Transcript a Global Challenge by David Vines [PPT 235.00KB]

Asia-Pacific Regional Integration: a
Global Challenge
David Vines
University of Oxford and ANU
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Introduction
A world in which multilateralism is in difficulty
There is much discussion in Asia of the extent to
which the European example can be taken as a
model for Asia. How far is this true?
The EEC and the European “model” of regional
integration was founded in very different economic
conditions than those which exist in the Asia Pacfic
Region today.
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Huge Growth Prospects
The emergence of large scale flows of private sector capital
across international frontiers
Size, Complexity and the Absence of an EU-like political
solution
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Features of European
Regional Integration
Initial reasons were political
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The fusing of the coal and steel industries of France and Germany in the
wake of the Second World War as a bulwark against war.
The Treaty of Rome set the goal of “an ever closer union of the peoples of
Europe”
Four Features of the Economic Model
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The creation of a ‘Common Market’, which led in the 1980s to
the agenda for a Single Internal Market – an agenda of deep
integration – of goods services and labour
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The Common Agricultural Policy
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Monetary Union in the 1990s
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a political agenda of the support of agriculture and an economic agenda of
ensuring that the agricultural sector had a rising real income to stimulate
demand for industrial goods.
partly an outcome of an era in which there was much less confidence in the
ability to use monetary policy to give good macroeconomic outcomes
Financial Stability kept as a national concern, rather than being
integrated with the tasks of the ECB in the monetary union
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Macroeconomic Projections: the Asia
Pacific Region
How might the world – and the Asian region - might continue to
grow in the next quarter of a century. Maddison (2002, 2006)
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Population will continue to grow fast in Asia (and Africa), but
not at all in Europe. It will grow at an intermediate rate in the
US, (partly driven by immigration).
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The proportion of workers engaged in non-agricultural activity will grow
much faster in emerging market economies than the growth of their
population. For example, in China alone, the urban workforce is growing by
more than twenty million a year, rate of growth roughly four or five times
the rate of growth of the Chinese population.
The accumulation of physical capital has been fundamentally
important in past growth, this will continue.
Linked to the acceleration of technical progress, and to an
increase in human capital, in a way which will continue.
Two striking consequences.
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First, we are likely to see both a very rapid increase in GDP in the
period to 2030 – according to Maddison world GDP is likely to be nearly
2.5 times as large in 2030 as it was in 2001. This is accumulation a la
both the Solow model and the Lewis model.
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Second we will see an extraordinary increase in the relative economic
size of the periphery in the world.
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In 1990, at the end of the Cold War, GDP in Western Europe was
about the same size as the US the US.
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Japan and China were each about a third as big as the US, India
was tiny
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The rest of Asia was about half as big as the US. By 2030 there will
again be two major powers, but they will be the US and China.
The rest of Asia (other than India) will, together, be just as big, or
bigger, than either of these big powers, and much bigger than
Western Europe. India will be half as big as China and coming up
fast. Japan will be tiny.
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If well managed, this will be another golden age.
This will, inevitably, produce a multi-polar and multi-lateral
world, unlike that in the 1990s in which the hegemonic size, and
thus power, of the US was so pronounced, and much more like
that in the late 1940s, immediately after World War 2.
But if it is to work out, significant adjustments to the changes in
relative size will be necessary.
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Trade Aspects of AsiaPacific Growth
This Solow-Lewis miracle has strong trade implications
 Exporting commoditised goods into the international market
place and importing high quality capital goods to enable
countries to accumulate capital and develop. This process of
integration into the world’s economy was underway long before
the more recent and wider pattern of “globalisation” was in
train.
 Companies (initially led by multinationals) to diversify and
fragment production and build up marketing and supply chain
networks to exploit economies of scale from division of labour
and specialisation across international boundaries.
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Thirdly, increased globalisation itself, reflected particularly in the
growth of private sector capital flows since the mid-1980 and
the introduction of previously excluded countries (particularly
China) to the framework of the international market economy.
This has encouraged Asian economies to liberalise in order to
take advantage of potential gains from FDI and capital flows.
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Implications for Regional
Trade Integration
5.1 Asia Pacific Interests in an Open International System
5.2 There are advantages of Unilateral Liberalisation.
Optimal tariff argument
Political economy of using liberalisation elsewhere as argument to support
liberalisation at home
5.3 Open Regionalism as an Alternative Strategy
Concerted MFN liberalisation as a strategy
Momentum of the 1990s and Bogor Declaration (1995):
experience shows collective action difficulties resolvable
Free rider problem – outsiders hold out
US always saw this problem strategically:
At APEC meetings it was agreed that an FTA this was not what APEC
would do.
As a result the US and its neighbours thus set off towards bilateral
discriminatory arrangements.
5.4
Western Pacific FTAs:
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Singapore-Japan; Singapore-New Zealand; Singapore-Australia;
Singapore-United States; Australia-Thailand; Australia-US, and ChinaHong Kong.
None of these is of huge importance in itself, each adds new layers of
complexity.
More importantly, each adds credibility and momentum to the drift
towards discriminatory trade in the western Pacific and globally.
At recent ASEAN heads of government meetings and ministerial
meetings involving China, Japan, Korea, and India, announcements
have been made that ASEAN would negotiate separate FTAs with each
of these partners. Negotiations are proceeding on Thai-US, JapanKorea, Australia-China, New Zealand-China, Australia-NZ-ASEAN, from
early 2006 Korea-United States, from early 2007 Japan-Australia and
several other bilateral FTAs.
