ASEAN Integration: Economic and Employment Effects · ASEAN Integration: Economic and Employment...

ASEAN Integration: Economic and Employment Effects

Ramon Clarete BSP UP Centennial Professor of Foreign Trade

School of Economics University of the Philippines

The ASEAN Economic Community

Sing

le M

arke

t and

Pro

duct

ion

Base

• Free flow of goods

• Free flow of services

• Free flow of investment

• Freer flow of capital

• Free flow of skilled labor

•Priority integration sectors

• Food, agriculture and forestry Co

mpe

titiv

e Ec

onom

ic R

egio

n • Competition policy

• Consumer protection

• Intellectual property rights

• Infrastructure development

• Taxation • e-Commerce

Equi

tabl

e Ec

onom

ic

Deve

lopm

ent • Small and

medium enterprise development

• Initiatives for ASEAN integration

Inte

grat

ion

to th

e G

loba

l Ec

onom

y • Coherent approach towards external economic relations

• Enhanced participation in global supply networks

The AEC will establish ASEAN as a single market and production base making ASEAN more dynamic and competitive. It envisages the following inter-related and mutually reinforcing key characteristics:

Creeping AEC Vision

• ASEAN Summit 2015 – formalization of the AEC

• Creeping vision – Started with AFTA in the 1990s

• 99.6% of all tariff lines were already brought down to zero since 2010

• Of 400+ AEC obligations, 84-89% is accomplished (PH: 87+%)

ASEAN Profile ASEAN China India Japan EU Nominal GDP (US$ billions) 5 2,351 8,358 1,875 5,960 16,604 GDP per capita (US$) 5 3,851 6,070 1,516 46,838 32,795 Real GDP growth5 5.40% 7.70% 3.20% 2.00% -0.40% 5-year CAGR on GDP growth 6 8.70% 13% 7.70% 4.20% -1.90% Total population (millions) 5 610 1,377 1,237 127 506 Median age (years)7 28 36 27 45 41 Inward FDI flows ( US$ billions)5 117.5 121.1 24.2 1.7 216

Outward FDI flows ( US$ billions)5 53.83 87.8 8.5 122.6 237.9

5 UNCTAD Statistics Database, 2012 http://unctad.org/en/pages/Statistics.aspx 6 UNCTAD Statistics Database, 2008 - 2012 http://unctad.org/en/pages/Statistics.aspx 7 NationMaster Statistics Database, 2012 http://www.nationmaster.com/country-info/stats/People/Median-age/Total

Challenges

• Remaining 15 or so % are more difficult to accomplish – e.g. Philippines – FDI liberalization, competition

policy, etc. – Unimplemented measures are region-wide

commitments, e.g. ASEAN Single Window

Views from Private Stakeholders

• Some private stakeholders in A&F are concerned, but others are hopeful.

• Areas for improvement: – Lower cost of power,

transportation, production inputs, marketing, and market information

– Reduce cost of doing business

“The government needs to provide effective and intense support to local producers in order to be better prepared for the integration and reap the corresponding benefits.”

AEC Tariff Reforms • Establish a free trade area

in ASEAN. – As of now 99% of ASEAN

6 countries’ tariffs are 0. – Only 68 % of CLMV tariffs

are zero, but most o these will be zero in 2018.

• Philippines by next year will have all its ASEAN preferential tariffs at no more than 5%, except rice which remains at 35%.

0

2

4

6

8

10

12

2001 2003 2005 2008

Brunei D

Cambodia

Indonesia

Lao PDR

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

How Has AFTA Affected Ph? • Assessment tool: GTAP Model,

• comprises 23 countries/regions and 40 industries, • ASEAN member states as separate countries, except Lao

PDR and Cambodia

• GTAP database comprises 137 countries and 57 industries

• Solution technique: GEMPACK

23 Regions

• Indonesia • Cambodia & Lao PDR • Malaysia • Philippines • Singapore • Thailand • Vietnam • Rest of Southeast Asia • China • Hong Kong and Taiwan • Japan • South Korea

