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Study on Assessing the Economics of the AEC

Study on Assessing the Economics of the AEC. Presentation by Siow Yue CHIA ASEAN HLTF Meeting Kuala Lumpur, 19 August 2008. Presentation Sequence. Structure of this Study Why the AEC? Emerging trends and challenges facing ASEAN ASEAN’s economic, trade and investment performance

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Study on Assessing the Economics of the AEC

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  1. Study on Assessing the Economics of the AEC Presentation by Siow Yue CHIA ASEAN HLTF Meeting Kuala Lumpur, 19 August 2008

  2. Presentation Sequence • Structure of this Study • Why the AEC? • Emerging trends and challenges facing ASEAN • ASEAN’s economic, trade and investment performance • Benefits of the AEC

  3. Structure of this Study Realizing the AEC: a comprehensive assessment The chapters correspond to the different elements in the AEC Blueprint • Chp1: Building on the Blueprint: An Overview of the Issues • Chp2: Regional Market for Goods, Services and Labor Mobility • Chp3: Competitive Economic Region: Competition Policy, Infrastructure, Energy, ICT • Chp4: Investment and Capital Flows • Chp5: Equitable Economic Development • Chp6: Integration into the Global Economy

  4. Emerging Trends and Challenges Facing ASEAN…1 • New global and regional competitive environment, particularly with rise of China and India • AEC could enable ASEAN countries to regain and sustain their economic dynamism and improve their international competitiveness • AEC could consolidate ASEAN’s economic position and slowdown the shift in economic gravity towards north Asia • International competitiveness depends not only on trade and investment liberalizations but also on within-border economic reforms to improve efficiency • Market growth is shifting from the mature economies of the West (North America and Europe) to the emerging dynamic economies of Asia • Need to use the AEC as an investment magnet and nest production networks in ASEAN

  5. Emerging Trends and Challenges Facing ASEAN…2 • Plurilateral and bilateral FTA trends pose a challenge to ASEAN solidarity • Need to consolidate ASEAN through AEC in the face of centrifugal forces • Need to establish ASEAN as an FTA hub. Need AEC as negotiating leverage • Need to work towards a East Asia FTA • The development gap hinders ASEAN social cohesion • Need for more inclusive regional and national development strategies • Need for regional help to the less developed by way of FDI, technology transfer, human resource development, infrastructure development, and transfer of learning experiences and best practices

  6. Emerging Trends and Challenges Facing ASEAN…3 • Delivering on regional public goods with increased interdependence among countries • Need for regional financial resilience and stability • Need for cooperative action in the areas of terrorism and security, climate change, cross-border environmental deterioration, natural disasters, health hazards • Need for development of trans-border infrastructure and logistics • Need for stronger and united voice of ASEAN in various international forums where decisions and actions affect the welfare of ASEAN

  7. ASEAN’s Economic, Trade and Investment Performance in Recent Years…1 • ASEAN is among the world’s most globalised regions. (see Table) Hence economic performance is closely linked to the health of the global economy and global trading system • Economic growth – ASEAN6 countries have not fully recovered their pre-crisis growth trajectory. CLMV countries have been recording higher growth rates (albeit from low levels), with Vietnam being the most dynamic. Emerging challenges of global economic slowdown, rising inflation from oil and commodity prices, misaligned exchange rates.

  8. ASEAN’s Economic, Trade and Investment Performance in Recent Years…2 • Production networks and fragmented trade increasingly characterize the manufacturing sectors. Growing dominance of electronics and intra-industry trade. The less developed CLMV have to be integrated into the regional production networks and supply chains. • Trade performance • Empirical studies show ASEAN’s export performance have not been adversely affected by the rise of China and India so far. But China is competing over a growing range of exports • Intra-ASEAN trade has been rising but its share of ASEAN total trade remains at about 25%, with wide inter-country variations (see figure). However, for outward oriented ASEAN, trade share is not indicative of integration success.

  9. Intra-ASEAN Trade Shares of Member Countries(% of total trade, 1980-2006)

  10. ASEAN’s Economic, Trade and Investment Performance in Recent Years…3 • ASEAN is at risk of losing its attractiveness for FDI with the rise of China, India and East-Central Europe • World Bank’s Doing Business shows the poor rankings of some ASEAN countries • ASEAN is dependent on FDI from Japan, US and EU but these investors are increasingly moving to China and India • Wide development gap exists and this prevents ASEAN from fully realizing the potentials of an integrated regional market of 550 million people

