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Emergent Trilateralism in Developing Asia Long Term Scenarios for Regional Growth and Trade Douglas Brooks, ADB David Roland-Holst, UC Berkeley Fan Zhai, ADB presented at the ADB Dissemination Seminar July 12, 2005 Mumbai, India Contents 1.

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Emergent Trilateralism in Developing Asia

Long Term Scenarios for Regional Growth and Trade

Douglas Brooks, ADB David Roland-Holst, UC Berkeley Fan Zhai, ADB

presented at the ADB Dissemination Seminar July 12, 2005 Mumbai, India

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Brooks, Roland-Holst & Zhai 2

Contents

  • 1. Introduction
  • 2. Overview of Initial Conditions
  • 3. Globalism, Regionalism, and Asian

Trade and Growth

  • 4. General Conclusions
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Brooks, Roland-Holst & Zhai 3

  • 1. Introduction
  • Regional events of the last decade have fundamentally

changed the economic landscape of Asia and its relation to the global economy.

  • While uncertainties remain and cycles will be inevitable,

the Asian region has demonstrated its resilience.

  • Ideology and rivalry have given way to pragmatism and

new opportunities for mutual prosperity.

  • Here we present a work in progress, an effort to inform

long term expectations regarding regional growth.

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Brooks, Roland-Holst & Zhai 4

Overview of Conclusions

  • Regional trade and integration offer Asia great potential

for more rapid and sustained growth. Indeed, much of Asia’s benefits from global trade liberalization can be realized by regional initiative alone.

  • Structural barriers to trade are now more important

than tariffs. Policies and investments that facilitate trade can accelerate regional growth dramatically.

  • Regional integration can promote Asian economic

convergence, raising average growth rates and benefiting poorer countries

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Brooks, Roland-Holst & Zhai 5

  • 2. Overview of Initial Conditions
  • Economic dynamism is well established in

Asia and continues to spread.

  • Trade is a primary driver, but heavy

reliance remains on demand outside the region.

  • Regional living standards remain uneven

and many areas have yet to enjoy significant benefits.

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Brooks, Roland-Holst & Zhai 6

Asian Trade and Growth Patterns

People’s Rep. of China Hong Kong, China Republic of Korea Taipei,China Central Asia Mongolia ASEAN Oceana India Nepal Pakistan Sri Lanka Bangaladesh

A Schematic View of ADB Developing Member Countries

North and Central Asia Southeast Asia South Asia

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Brooks, Roland-Holst & Zhai 7

Macro Conditions, 2005

Trade GDP Average Growth Rate Population

GDP Southeast Asia South Asia East and Central Asia Imports Southeast Asia South Asia East and Central Asia Southeast Asia South Asia East and Central Asia Population Southeast Asia South Asia East and Central Asia
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Brooks, Roland-Holst & Zhai 8

Asian Trade Flows, 2005

(percent of total Asian trade) Extra-regional demand remains a primary economic driver. Intra-Asian trade is far from reaching its potential.

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Brooks, Roland-Holst & Zhai 9

  • 3. Regionalism, Globalism, and Asian Growth
  • To project regional trade and growth under

alternative scenarios, we have developed the ADB Structural Model, a version of the LINKAGE model, calibrated to GTAP 6 database – 18 countries/regions – 20 sectors

  • Currently in prototype form, benchmarked for

projections to 2025.

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Brooks, Roland-Holst & Zhai 10

Baseline Per Capita GDP Growth

(annualized percent change, 2005-2025)

  • 1

1 2 3 4 5 6 7 8 PRC Sri Lanka Philippines Thailand Viet Nam Hong Kong, China Malaysia India Korea Indonesia Bangladesh Taipei,China Singapore Australia, NZ United States Latin America Rest of World Europe 17 Japan

Real GDP/Cap Pop

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Brooks, Roland-Holst & Zhai 11

Trade Scenarios

  • 1. Baseline: Baseline scenario

– including admission of China in the WTO – removal of quotas on textile to the US and the EU