• India • Rest of South Asia • Australia and New zealand • Canada • United States • Brazil • Rest of North and South Americas • European Union (27) • Middle East and North Africa • Rest of Africa • Rest of the World

40 Sectors 1. paddy rice 2. cereal 3. oil seeds 4. sugar cane and bee 5. vegetables and fruit 6. other crops 7. other animal products 8. cattle 9. fishery 10. forestry 11. mining 12. oil and gas 13. meat preparations 14. dairy 15. vegetable oils 16. processed rice 17. milled sugar 18. other food predcuts 19. beverages and tobacco 20. textile and garments

21. wood products 22. paper and publishing 23. leather 24. chemicals, rubber and plastic 25. petroleum and coal 26. non-metal mineral products 27. metal products 28. machinery products 29. electrical products 30. transport equipment 31. other manufacturing 32. construction 33. fuel, electricity and water 34. transport services 35. trade services 36. communications 37. financial intermediary 38. public administration, education and health 39. real estate and commercial services 40. rest of services

Production Effects

Sectors Base Value Bln. Pesos %

1 Paddy rice 142.36 -4.58 2 Cereal 56.64 -0.4 3 Oil seeds 35.84 -1.02

4 Sugar cane and beet 25.48 -1.83

5 Vegetables and fruits 140.72 -0.18

6 Other crops 43.96 15.13

7 Other animal products 227.96 0.17

8 Cattle 28.12 0.35 9 Fishery 180.08 -0.03

10 Forestry 14.52 -1.15

Production Effects

Sectors Base Value Bln. Pesos %

11 Mining 92.52 -0.92

12 Oil and gas 13 -0.91

13 Meat preparations 278.56 0.06

14 Dairy 52.56 0.45

15 Vegetable oils 83.52 -1.82

16 Processed rice 141.28 -4.78

17 Milled sugar 43.8 -1.95

18 Other food preparations 430.64 -0.17

19 Beverages and tobacco 130 4.62

20 Textile and garments 278.56 -0.97

Production Effects

Sectors Base Value Bln. Pesos %

21 Wood products 86.28 -1.63

22 Paper and publishing 96.28 0.07

23 Leather 30.28 -0.94

24 Chemicals, rubber and plastic 327.6 -0.86

25 Petroleum and coal 260.56 0.3

26 Non-metal mineral products 87.28 0.28

27 Metal products 341.76 0.9

28 Machinery products 438.24 -1.36

29 Electrical products 1912.04 -1.56

30 Transport equipment 246.32 16.54

Production Effects

Sectors Base Value Bln. Pesos %

31 Other manufacturing 117.32 -0.62

32 Construction 388.4 1.29

33 Fuel, electricity and water 388.4 0

34 Transport services 585.64 0.08

35 Trade 1232.68 0.14

36 Communications 213.92 -0.12

37 Financial intermediary 396.48 0.11

38 Public administration, education and health 812.72 -0.05

39 Real estate and commercial services 724.72 -0.32

40 Rest of services 217.48 -0.16

Trade Effects

Sectors Exports %

Imports %

1 Paddy rice 9.09 -6.77 2 Cereal 0.4 0.32 3 Oil seeds -0.59 0.47

4 Sugar cane and beet 0.5 -0.55

5 Vegetables and fruits -0.81 1.26

6 Other crops 280.79 15.29

7 Other animal products -1.01 0.58

8 Cattle -3.52 1.92 9 Fishery -0.63 3.3

10 Forestry -2.39 0.15

Trade Effects

Sectors Exports %

Imports %

11 Mining -0.82 1 12 Oil and gas 2.9 0.34 13 Meat preparations 9.82 2.16

14 Dairy 7.47 1.19

15 Vegetable oils -1.22 2.02

16 Processed rice 3.96 20.62

17 Milled sugar 1.58 36.97

18 Other food preparations 0.86 2.8

19 Beverages and tobacco 76.79 1.35

20 Textile and garments -1.11 0.97

Trade Effects

Sectors Exports %

Imports %

21 Wood products -1.38 3.8

22 Paper and publishing 3.1 1.42

