Transcript The rise of China: challenges and opportunities for SE Asia

8. Asian regionalism:
opportunities and constraints
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Overview
 Rise of East Asian regional trade
 New production systems and trade networks: production
sharing/fragmentation
 Winners from the new system: skill-intensive economies
 Mixed stories: labor-intensive and resource-abundant
economies
 Future challenges: China as investor in SE Asia;
development implications?
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Asian integration and development
 Rapid growth of China, serving global markets
 Lower trade costs raise final demand and int’l demand for
inputs
 Trade in intermediates (fragmentation): the main stimulus
to intra-Asian trade and skills accumulation
 Also boom in demand for energy & nat res products, with
impacts on resource exporters in Asia and worldwide
 Consequences of Asian integration? Esp. when
comparative advantage includes depletable natural
resources
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 What are “parts and components”?
 Look at this list….
 This is not the world of Heckscher-Ohlin!
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Trade-development stories
 Old: N-S trade based on factor endowment diffs (H-O)
 Vertical integration; in South: labor-intensive exports,
skill-intensive imports
 Strong predictions of trade and distribution, but
empirical weakness and few policy insights
 New: intraindustry trade in intermediates, with
production distributed according to cost
 Infinite number of varieties are produced, not just 2
 Fragmentation possible b/c of lower trade and ‘service’ costs
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From national production to fragmentation
Cost, price
YN
YF
YF
SF
SF’
SN
Q
Q’
Output, inputs
National prodn (N): low service costs, high marginal costs. Fragmented prodn (F):
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higher service costs, lower marginal costs
Fragmentation
 Low service costs = integration across borders (MNCs,
production-sharing contracts)
 Distribute production and assembly operations according
to lowest cost
 National borders don’t matter so long as trade is open
 Analyzing production and trade in a fragmented world:
 Many intermediate goods ,each produced with constant returns to
scale by a competitive firm
 One assembly operation to complete final good
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Chinese growth and market integration
 Focus on manufacturing trade
 Three (or more) countries ranked by skills-labor endowment ratio (kA <
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kB < kC); thus (w/r)A < (w/r)B < (w/r)C
Continuum of manuf. goods 0 ≤ z ≤ 1, ranked by skill intensity
Single natural resource good (y)
Factor mobility assumptions:
 Fixed capital ( = skills) in manufacturing
 Fixed resource stocks & extraction capital in resource sector
 Intersectorally mobile labor, so Ly = L – Lz
We study:
 Initial comp. adv, prod’n & trade, without & with trade costs;
 Effects of unit cost reductions in one economy
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Figure 1: Patterns of specialization with no trade costs: three-country case
X1
X2
X3
A
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B
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
C

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
 Exported
 Imported
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Trade and transport costs
 “Iceberg” assumption: only g < 1 of each export arrives at its
destination
 Country i will import if gci(z; vi) > cj(z; vj), i.e. ci > cj/g
 Some import-competing goods are produced but not
traded
 Less international specialization
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Figure 2: Patterns of specialization with trade costs
X1
X2
X3
X4
X5
X6
X7
A
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 

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B
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 
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C

 
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
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 Exported
 Imported
 Produced but not traded
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Figure 3: Effects of unit cost reductions in country B
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Comparative changes in production and trade: summary
X1
X2
X3
X4
X5
X6
X7
A
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B
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C
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Initial case with trade costs
X1
X2
X3
X4
X5
X6
X7
A
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

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B
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
C

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Exporte d
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Imported

