Transcript Financial and Monetary Integration

The ASEAN Economic
Community:
Liberalization of Finance and
Investment
Michael G. Plummer,
The Johns Hopkins University, SAIS-Bologna,
and East-West Center
Presentation to:
Shanghai Forum, 24-27 May, 2007
contents
•
•
•
•
Brief Introduction to the AEC
Financial and Monetary Integration in the
ASEAN and ASEAN+3 Context
Main Pillar of the Third Freedom in the
AEC: the ASEAN Investment Area
Concluding Remarks
AEC and Its Historical Context
AEC Overview
We have little time and this group is expert, so I’ll be brief!
1. ASEAN Integration at first was superficial, and this was
fortunate: direction was wrong (and this is true for certain
existing developing country groups today)
2. “Serious” approaches to integration began late 1980s,
when political exigencies receded
3. AFTA was milestone in regional integration, both due to
its being first FTA in Asia and its “policy signal”
AEC Overview
• 4. AFTA is as much of a investment accord as a trade
accord; ASEAN Investment Area (AIA) and ASEAN
Framework Agreement on Services (AFAS) will complete,
in EU parlance, the second and the most important aspects
of the third “freedoms” of the AEC.
AEC Overview
• ASEAN Economic Community (AEC):
• 1. Proposed in Nov 2002; endorsed at Bali Summit in Oct
2003
• 2. Reasons:
– A. New, comprehensive post-AFTA agenda
– B. Perceived need to deepen integration, given new
regional zeitgeist and potential trade/investment
diversion
– C. Fear of diluting ASEAN cooperation due to bilateral
FTAs of ASEAN partners
AEC Overview
– D. Lessons from Asian Crisis regarding need to link
financial/monetary and trade integration
– E. Perceived success in EU, both in terms of SEA and
implementation of euro
AEC Overview
Key Challenges:
• A. Diversity: coefficient of variation on ASEAN per
capita GDP: 1.62, among highest in world. (EU=0.6, for
example)
• B. Diversity in terms of economic policy (as well as other
social aspects of cooperation), at least with respect to
original and new ASEAN Member Countries.
• C. Makes deeper integration more difficult
• D. Complicates speed of implementation of integration
• E. 10-X?
Financial and Monetary Integration
Financial and Monetary Integration
1. Theoretical and empirical models of economic integration
generally suffer from a separation of trade from monetary
aspects of integration
• Examples of “revealed” problems: EMS 1992;
Mexico/NAFTA 1994; MERCOSUR 2001
2. In Asia, the combination of the FTA trend taking place after
the Crisis has led to a different approach
• Financial and monetary issues have been treated in tandem
with real-sector initiatives, albeit at a lower level
Financial and Monetary Integration
3.There has been no exchange-rate
cooperation in ASEAN per se, but:
a. They all have in common a strong role for
dollar.
b. Since the Crisis, there is a realization of
need to cooperate more in this area (“policy
externalities”).
Finance and Monetary Integration
4. In response to the Asian financial crisis, initial conditions
for greater monetary and financial cooperation in East Asia
have emerged:
• Regional Economic Surveillance (ASEAN Surveillance , ASEAN+3
Economic Review and Policy Dialogue, EMEAP)
• Regional Reserve Pooling (Chiang Mai Initiative)…multilateralize?
• Asian Bond Market Development (ABMI, ABF)
Financial and Monetary Integration
4. Natural question: would closer monetary
integration make sense?
a. Usual tool: Is ASEAN an “Optimum Currency
Area”?
• Literature: Economics generally as good as in EU
case. Problem is political dimension.
• Political ducks, however, are slowly lining up, with
some volatility, obviously.
• Plummer and Wignaraja (2006): FTAs could well
help to endogenously address problem (Frankel
and Rose endogeneity effect in political realm).
Same could be said of AEC.
Finance and Monetary Integration
7. However, most realistic scenarios in the
monetary (and financial) end point to
ASEAN+3, rather than ASEAN per se.
a. In part, this is due to the fact that an
ASEAN currency would be linked to a
“hard” currency anyway.
b. ACU, CMI, etc., all geared toward
ASEAN+3
Correlation of GDP Growth Rates between
Individual Countries
and ASEAN+3: 1980–2005 1
1980 to 1997
1998 - 2005
China, People’s Republic of
-0,41
0,58
Indonesia
-0,23
0.9036*
Japan
-0,14
0.8103*
Korea, Rep. of
0,28
0,53
Lao PDR
-0,39
0,68
Malaysia
-0,20
0.8824*
Philippines
-0,19
0.9496*
Singapore
-0,16
0,69
Thailand
0,46
0.8635*
Viet Nam
-0,24
0,70
Significant at 5% level.