  • 2. GBL0: Global Trade Liberalization

– removal of all import tariffs and tariff-equivalent NTBs – removal of all export subsidies

  • 3. GBL2: Global Trade Liberalization with Trade Facilitation

– GBL0 with trade facilitating policies simulated by 2 percent annual increases in intra-Asian trade efficiency

  • 4. AFTA2: Asia Trade Liberalization with Trade Facilitation

– removal of all import tariffs and tariff-equivalent NTBs within Asia – removal of all export subsidies within Asia – trade facilitating policies simulated by 2 percent annual increases in intra-Asian trade efficiency

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Brooks, Roland-Holst & Zhai 12

Equivalent Variation Aggregate Income

(percentage change from Baseline in 2025)

Scenario 1 2 3 Region Country GBL0 GBL2 AFTA2 East and PRC 24.92 86.62 79.01 Central Korea 6.86 43.71 43.95 Asia Hong Kong, China 5.98 78.76 78.03 Taipei,China 0.66 29.79 29.74 SE Asia Indonesia 2.71 53.26 53.83 Thailand 5.32 87.52 87.35 Viet Nam 4.33 64.15 65.49 Rest of ASEAN 4.00 99.29 99.66 S Asia Bangladesh 3.64 25.30 26.06 India 6.87 33.99 33.86 Sri Lanka 2.96 39.61 39.27

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Brooks, Roland-Holst & Zhai 13

Equivalent Variation Aggregate Income

(percentage change from Baseline in 2025)

20 40 60 80 100 120 PRC Korea Hong Kong, China Taipei,China Indonesia Thailand Viet Nam Rest of ASEAN Bangladesh India Sri Lanka

GBL2 GBL0 AFTA2

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Brooks, Roland-Holst & Zhai 14

Real Exports

(percentage change from Baseline in 2015)

50 100 150 200 250 300 P R C K

  • r

e a H

  • n

g K

  • n

g , C h i n a T a i p e i , C h i n a I n d

  • n

e s i a T h a i l a n d V i e t N a m R e s t

  • f

A S E A N B a n g l a d e s h I n d i a S r i L a n k a

GBL2 GBL0 AFTA2

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Brooks, Roland-Holst & Zhai 15

EV Income Growth: East and Central Asia

(incremental percentage change from Baseline in 2025)

0% 10% 20% 30% 40% 50% 60% 70% 80% 2005 2010 2015 2020 2025 GBL0 AFTA2 GBL2

East and Central Asia

0% 10% 20% 30% 40% 50% 60% 70% 80% 2005 2010 2015 2020 2025 GBL0 AFTA2 GBL2

Southeast Asia

0% 10% 20% 30% 40% 50% 60% 70% 80% 2005 2010 2015 2020 2025 GBL0 AFTA2 GBL2

South Asia

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A Snapshot of Regional Growth Drivers:

Regional Import Demand Composition(2005)

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EV Income Growth: East and Central Asia

(incremental percentage change from Baseline in 2025)

0% 5% 10% 15% 20% 25% 30% 35% 40% 2005 2010 2015 2020 2025 GBL0 AFTA2 GBL2

Bangladesh

0% 5% 10% 15% 20% 25% 30% 35% 40% 2005 2010 2015 2020 2025 GBL0 AFTA2 GBL2

India

0% 5% 10% 15% 20% 25% 30% 35% 40% 2005 2010 2015 2020 2025 GBL0 AFTA2 GBL2

Sri Lanka

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Brooks, Roland-Holst & Zhai 18

Regionalism and Trade Facilitation Increase Most Trade, but Intensify Asia’s Linkages

Regional Trade Flows (percent change from 2005 in 2025) Regional Trade Shares (percent change from 2005 in 2025) BAU E&C Asia SE Asia South Asia ROW BAU E&C Asia SE Asia South Asia ROW E&C Asia 156 156 189 99 E&C Asia 11 11 25