Produced but not traded
After unit cost reductions in country B
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Consequences of Asian regional intgrtn
 Growth in B’s exports and its imports of manuf inputs and nat res
 Upper-middle-income economy (“C”):
 Loses comp. adv. in its most L-intensive sectors
 Manufactured exports become more skill-intensive
 Res. boom raises w/r, reinforcing rise in skill-intensity of z
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E.g. Thailand, Malaysia: rise of fragmentation trade
 Low-income economy (“A”):
 Loses comp. adv. in its most skill-intensive sectors
 But res. boom raises w/r, reducing comp. adv. in its most L-
intensive manufactures (cf. Dutch disease)
 E.g. Indonesia
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Does Indonesia’s resource wealth
prevent industrialization?
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Overview
 Skills-based (SB) exports and development
 What determines growth of SB exports? International
evidence
 Indonesia’s record in SB export growth
 Through time
 In regional perspective
 Support from firm-level data (quick review)
 Some policy implications
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Skills-based exports & economic growth
 ‘Moving up’ from basic manufactures to skills-based (SB)
products supports economic growth
 Elastic foreign demand, relatively stable prices
 Strong complementarities with supply of ‘high-powered’
investments (FDI, skills/human capital)
 Intra-industry spillovers: factor productivity; ‘cost discovery’
 For low-mid income countries, higher “sophistication level”
of exports assoc. with faster GDP growth
 10% incr. in sophistication level of exports raises GDP growth
by 0.35 – 0.37% (Hausmann, Hwang & Rodrik 2007).
 Expansion of skills-based exports has been a defining
characteristic of E & SE Asian growth successes
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SB exports: international evidence
 Exports from dev. countries are > 22% world trade in SB
products, but only a few countries participate in this trade
 What determines success as an exporter of SB products?
 We hypothesize:
Δ(SB/total exports) = ƒ(FDI+, Human cap.+, Nat res. wealth-,
Inst’l strength+, Infrastructure+, Asia-Pacific+)
 UN Comtrade, net export data: 103 countries, 1985-2005 in
5-year intervals
 Estimation method: panel data regression with region and
time period controls
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See paper for complete results
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Model overpredicts Indonesian SB exports
Coxhead and Li (2008): cross country counterfactual highlights FDI and H
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Indonesia and its neighbors: structure of
export growth
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Indonesia: Structure of merchandise exports 1979-2007
High-skill mfg
Med-skill mfg
Low-skill mfg
Chemicals
Semi-manufactures
Veg. oils
Agriculture and natural resources
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Why are Indonesia’s SB exports low?
 Initial conditions: resource wealth, human and other
capital endowments
 1998-2001: krismon/kristal and transition to democracy
 External challenges: rise of China/India
 “New” resource curse threat
 Erosion of comparative advantage in low-tech mfg
 Policy-related reasons
 Poor performance on FDI and human capital
 Loss of momentum on trade policy reforms
 High transactions costs in shipping, customs, labor markets
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Initial conditions: FDI and H endowments
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Trade, FDI and growth: micro evidence
 Globally: “What you export matters”
 Positive productivity and growth linkages from SB goods in cross-
country product line data (Hausmann, Hwang & Rodrik 2007)
 Studies using Indonesian firm-level data
 Positive association between exports and firm-level productivity
growth (Sjoholm 1999; Blalock and Gertler 2004)
 Foreign-invested firms hire better-educated workers, and
 For given education, they pay substantial wage premia to both blue
collar and white collar workers (Lipsey and Sjoholm 2004)
 Foreign-invested firms are more productive and generate intraindustry spillovers— when technologies used are similar to local
firms (Takii 2005)
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Implications for development & policy
 SB production is a source of ‘high-powered’ growth
 Confers productivity externalities
 Stimulates other investments
 Diversifies export base (reduces vulnerability)
 SB exports are a vaccine for Dutch Disease?
 But progress in SB export growth requires
 Low trade costs (re: tariffs and transport costs)
 Efficient and flexible labor markets
 Positive FDI environment
 Support for risk-taking entrepreneurs
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Policy reasons: inefficiency (ranking, N=181)
Ease of doing business
SGP
THA
MYS
VIE
IDN
PHP
Starting a business
10
44
75
108
171
155
Employing workers
1
56
48
90
157
126
Getting credit
5
68
1
43
109
123
Protecting investors
2
11
4
170
53
126
Enforcing contracts
14
25
59
42
140
114
Overall ranking
1
13
20
92
129
140
 Data from Athukorala and Hill 2010 APEL Table 4
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Average time to clear exports through customs (days)
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Cost of business start-up procedures (% of GNI per capita)
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Rigidity of employment index (0=less rigid to 100=more rigid)
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Any policy implications?
 Reduce trade, transport and transactions costs for all trade-
oriented firms
 Relatively speaking, support trade-oriented firms and firms
with foreign investments or partnerships
 FDI raises productivity of labor in general
 Productivity benefits spill over to domestic firms
 Wage premium means workers have incentives to train
 Relatively speaking, support firms producing more highly
differentiated products
 Niches can be identified
 Demand is elastic
 Support innovators, but not followers
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Tomorrow
 Labor mobility and human capital
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