1
ASEAN+3 excludes Brunei, Cambodia, and Myanmar. Regional GDP growth is weighted by gross national income (atlas method, current $).
Sources: IMF World Economic Outlook Database and World Bank World Development Indicators Online.
Correlation of GDP Growth Rates between
Individual Countries and ASEAN5+3:
First Quarter 1994 to Third Quarter 20061
Q11994–Q41997
Q11998–Q32006
China, People’s Republic of
-0,16
0.5117*
Indonesia
0,33
0.7633*
Japan
-0,08
0.7690*
Korea, Rep. of
0,08
0.5312*
Malaysia
0,35
0,81
Philippines
0,33
0.8479*
Singapore
-0,31
0.7322*
Thailand
0,06
0.7971*
Significant at 5% level.
1Regional
GDP growth is weighted by gross national income (atlas method, current $).
Sources: CEIC Database and World Bank World Development Indicators Online.
Financial and Monetary Integration
8. Macroeconomic convergence, coupled with the
four freedoms and “national treatment” in the real
sector in the EU, were deemed necessary for
EMU.
a. How difficult would this be for ASEAN?
Divergence in ASEAN
Macroeconomic Indicators (2005)
Public Sector
Debt
(% of GDP)
Fiscal Balance of
Central Government
(% of GDP)
Inflation Rate
(%)
Interest Rate
(%)
Brunei Darussalam
…
…
0.9 3/
…
Cambodia
…
-3.1
5.8
…
Indonesia
58.3
-0.5
10.5
10.3
Lao PDR
…
-6.0
7.2
…
Malaysia
68.9
-3.8
3
2.9
Myanmar
…
-6.0 3/
4.5 3/
…
Philippines
101.3
-2.7
7.6
7.0
Singapore
…
8.0
0.4
2.3
Thailand
49.4
0.1
4.5
3.3
Viet Nam
40.8
-2.3
8.3
…
ASEAN
Sources: Asia Economic Monitor (December 2006), Asian Development Outlook (2006), and Bloomberg
Financial and Monetary Integration
10. This brings us to our last point in this regard: the
microeconomics of closer monetary and financial
integration.
a. Perils of one-pillar financial systems based on
banking became evident during Crisis.
b. Cooperation could help deepen fixed-income and
securities markets in the region.
c. EU example is, perhaps, pertinent in this regard
The ASEAN Investment Area:
Completing the Third Freedom
AIA
1. AIA set up in October 1998, with facilitation,
liberalization, and promotional pillars.
2. Part of a post-AFTA ASEAN integration agenda.
3. This agenda has been made more urgent due to
various developments in recent years, such as:
AIA
a.
The Asian Crisis
b. The major increase in FTAs globally, and
between ASEAN Members and non-Members
c.
EU Success
d. Successful inclusion of investment provisions in
modern FTAs
e.
Maturing of ASEAN integration (AEC)
AIA
4. The AIA is composed of five sectors
(manufacturing, agriculture, fisheries, quarrying,
mining) and “Services Incidental”.
5. Drawback: Rest of services, which account for
an increasing share of ASEAN’s trade, are
included under AFAS, which borrows a positivelist approach (based on GATS).
World Shares of FDI
1995
1997
1998
2001
2004
2005
United States
17,3
21,1
24,5
19,2
17,2
10,9
EU 25
37,9
29,2
39,8
45,9
30,1
46
Japan
0,01
0,66
0,45
0,75
1,1
0,3
China
11
9,24
6,38
5,63
8,53
7,9
South Korea
0,37
0,54
0,71
0,46
1,09
0,79
East Asia
21,7
19,4
12,2
11,7
18,3
16,8
ASEAN
8,27
7,01
3,13
2,34
3,61
4,05
World ( U S$millio n)
340336
489709
712032
832248
710755
916277
FDI Flows to ASEAN Members
1995
1997
1998
2001
2004
2005
Indonesia
Laos
Malaysia
Myanmar
Philippines
Singapore
Thailand
4346
4678
-356
-3279
1895
6107
88
86
45
24
17
28
5815
6323
2714
554
4624
3965
318
879
683
192
251
72
1577
1261
1718
195
688
1132
11503
13533
7594
15649
14819
20081
2070
3882
7491
3886
1414
4008
Vietnam
TOTAL
1,780
2,587
1,700
1,300
1,610
2,021
28231
34099
22406
19197
25661
38083
AIA
3. Data for 2006 are now being released.
a. Preliminary estimates based on third quarter extrapolation
suggest record nominal flows ($50-60 billion range).
b. Several countries do well, but especially Singapore ($38b),
better than half. Hard to attribute to AIA (e.g., Singapore has
No. 1 environment rank and many FTAs) but not inconsistent.