  • 14

SE Asia 167 212 270 104 SE Asia 16 35 60

  • 12

South Asia 256 287 246 159 South Asia 54 68 50 12 ROW 124 150 163 131 ROW

  • 3

8 14 GBL0 E&C Asia SE Asia South Asia ROW GBL0 E&C Asia SE Asia South Asia ROW E&C Asia 246 224 385 151 E&C Asia 17 10 64

  • 15

SE Asia 221 232 676 118 SE Asia 8 12 162

  • 26

South Asia 493 565 501 346 South Asia 100 125 103 51 ROW 195 174 319 196 ROW

  • 7

42 GBL2 E&C Asia SE Asia South Asia ROW GBL2 E&C Asia SE Asia South Asia ROW E&C Asia 682 881 2363 132 E&C Asia 76 121 456

  • 48

SE Asia 1027 951 2254 5 SE Asia 154 137 431

  • 76

South Asia 2917 3054 1865 282 South Asia 581 611 343

  • 14

ROW 121 162 81 343 ROW

  • 50
  • 41
  • 59

AFTA2 E&C Asia SE Asia South Asia ROW AFTA2 E&C Asia SE Asia South Asia ROW E&C Asia 681 889 2443 90 E&C Asia 87 137 510

  • 54

SE Asia 1047 959 2306

  • 6

SE Asia 175 154 478

  • 78

South Asia 2916 3188 1983 222 South Asia 624 689 400

  • 23

ROW 65 154

  • 9

317 ROW

  • 60
  • 39
  • 78
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Brooks, Roland-Holst & Zhai 19

Real Output : India

(percent change with respect to Baseline in 2020)

AGR Baseline GBL0 GBL2 AFTA2 Agriculture 2.9

  • 5.3
  • 3.8

2.7 Energy Fuels 5.9

  • 9.5
  • 56.3
  • 57.6

Processed Food 3.1

  • 21.3
  • 17.5

5.4 Textile&Apparel 4.6 6.5

  • 13.7
  • 15.1

Motor Vehicles 7.4 148.4 160.6 46.8 Electronics 7.5 16.8

  • 19.7
  • 27.8

Other Manufactures 7.1 10.2 19.4 14.7 Whl&Retail Trade 6.4 5.6 16.2 14.9 Transport&Communication 6.8 8.7 22.4 18.8 Services 6.3 6.1 18.9 16.9 Total 5.9 9.8 16.8 11.9 AGR: Annualized Growth Rate (2005-2025) Percent Change from Baseline in 2025

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Real Exports : India

(percent change with respect to Baseline in 2020)

AGR Baseline GBL0 GBL2 AFTA2 Agriculture

  • 5.5

106.2 1,322.2 1,512.4 Energy Fuels 2.2 122.6 395.8 321.1 Processed Food 1.5 89.4 573.1 965.4 Textile&Apparel 1.8 33.3 10.6 2.7 Motor Vehicles 10.0 1,083.1 1,292.0 457.7 Electronics 8.3 109.9 171.3 129.4 Other Manufactures 7.6 82.7 272.9 249.6 Whl&Retail Trade 7.9 9.0 95.8 102.5 Transport&Communication 4.9 31.2 94.9 73.2 Services 7.4 11.3 110.7 110.8 Total 6.1 108.5 256.7 211.0 AGR: Annualized Growth Rate (2005-2025) Percent Change from Baseline in 2025

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Real Imports : India

(percent change with respect to Baseline in 2020)

AGR Baseline GBL0 GBL2 AFTA2 Agriculture 8.3 101.8 271.7 153.4 Energy Fuels 7.2 43.9 264.3 256.7 Processed Food 4.6 504.3 1,439.3 1,381.5 Textile&Apparel 6.2 149.4 1,064.4 948.7 Motor Vehicles 4.1 66.0 605.9 636.8 Electronics 5.8 28.3 271.1 270.1 Other Manufactures 5.2 113.8 416.8 365.2 Whl&Retail Trade 4.2 2.1 83.7 74.7 Transport&Communication 5.3

  • 4.9

39.1 44.2 Services 4.3 1.2 49.0 46.3 Total 5.7 96.9 384.7 344.2 AGR: Annualized Growth Rate (2005-2025) Percent Change from Baseline in 2025

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  • 4. General Conclusions
  • 1. Growth prospects for the region are quite positive, and trade

can play a central role.

