Sub-regional Economic Cooperation : Implications for Central Asia and South Caucasus

1. Sub-regional Economic Cooperation : Implications for Central Asia and South Caucasus Mya Than

2. Regionalism: Conditions • Countries must have 1. Geographical proximity 2. Cooperation of countries either in economic, political or social fields 3. Setting up a regional cooperation for the achievement of common purposes

3. Regional Economic Cooperation & Integration • Members: Transnational economic region (or sub-region) established by 2 or more countries or territories 2. Objective: To promote free movement of factors of production & effective distribution of outputs 3. Mechanism: To gain from economy of scale

4. Economic Cooperation and Integration 6 stages from Economic Cooperation to Economic Integration • Harmonization: to adjust trade policies to minimize discrimination • Free Trade Area (FTA): to remove tariffs between the partners without adopting a common tariff policy • Customs Union (CU): FTA adopting a common tariff policy against third countries • Common Market (CM): CU removing restrictions on factor movement • Economic Union (EU): CM coordinating their policies on fiscal, monetary, etc. • Economic Integration: Extreme type of Economic Cooperation when policy matters and their implementation is governed by some supra-national agency

5. Forms of Regional Economic Cooperation/Integration Forms Free intra- Common Free factor Common trade trade policy mobility monetary & fiscal policy FTA Yes No No No Customs Union Yes Yes No No Common Market Yes Yes Yes No Economic Union Yes Yes Yes Yes

7. Free Trade Area (FTA) Definition: Economic cooperation between two or more countries within the region or outside the region by removing tariffs between partners without adopting a common tariff policy. Objectives of FTAs • Greater market access in goods and services • Increased investment opportunities • Reduction in Business costs

8. Formation of FTAs in Southeast Asia World Total 250 (2002) 300 (2005) estimates East Asia Total 72 (2003) Signed 20 Under negotiation 20 Under study 19 Proposed 13 Southeast Asia 51 Signed 14 Under negotiation 23 Under study 12 Proposed 2

9. Building Blocks for FTAs Push factors • Competition for export markets in the face of increasing FTAs in other regions • Rising of China • The end of the Cold War/Thawing of political tension • Obstacles in trade liberalization under GATT/WTO (eg., Doha Round) Pull factors • Transformation of former command/controlled economies into market-oriented economies • Increase or maintain market access • Promotion of economic or other types of cooperation

10. Conditions for enjoying benefits • Trade liberalization • Trade and Investment facilitation • Economic cooperation • Harmonization

11. Impacts of East Asian FTAs Positive impacts • Trade creation effect • Improved terms of trade • Increase in economic welfare • Trade diversion effect will be reduced • Increased business access to members’ markets • Economy of scales • Competition enhancing effect • FDI creation effect (among member countries) • Promotion of regionalization Negative Impacts • Extra-ASEAN trade expands faster than intra-ASEAN trade

12. Interdependence: Intra-Regional Trade (%)* 1990 1995 2000 2003 ASEAN 18.0 21.0 22.8 22.3 ASEAN+3 28.6 37.1 37.3 38.9 NAFTA 37.3 42.0 46.9 44.9 EU (25) 65.2 65.2 64.6 66.1 Mercosur - - 17 - * Total trade as % of their total world trade

13. Stumbling Blocks for FTAs in East Asia Political • Different political systems • Lack of strong political will • Territorial disputes • Nuclear issue (PR Korea) Historical • Historical baggage • Visits to a War Shrine

14. Stumbling Blocks for FTAs in East Asia (Cont’d) Economic • Different economic systems • Different development levels • Different legal systems • Likely opposition from non-competitive sectors • Two-speed ASEAN in terms of trade liberalization Technical • Spagetti Bowl effect

