8. Asian regionalism: opportunities and constraints

1. 8. Asian regionalism: opportunities and constraints

2. 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?

3. 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

5. What are “parts and components”? • Look at this list…. • This is not the world of Heckscher-Ohlin!

6. 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

7. 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):higher service costs, lower marginal costs

8. 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

9. Chinese growth and market integration • Focus on manufacturing trade • Three (or more) countries ranked by skills-labor endowment ratio (kA < 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

10. Figure 1: Patterns of specialization with no trade costs: three-country case

11. 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

12. Figure 2: Patterns of specialization with trade costs

13. Figure 3: Effects of unit cost reductions in country B

14. Comparative changes in production and trade: summary Initial case with trade costs After unit cost reductions in country B

15. 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 • 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

17. Does Indonesia’s resource wealth prevent industrialization?

18. 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

19. 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

20. 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

21. See paper for complete results

22. Model overpredicts Indonesian SB exports Coxhead and Li (2008): cross country counterfactual highlights FDI and H

23. Indonesia and its neighbors: structure of export growth

25. 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

26. Initial conditions: FDI and H endowments

27. 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 intra- industry spillovers— when technologies used are similar to local firms (Takii 2005)

28. 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

29. Policy reasons: inefficiency (ranking, N=181) • Data from Athukorala and Hill 2010 APEL Table 4

33. 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

34. Tomorrow • Labor mobility and human capital