  • 2. Regionalism and trade facilitation should be very high priorities

for the region. Combined gains from removing tariff and structural barriers to Asian trade far outweigh those of global tariff abolition.

  • 3. Asian trade liberalization will increase trade in nearly all

directions, but significantly intensify intra-Asian trade linkages. This will increase growth spillovers to poorer countries.

  • 4. ASEAN will enjoy the greatest relative benefits for two reasons:

– Because of geography, it can act as a “growth bridge” between South and East Asia, facilitating regional trade. – ASEAN includes some of Asia’s lowest income economies, and these are among the most appropriate for infrastructure to promote regional integration. Myanmar, Laos, Cambodia, and Vietnam could all be “pillars” of the Asian growth bridge.

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Discussion

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What Makes Regionalism Work?

  • Historic trade patterns were driven by traditional

comparative advantage, emphasizing national differentiation.

  • As economies advance and diversify internally, trade is

increasingly driven by shared characteristics: – Economies of Scale – Multinational marketing – Supply chains

  • The main impetus for modern integration is to expand

networks and capture value added through domestic and international diversification

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Policies to Facilitate Integration

  • Greater regional integration will propagate commercial

linkages and transfer the stimulus of Asia’s rapid growth economies, particularly China and India, to their neighbors

  • Coherent administrative, regulatory, and technical

standards are essential (“soft infrastructure” – an Asian OECD)

  • Focused policies to promote growth spillovers:

– Integrated infrastructure development – Regional capital market coherence – Trade negotiation and facilitation

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Brooks, Roland-Holst & Zhai 26

Infrastructure Investment

  • Infrastructure commitments will be an essential

guarantor of regional integration and growth.

  • Public investment needs to extend its development

leadership, increasing returns to market participation and private investment across the region.

  • Public and private capital commitments must be

complementary, particularly if the former is to be effective.

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20 40 60 80 100 120 140 160

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

ODA-Asia FDI-Asia

Regional Public and Private Investment

(Asian inbound Aid and FDI, USD Billions)

We live in an age of complementarity.

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Asian FDI – Top Ten Destinations

FDI is very unequally distributed.

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Regional Capital Markets

  • Along with export demand, private capital formation

has been an essential growth agent in Asia.

  • International investment flows have helped many

emerging economies overcome savings constraints to stimulate and sustain development.

  • FDI is now an essential feature of regionalism and a

forceful integration mechanism.

  • Policy can facilitate FDI through standard setting and

public investments that extend the profitable investment horizon across the region.

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Trade Policy and Regional Integration

Bilateral and multilateral trade facilitation are essential for regional integration and growth:

  • Geographically, ASEAN’s role as the growth bridge is
  • critical. Unless this succeeds, intra-Asian trade and growth

benefits will be much smaller.

  • This project will be evaluating regional and national

implications of a variety of trade agreements, including: – WTO and Doha global negotiations – ASEAN plus China and others – Northeast Asian FTA – Deepening APEC – various bilateral agreements

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Economic Convergence and Sustainability

  • Disparities in regional growth characteristics pose a

challenge for equitable development and weaken the basis for overall progress.

  • The Asian region still relies heavily on external

demand, while a primary characteristic of advanced economies is the emergence of middle income consumer majorities.

  • Expansion and diversification of regional demand are

an essential to stability and sustained growth.

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Policies to Facilitate Convergence

To promote convergence at higher growth trajectories, regional commitments can be focused in two areas:

  • 1. Infrastructure and other policies to increase

market participation - distribution costs undermine market access, and more so for less developed regions

  • 2. Investment promotion - let private capital do more
  • f the work.
  • 3. Human capital development – a huge public and

private challenge; initial conditions vary greatly

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Sustainability – Risk Factors

  • Institutional Uncertainty
  • Energy Costs
  • Public Health
  • Natural Disturbances
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Discussion