4.
Intra-regional FDI is low (14 percent of total) and
unbalanced; Singapore alone accounts for 2/3 total (and its
FDI outflows are mostly destined to Malaysia and Thailand).
But this is not over-riding goal of ASEAN integration;
competitiveness is, not FDI nationality.
AIA
5. With respect to the structure of FDI in ASEAN, we
see that in most countries it has changed
substantially over time:
6. The largest sectoral share is in manufactures at the
regional level, followed by financial services and
trade and commerce.
7. Services also accounted for 60% of FDI inflows
(1999-2005).
8. These data underscore the fact that AIA agreement
is not comprehensive and, hence, even a strong
positive effect might be masked empirically.
AIA
• 9. Our own statistical work shows
considerable structural change in
distribution of inward investment in
ASEAN countries since the Crisis, but
increasing complementarity. (The same is
true of trade).
Structural Change of Inward FDI in ASEAN
(SRCC - Pre 1998 and Post 1998)
SRCC
Indonesia
0.69*
Malaysia
0.21
Philippines
0.66*
Singapore
0.47*
Thailand
0.49*
Vietnam
0.70*
Correlation of the structure of FDI in ASEAN Countries
Post-crisis (1998 – 2006)
Indonesia
Indonesia
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
-0.04
-0,75
-0.26
-0.17
0.02
-0.05
-0.06
0.73*
0.80*
0.62*
0.29
-0.03
-0.23
-0.29
0.46
0.72*
0.74*
0.80*
0.62*
0.25
0.37
AIA
10. Is there a clear empirical effect of AIA?
1.
2.
Our econometric modeling finds no such effect, but as noted
earlier, difficult to capture.
a.
Need firm-specific data to capture sectors in which AIA
applies (not available).
a.
Many specification problems in modelling (unlike
trade, FDI is influenced by many quantitative and
qualitative variables)
a.
Dataset is limited: includes up to 2004, whereas ’05
and ’06 (preliminary) were banner years.
Our descriptive analytics tell a mixed story but on the whole
positive (or getting better) for most countries.
AIA
3. AIA itself focuses on liberalization and
facilitation with national treatment as a key
vehicle (for partners and, eventually, nonpartners).
4. But, of course, this is not an easy task (national
treatment is hard...see EU!).
5. Also, AIA is a necessary BUT NOT sufficient
condition for efficient AEC.
a. Example: World Bank, Doing Business 2007.
Policy Diversity in ASEAN
Cambodia
EaseDB
Indonesia
Laos
Malaysia
Philippines Singapore
Thailand
Vietnam
143
135
159
25
126
1
18
104
159
161
73
71
108
11
28
97
60
60
170
4
151
2
33
170
159
131
130
137
113
8
3
25
16
133
36
49
106
8
57
120
124
140
71
38
118
3
46
104
114
60
161
46
63
4
103
75
100
120
148
66
98
12
18
34
118
145
146
81
59
23
44
94
Getting Credit
174
83
173
3
101
7
33
83
Closing a
business
151
136
151
51
147
2
38
116
(overall rank)
Starting a
business
Protecting
Investors
Dealing with
licenses
Paying taxes
Employing
workers
Trading Across
Boarders
Registering
Property
Enforcing
Contracts
Concluding Remarks
conclusion
1. The AEC is an extremely ambitious project.
2015 is not far away!
2. In this paper, we surveyed financial and
monetary integration in ASEAN in light of the
need to support closer integration.
3. We found that, while the region has been active
in proposing initiatives and even implementing
some, they have been modest.
4. Also, ASEAN has mainly relied on ASEAN+3
initiatives in finance, which may make sense.
conclusion
5. On the other hand, national treatment of FDI is
necessary for the completion of the AEC.
6. In this paper, we focused on the AIA and its
progress over time.
7. We would argue that on paper the AIA is taking
the correct approach, but much remains to be
done in terms of implementation and inclusion.
8. Hence, the roadmap is there, but the road will be
relatively bumpy.
Thank You!