, Intermediaries, and Economic Development

The banana: empires, trade wars, and globalization

Selected Essays On Economic Policy

Globalization: Encyclopedia of Trade, Labor, and Politics

Trade and Globalization: An Introduction to Regional Trade Agreements

Capitalism Unleashed: Finance, Globalization, and Welfare

Trade Facilitation and Regional Cooperation in Asia

Trade Facilitation and Regional Cooperation in Asia

Writing the World: On Globalization Essays

Basics of Trade Services and Trade Finance Citibank

Commodities, Governance and Economic Development Under Globalization

Capital Markets, Globalization, and Economic Development

International Economic Law, Globalization and Developing Countries

Eli Heckscher, International Trade, and Economic History

Tracking changes in the humanities: essays on finance and education

Economic Globalization and Asia: Essays on Finance, Trade and Taxation

Mediaeval Trade and Finance

Mediaeval Trade and Finance

Globalization for Development: Trade, Finance, Aid, Migration and Policy

Globalization and Agricultural Trade Policy

Essays on Philosophy and Economic Methodology

Globalization and National Economic Welfare

Globalization and Utopia: Critical Essays

Regionalism, Trade And Economic Development in the Asia-Pacific Region

Trade policy and economic welfare

Asia-pacific Trade and Investment Review, 2008 (Economic and Social Commission for Asia and the Pacific)

Globalization and progressive economic policy

Trade Policy and Economic Welfare

Growth, Trade and Economic Institutions

Finance, intermediaries, and economic development

Finance, Intermediaries, and Economic Development

The banana: empires, trade wars, and globalization

Selected Essays On Economic Policy

Globalization: Encyclopedia of Trade, Labor, and Politics

Trade and Globalization: An Introduction to Regional Trade Agreements

Capitalism Unleashed: Finance, Globalization, and Welfare

Trade Facilitation and Regional Cooperation in Asia

Trade Facilitation and Regional Cooperation in Asia

Writing the World: On Globalization Essays

Basics of Trade Services and Trade Finance Citibank

Commodities, Governance and Economic Development Under Globalization

Capital Markets, Globalization, and Economic Development

International Economic Law, Globalization and Developing Countries

Eli Heckscher, International Trade, and Economic History

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