  11. Benefits of the AEC…1 1. Free Flows of Goods • Benefits –enlarged export market access, increased participation in production networks and value chains; improved competitiveness through economies of scale and lower business transaction costs; cheaper imports of capital goods, intermediate inputs and consumer goods • Winners – businesses including local SMEs through market expansion and improved competitiveness; workers of expanding businesses; increased government revenue from expanding economy; consumers accessing cheaper, wider range of goods • Losers –uncompetitive businesses particularly SMEs and farmers; loss of employment in these businesses; loss of government import tariff revenue

  12. Benefits of the AEC …2 2. Free Flows of Services • Benefits –enlarged services exports; improved services competitiveness and efficiency and contribute to competitiveness of goods; MRAs improve service delivery by foreign service suppliers. • Winners – businesses including local SMEs through market expansion and improved competitiveness; workers of expanding services; increased government revenue from expanding services sectors; consumers accessing cheaper range of services under various modes. • Losers –uncompetitive services, particularly SMEs; loss of employment in these services and competition from foreign service suppliers.

  13. Benefits of the AEC …3 3. Free Flows of Investment • Benefits –larger and better quality inflows of FDI raise investment and output; FDI linkage to global and regional production networks; FDI-local SME linkage; FDI-trade linkage; FDI-productivity linkage; FDI and technology transfer; FDI and skills development; introduction of new products, services and processes • Winners – local businesses including SMEs benefit through joint ventures and link-ups, learning from best management practices, easier access to inputs and technology; “piggy-back” MNCs in exporting; new employment opportunities and skills acquisition for local workers; increased government tax revenue • Losers –local businesses unable to compete with FDI, particularly local SMEs; loss of employment in these local businesses

  14. Benefits of the AEC …4 4. Freer Flows of Capital • Benefits from deepening capital markets; financial services liberalization and capital account liberalization • However, as the Asian financial crisis clearly demonstrates, financial and capital account liberalization needs strong financial systems and prudential regulations to be in place 5. Free Flows of Skilled Labor • Benefits from more efficient allocation of skilled labor; improves attraction of ASEAN for FDI with removal of skills constraint; leads to more MRAs; foster social integration; help build ASEAN Community from the ground-up. • Winners –businesses in host countries, foreign skilled labor, as well as local labor complementary to foreign skilled labor • Losers –increased competition and wage suppression for local skilled labor; short-term brain drain from source countries

  15. Benefits of the AEC …5 6. Towards Highly Competitive Economic Region • Benefits –a competitive framework for exchange and distribution positively affects business efficiency and income distribution; better IPR facilitates technology transfer, protection and development of indigenous technologies, and encourage local innovation; infrastructure development links the countries of ASEAN to promote trade in goods and movement of people and narrows the development gap • Winners –businesses, workers, consumers, R&D firms and persons, and the less developed countries with inadequate infrastructure • Losers –monopolists and oligopolists (including state owned enterprises), the piracy industry

  16. Benefits of the AEC …6 7. Towards a Region of Equitable Economic Development • Benefits – narrowing the development gap is necessary for building goodwill and social cohesion in the region; accelerate economic development of the CLMV; promote development of SMEs • Winners –the CLMV countries, the less developed areas within ASEAN countries, and SMEs 8. Towards Full Integration into the Global Economy • Benefits – Improve international competitiveness, access to markets and resources, integrate into global supply networks, international technical assistance for CLMV, maximising benefits from ASEAN Plus agreements • Winners – businesses and CLMV countries

  17. Benefits of the AEC …7 Summary of Benefits to Stakeholders • For ASEAN ---AEC projects ASEAN interests in regional and international forums through One Voice; enhance the foundation of regional stability for a more prosperous future • For the national economy --- faster and more dynamic economic growth; improved international competitiveness and in meeting the challenges of globalization; strengthened macroeconomic stability • Businesses, including SMEs --- unified and larger market with reduced transaction costs lead to economies of scale, greater efficiency and competitiveness; positive linkages between FDI and SMEs; protection of IPR encourages technology transfer and local innovation; infrastructure and logistics development improve spatial connectivity and business links • Workers and professionals ---employment gains from expanding economy, skills training and upgrading, MRAs improve mobility of professionals • Consumers --- access to cheaper and wider range of imports and service suppliers, improved consumer protection

  18. Benefits of the AEC …8 Quantification of AEC Benefits • Empirical studies of other groupings such as the EU show that the gains from different aspects of regional integration could be substantial • CGE models that include liberalization of trade in goods and services and the dynamic effects of FDI show broader groupings (such as ASEAN+3 and ASEAN+6) and deeper integration (including goods, services, investment, trade facilitation) produce more beneficial effects. These models have so far not been able to incorporate the effects of all the “within-border” reforms • Preliminary data analysis for this Study suggests that ASEAN can expect a large increase of about 8-10% of GDP from the AEC. This will be better than double the effect of AFTA alone

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