15. Sub-regional Economic Cooperation in Southeast Asia I. Economic Geography 1. Growth Triangle (a) IMS-GT (Indonesia-Malaysia-Singapore) (b) IMT-GT (Indonesia-Malaysia-Thailand) 2. Growth Quadrangle (a) Golden Quadrangle (Yunnan-Laos-Myanmar-Thailand) (b) BIMP-EAGA (Brunei-Indonesia-Malaysia-Philippines) Or (East ASEAN Growth Area)

16. Sub-regional Economic Cooperation in Southeast Asia (Cont’d) II. River-based Cooperation 1. GMS (Greater Mekong Sub-regional Eco. Cooperation) (Cambodia, Laos-Myanmar-Thailand-Yunnan-Vietnam) 2. ACMECS (Cambodia-Laos-Myanmar-Thailand-Vietnam) Or (Ayeyawady-Chao Phra-Mekong Eco. Cooperation Strategy) 3. MG-EC (Mekong Ganga Eco. Cooperation) (Mekong Countries and India)

17. Sub-regional Economic Cooperation in Southeast Asia (Cont’d) III. Cross-subregional Cooperation 1. BIMST-EC (Bay of Bengal Multi-Sectoral Technological Eco. Cooperation) (Bangladesh-Bhutan-India-Myanmar-Nepal-Sri lanka-Thailand)

18. GROWTH TRIANGLE Concept: To link three areas with different factor endowments and different comparative advantages for a larger region with greater potential for economic growth. Definition: A sub-regional economic zone encompassing geographically contigous areas of two or more countries in the economic integration process which involves the flow of goods, services, investment and people. GTs also could be considered as “cross-border economic zones”. Rationale: To exploit the complementarities of the geographically contiguous areas to achieve accelerated economic development by means of enhancing competitiveness of participating areas and of promoting their exports in the global marketplace

19. Types of Growth Triangles 1. Metropolitan Spillover into Hinterland (IMS-GT, IMT-GT) 2. Joint Development of Natural Resources (GMS) 3. Common Geo-political Interest (ASEAN before 1997)

20. Sub-regional Eco. Cooperation Arrangements:Growth Triangles and Other Cooperation Arrangements

21. MOTIVATING FACTORS • Geographical Proximities/Existence of old trade routes • Historical Links • Cultural Proximities and Ethnic Ties • Economic Complementarities • Thawing of Political Tensions • Economic Reforms in Formerly Command/Controlled Economies • Rising of China and India/Competition for Foreign Investment • Emergence of Regional and Sub-regional Groupings and Trade Blocs • Fear of Protectionism

22. Challenges and Issues Political • Different political systems • Lack of political will • Territorial disputes Historical • Historical baggage Cultural • Common ethnicity • Common/similar culture

23. Challenges and Issues Economic • Different economic systems • Different levels of development • Different financial and banking systems and legal systems • Likely opposition from non-competitive sectors Environmental • Degradation of environment Cross-border Issues • Illegal trade • Human trafficking • Drug trafficking • Spread of HIV/AIDS

24. Key Factors behind the Success of Growth Triangles • Economic Complementarity • Geographical proximity • Political Commitment and Policy Coordination • Infrastructure Development

25. GTs Complement the FTAs • GT as a form of regional cooperation provides competitive model to attract investment and technology as well as building block towards FTA. • GT as a starter, with relatively less rigid and formal cooperation structure as compared to FTA, is expected to be more innovative, flexible, and most importantly always ready to attend to the ever-changing needs of investors and alike. • GT as a strategy promoted by those regional leaders keen on expanding “embedded exportism” and by global enterprises involved in international production see it as having a “facilitating effect” upon “open regionalism” championed in the Bogor declaration. • GT has become a building block towards free trade arrangements since the changes that are manifested in the growth triangle strategy provide supports for ASEAN’s FTAs and APEC’s free trade plans.

26. Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT) What Is IMT-GT • Early attempt at economic cooperation and integration in ASEAN. • Formally endorsed by all 3 governments’ heads of IMT-GT nations in 1993. • Expected to boost economic, social and cultural ties between their areas. • The private sector is expected to drive the economic agenda & the development of the IMT-GT by supporting and facilitating its activities. • IMT-GT Joint Business Council (JBC) was inaugurated in 1995 as the official vehicle to mobilize private sector participation. • ADB took initiatives to conduct a detailed feasibility study and formulated the framework for cooperation.

27. Indonesia-Malaysia-Thailand-Growth Triangle

28. Goals of IMT-GT: • Overall goal of the IMT-GT is to accelerate private sector-led economic growth in the IMT-GT region by: • increasing trade and investment by exploitation the underlying economic complementarities and comparative advantages; • increasing exports to the rest of the world by enhancing competitiveness for exports and investment; • increasing the welfare of the people by creating employment, educational, social, and cultural opportunities in the IMT-GT region; and • Encouraging the private sector to play a leading role, while the public sector facilities and supports as much as possible.

29. IMT-GT: Members Indonesia: • 1994: North Sumatera and Aceh • 2005: Aceh, Sumatera Utara, Sumatra Barat, Bangka Belitung, Riau,Kepulauan Raiu, Lampung, Sumatera Selatan, Kepulauan Natuna • (The entire island of Sumatra is included in the IMT-GT) Malaysia: • 1994: Kedah, Perlis, Perak, Pulau Pinang, Selangor • 2005: Kedah, Perlis, Perak, Pulau Pinang, Selangor Kedah, Perlis, Perak, Pulau Pinang, Selangor Melaka, Kelantan, Negeri Sembilan, Terengganu, • (Kuala Lumpur can also be considered as an IMT-GT market due to its location and proximity to Selangor) Thailand: • 1994: Yala, Satun, Narathiwat, Songhla, Pattani • 2005: Yala, Satun, Narathiwat, Songhla, Pattani, Trang, Nakhon Sri Thammarat, Pattulung • Potential Consumer Base: 100 million

30. IMT-GT: Selected Economic Indicators

31. IMT-GT: Selected Social Indicators

32. IMT-GT: Foreign Direct Investment

33. IMT-GT: Intra Subregional Trade(US$Million)

34. The Public Sectors of the IMT-GT Coordinating secretariat in each of the IMT-GT countries; Coordinating the activities, plans & progress of their respective ministries and government agencies involved in one way another with the IMT-GT; Holding the annual Senior Officials Meeting (SOM) and Ministerial Meeting (MM) to take stock of the problems & progress faced by the IMT-GT; and others.

35. The Role of the Private Sector (JBC) • The Joint Business Council (JBC) is the official representative body for the IMT-GT business community; • Created in 1995 with mandate from the IMT-GT governments; • Meeting three or four time a year on rotation basis; • Annual JBC meeting in conjunction with the annual IMT-GT meeting with Senior Officers Meeting (SOM) and Ministerial Meeting (MM); • Instrumental in guiding government policy in IMT-GT countries in regard to IMT-GT, especially in the areas of trade and investment, people mobility, education & training, tourism, cultural & sports linkages, agriculture and fisheries;

36. The Role of the Private Sector (JBC)(cont’d) • Facilitated an estimated US$3.8 billion worth of projects between 1995-2005; • Mobilize private sector involvement in exploring the many opportunities; • Coordinate with the IMT-GT governments on the issues of mutual concerns; • Acting as a channel for business information and exchange of business opportunities; • Promote IMT-GT as an attractive investment destination for foreign investors; among others.

37. JBC’s Achievements • Enabling several thousands Indonesians & Thai students to undergo training in Malaysia; • Boosting the number of operators and frequency of marine & flight linkages within the IMT-GT; • Enabling the “fiscal tax” on Indonesian citizens departing the country to be waived for those departing from any IMT-GT airports; • Getting involved in reconstruction and rehabilitation efforts in tsunami-affective areas; • Boosting trade, investment & tourism; among others.