23 Leather -0.27 2.13

24 Chemicals, rubber and plastic -0.48 0.99

25 Petroleum and coal 4.23 0.88

26 Non-metal mineral products 0.5 2.95

27 Metal products 1 2.14

28 Machinery products -1.55 1.74

29 Electrical products -1.59 -0.96

30 Transport equipment 47.87 6.76

Trade Effects

Sectors Exports %

Imports %

31 Other manufacturing -2.07 2.28

32 Construction -1.46 2.05

33 Fuel, electricity and water -2.53 1.26

34 Transport services -0.43 0.46

35 Trade -1.83 1.08

36 Communications -1.98 1.06

37 Financial intermediary -2.26 1.28

38 Public administration, education and health -2.16 1.15

39 Real estate and commercial services -2.29 0.96

40 Rest of services -1.89 0.08

Economic Indicators

Country/Region Trade Surplus GDP at constant prices Efficiency gain

1 Indonesia -274.38 80.09 64.87 2 Cambodia & Lao PDR -217.34 24.58 182.27 3 Malaysia -667.76 270.06 430.37 4 Philippines -239.22 74.92 248.97 5 Singapore 795.43 65.89 2389.27 6 Thailand -1573.16 333.36 210.79 7 Vietnam -198.21 15.02 24.31 8 Rest of Southeast Asia -54.73 49.16 76.41 9 China -19.96 -57.25 -421.73 10 Hong Kong and Taiwan -9.17 -20.06 -191.83

Economic Indicators Country/Region Trade

Surplus GDP at

constant prices Efficiency

gain

11 Japan 684.34 -164 -827.83 12 South Korea 54.04 -116.88 -283.99 13 India 27.31 -104.5 -328.49 14 Rest of South Asia 17.94 -6.03 -32.8

15 Australia and New Zealand 66.56 -23.44 -101.61

16 Canada 52.34 -0.13 -15.45

17 United States of America 663.63 -36 -601.56

18 Brazil 46.73 -11.63 -47.33

19 Rest of North and South Americas 46.8 12.5 36.62

20 European Union 27 585.12 -106 -767.54

21 Middle East and North Africa 129.74 -22.25 183

22 Rest of Africa 22.25 -5.5 -16.45 23 Rest of the World 61.22 58 111

Employment Effects

Sectors Skilled Low Skilled

1 Paddy rice -5.01 -5.03 2 Cereal -0.47 -0.5 3 Oil seeds -1.15 -1.18

4 Sugar cane and beet -2.03 -2.06

5 Vegetables and fruits -0.23 -0.26 6 Other crops 16.57 16.54

7 Other animal products 0.15 0.12 8 Cattle 0.34 0.31 9 Fishery -0.05 -0.08

10 Forestry -1.17 -1.19

Employment Effects

Sectors Skilled Low Skilled

11 Mining -0.94 -0.96 12 Oil and gas -1.16 -1.19 13 Meat preparations 0.14 0.02

14 Dairy 0.53 0.40

15 Vegetable oils -1.75 -1.87

16 Processed rice -4.71 -4.83

17 Milled sugar -1.88 -2.00

18 Other food preparations -0.09 -0.22 19 Beverages and tobacco 4.69 4.55 20 Textile and garments -0.88 -1.02

Employment Effects

Sectors Skilled Low Skilled

21 Wood products -1.54 -1.68 22 Paper and publishing 0.15 0.01 23 Leather -0.85 -0.99

24 Chemicals, rubber and plastic -0.78 -0.92

25 Petroleum and coal 0.39 0.25

26 Non-metal mineral products 0.36 0.22

27 Metal products 0.99 0.85

28 Machinery products -1.28 -1.42 29 Electrical products -1.48 -1.62 30 Transport equipment 16.63 16.44

Employment Effects

Sectors Skilled Low Skilled

31 Other manufacturing -0.53 -0.66 32 Construction 1.4 1.24 33 Fuel, electricity and water 0.07 -0.07

34 Transport services 0.2 0.01

35 Trade 0.26 0.07

36 Communications -0.05 -0.19

37 Financial intermediary 0.18 0.04

38 Public administration, education and health 0 -0.14

39 Real estate and commercial services -0.25 -0.39

40 Rest of services -0.09 -0.23

Employment Effects

• Effects reflect the reallocation of labor (skilled and unskilled) across the 40 industries.