Following much talk and some action on single-country and ASEAN
bilateral free trade agreements, discussion of an East Asian FTA has
risen in profile and credibility.
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5.5
Evenett: a self-reinforcing domino tendency.
Typically, the new FTAs breach WTO rules in one way or another.
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Generally there are excessively long transition periods, or exclusion of
significant areas of potential trade, or -- in the case of the ChinaASEAN “early harvest” -- the beginnings of trade discrimination in
particular areas before there is a plan and a schedule for movement to
free trade in substantially all items..
Different rules of origin from all other existing FTAs, and every one of the
new FTAs still under negotiation is also to have different rules of origin
from existing FTAs.
These moves in the Asia Pacific region are creating obvious and major
systemic risks for the international trading regime, risks which are perhaps
especially large for developing, moderately sized and small economies.
There are serious risks for all Asia Pacific economies. But there are also
such risks for Europe, and, indeed for the US itself.
The US Strategy: Competitive Discriminatory Liberalisation
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Macro and Financial Aspects of Asia
Pacific Growth
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The Solow Lewis miracle also has strong
macro and financiaql implications
During the 1990s the Asian miracle countries
liberalised international capital flows and integrated
with the international capital. Many emerging East
Asian countries clearly benefited from the
liberalisation and globalisation of financial markets.
From the mid-1980s to the mid-1990s, large inflows
of capital, particularly long term capital such as FDI
helped finance the region’s rapid economic growth.
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An under-developed financial system and over-protected financial
sector in some Asian economies meant that the private sector had
to rely on borrowing, rather than equity issuance, to raise
investment funds. As a result, firms became highly leveraged, but
banks continued to lend because they were underpinned by implicit
government guarantees.
 When growth slowed, as it first did in Thailand in 1996, these
banks were exposed to the inability of borrowers to repay
loans.
In addition, countries had received large inflows of capital in the
financial and corporate sectors, particularly in the form of unhedged short-term capital due to relatively high domestic interest
rates with de facto US dollar-pegged exchange rates. As a result,
the ratio of short term external debt to foreign exchange reserves
rose dramatically and the exposure to risk of “double mismatch”
(maturity risk and currency risk) and when market perceptions
changed in 1997 there was a sudden outflow of capital and
consequent large downward pressures on currencies.
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A further difficulty came, as so many times before, from the
existence of fixed exchange-rate systems, but with a new twist.
Banks financed much of their domestic corporate lending by
borrowing in foreign exchange from abroad, often at shorter
maturities than those employed when they lent onwards in
domestic currency. Very little of this borrowing was hedged as a
result of the implicit guarantee on the exchange rate.
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As noted the financial sector was already in difficulty after the
initial slow down in growth in 1996. Currencies fell in mid-to-late
1997 because of foreign investors’ concerns about these
difficulties; as a consequence, widespread bankruptcies and
potential bank failures loomed because of the unhedged foreigncurrency obligations. Fear grew that fiscal systems would be unable
to bear the cost of large-scale bank rescues.
Inadequacies of IMF Rescue
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Dissatisfaction with the IMF’s practice in crisis management
continues to cast a long shadow over the Fund’s relations with
many emerging-market economies, may have regional
consequences
The Fund has developed a detailed debt sustainability
framework and complemented its traditional analysis of financial
flows with a ‘balance sheet approach’ to analysing stock
imbalances, so as to enable it to understand the financial
vulnerabilities of countries. This tool is designed to help Fund
staff draw a clearer distinction between liquidity crises and
solvency cases.
The crises threw the problem of moral hazard arising from IMF
lending into sharp relief. The need to better balance debtor
moral hazard and creditor moral hazard is one of the key
challenges now facing the Fund in the design of its lending
facilities and its accompanying policy responses to crises.
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Macro and Financial Implications for
Regional Integration
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Low investment and slow growth since crisis
A number of East Asian countries, over the ten years since the
East Asian crisis, have accumulated in excess of a trillion US
dollars of reserves. This massive reserve accumulation reflects a
persistent excess of saving over investment across these
economies, which may, at least in part, represent a conscious
choice to amass reserves as a form of self-insurance against
future crises.
These countries have gone about a pooling of some of these
reserves into a common fund, a process which began in 2000
when ASEAN, Japan, China and the Republic of Korea agreed to
set up a bilateral currency swap scheme known as the Chiang
Mai Initiative.
This could help to deal with original sin. And…
Taking this step would require difficult decisions by
these countries, in order to make surveillance
between the pool’s members effective and
enforceable.
*Such a common pool of reserves might also
create its own form of moral hazard, if it were to
encourage countries to take excessive risks with
foreign borrowing
*Could responsibility for international financial
stability be internationalised when this has not
proved possible in much more politically integrated
Europe.
8 Trade Macro and Finance:
Implications for Regional Strategy
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Inexorable rise of China, importance of
Chinese Japanese relationship, no obvious
regional agenda, as there was in Europe
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Trade much more global than in the early days of
the EU – Asia-wide FTA hard to contemplate:
strong interest in progress in WTO and difficulties
for regional FTAs
No prospect of monetary union
Difficult questions ahead for Chiang Mai initiative
on financial cooperation