8. Asian regionalism: opportunities and constraints

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Overview

Rise of East Asian regional tradeNew production systems and trade networks:

production sharing/fragmentationWinners from the new system: skill-intensive

economiesMixed stories: labor-intensive and resource-

abundant economiesFuture challenges: China as investor in SE Asia;

development implications?

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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

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What are “parts and components”?Look at this list….

This is not the world of Heckscher-Ohlin!

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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

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Q Q’ Output, inputs

Cost, priceYN

YF

YF’

SF

SF’

SN

National prodn (N): low service costs, high marginal costs. Fragmented prodn (F):higher service costs, lower marginal costs

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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 firmOne assembly operation to complete final good

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Chinese growth and market integrationFocus on manufacturing tradeThree (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 intensitySingle natural resource good (y)Factor mobility assumptions:

Fixed capital ( = skills) in manufacturingFixed 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

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

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

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X1 X2 X3 X4 X5 X6 X7

A ò ò ¢ ô ô ô ô

B ô ¢ ò ò ò ¢ ô

C ô ô ô ô ¢ ò ò ò Exported ô Imported ¢ Produced but not traded

Figure 2: Patterns of specialization with trade costs

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Figure 3: Effects of unit cost reductions in country B

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X1 X2 X3 X4 X5 X6 X7

A ò ò ¢ ô ô ô ô

B ô ¢ ò ò ò ¢ ô

C ô ô ô ô ¢ ò ò

X1 X2 X3 X4 X5 X6 X7

A ò ò ¢ ô ô ô ô

B ô ¢ ò ò ò ¢ ô

C ô ô ô ô ¢ ò ò ò Exported ô Imported ¢ Produced but not traded

Comparative changes in production and trade: summary

Initial case with trade costs

After unit cost reductions in country B

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Consequences of Asian regional intgrtnGrowth 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 sectorsManufactured exports become more skill-intensiveRes. 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 sectorsBut res. boom raises w/r, reducing comp. adv. in its most L-

intensive manufactures (cf. Dutch disease) E.g. Indonesia

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Does Indonesia’s resource wealth prevent industrialization?

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Overview

Skills-based (SB) exports and developmentWhat determines growth of SB exports?

International evidenceIndonesia’s record in SB export growth

Through timeIn regional perspective

Support from firm-level data (quick review)Some policy implications

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Skills-based exports & economic growth‘Moving up’ from basic manufactures to skills-based

(SB) products supports economic growthElastic foreign demand, relatively stable pricesStrong 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 growth10% 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

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SB exports: international evidenceExports 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

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21See paper for complete results

22Coxhead and Li (2008): cross country counterfactual highlights FDI and H

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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 threatErosion of comparative advantage in low-tech mfg

Policy-related reasonsPoor performance on FDI and human capitalLoss of momentum on trade policy reformsHigh transactions costs in shipping, customs, labor

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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 dataPositive 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)

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Implications for development & policy

SB production is a source of ‘high-powered’ growth Confers productivity externalitiesStimulates other investmentsDiversifies 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 marketsPositive FDI environmentSupport for risk-taking entrepreneurs

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Policy reasons: inefficiency (ranking, N=181)

Data from Athukorala and Hill 2010 APEL Table 4 29

Ease of doing business SGP THA MYS VIE IDN PHP

Starting a business 10 44 75 108 171 155

Employing workers 1 56 48 90 157 126

Getting credit 5 68 1 43 109 123

Protecting investors 2 11 4 170 53 126

Enforcing contracts 14 25 59 42 140 114

Overall ranking 1 13 20 92 129 140

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Any policy implications?Reduce trade, transport and transactions costs for

all trade-oriented firmsRelatively speaking, support trade-oriented firms

and firms with foreign investments or partnershipsFDI raises productivity of labor in generalProductivity benefits spill over to domestic firmsWage premium means workers have incentives to train

Relatively speaking, support firms producing more highly differentiated productsNiches can be identifiedDemand is elastic

Support innovators, but not followers

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Tomorrow

Labor mobility and human capital

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