• There is full employment. • Model is does not inform if AEC creates new

jobs or reduces unemployment.

Empirical Assessment (1)

• ILO studies on trade liberalization and employment in early 2000s failed to provide a clear picture.

• Successful cases: China, India and Malaysia – the expansion of trade led to increases in

employment – driver: growth of export oriented industries

Empirical Assessment (2)

• Less successful cases: Latin America, e.g. Brazil and Mexico – Manufacturing employment has either stagnated

or declined. – Low skilled workers tended to lose jobs. – Attributed "to unfavourable initial conditions (e.g.,

extremely unequal distribution of assets), problems of macroeconomic management and overdependence on external resources, but more work is required to develop adequate insights."

Why Unemployment Stagnated

• Trade costs in export markets • Importing firms are likely to respond faster to

trade liberalization than exporting firms. • Economy lose jobs faster than gain them. • Labor market transaction costs

– Workers looking for jobs – Firms looking for workers

Need for jobs sensitive models

• Conventional CGE models are full employment and zero transaction costs.

• Firms are homogeneous, when in reality they differ in productivity (Melitz, 2003).

• Labor markets have search costs. It is possible to have persistent unemployment (Mortensen and Pissarides, 1999).

Possible Improvements

• Export markets in the model are slapped with trade costs.

• Trade costs – reduce export volumes of existing firms; or – Prevent new firms to enter the markets.

• When jobs are lost in the import substituting industries, export sectors fail to absorb them fast enough, causing unemployment.

Message

• If trade costs in the export sector are reduced, jobs lost through import liberalization are absorbed faster by export oriented industries.

• What does it take to do that?

Coordinated action of small and medium investors

• Information on market access opportunities is unevenly distributed.

• Business firms with access to such information may invest to export a given product if the tasks entailed are few and the whole investment not lumpy.

• Generally, to realize market opportunities the coordinated investments of small and medium business firms along the chain is required.

Preliminary Development Follow Up

• Draft road map

• Investment opportunity assessments (pre-feasibility of businesses needed in the value chain)

• Road map validated

• Obligations and benefits; Rules of the chain agreed upon

• Agreements enabled

• Implementa-tion plan

• Monitor/analyze shocks

• Adjustments to the road map

• Keeping the alliance together

I like it!

Who can be the sponsor/leader?

• One with the greatest stake in the organization of the value chain.

• Sponsor organizes, makes a good case for the viability of the chain in order for other chain participants to come in, and invest.

Policy Interventions

• Public sector – may initiate the formulation of the draft road

maps – may help organize meetings in the development

state, facilitate negotiations – May invest in drafting agreement template – Act on the policy bottlenecks/public good/shared

facilities required by the chain – May assist in training participants of the chain

CSOs • May assist in the organization of the farmers

especially in A&F industries • May assist in training the participants on the

obligations/benefits/rules of the chain • May be tapped by the chain participants in

providing management services for a fee • As third party managers may analyze the impact

of unanticipated shocks to the alliance and identify solutions/adjustments to the agreement

Concluding remarks • Outward not inward looking!

– Losses in jobs in import competing industries can be more than replaced with more exports.

• More competition, less protection! – Our sector gets more and better ideas how to become more

competitive. – Public sector will be more pressured by constituents to deliver the

right policies and assistance. • More self-reliant, less expecting public sector assistance! • Doing business together not separately!

– Farmers and SMEs need to cooperate to make the value chain happen. • Disadvantages now can become strengths in the future.

– Except for products that we do not have any resources to produce, products can be improved to become internationally competitive.

Thank you.

Ramon Clarete BSP UP Centennial Professor of Foreign Trade

School of Economics University of the Philippines

ramonclarete@econ.upd.edu.ph