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Regional Economic Integration: a Perspective Offering for Myanmar Sjamsu Rahardja Senior Economist World Bank Group ESCAP Conference on Regional Cooperation and Integration Yangon, May 9th 2016 Asia is a dynamic region.. • Region where growth and poverty reduction is sustained • Region where economic integration is driven by regionalism • Factory Asia continues to reshape and offer opportunities At a glance: Sustained growth drove progress in poverty reduction Progress in reducing extreme poverty - Poverty headcount ratio at $1.25 a day (PPP) (% of population) Growth of Asian economies - Average GDP per capita growth, 1990-2013 8.1 8.0 6.8 6.0 2008-2013 7.0 7.4 5.0 5.0 PERCENT 5.0 4.0 3.3 3.0 2.0 3.1 2.6 2.3 2.8 2.1 1.8 1.8 1.4 1.2 1.0 1.4 -0.1 -0.8 0.0 -1.0 1990-1999 2000-2007 2008-2013 100 90 80 70 60 50 40 30 20 10 0 0 East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Source: World Bank WDI database; Calculations based on the World Bank WDI database 20 40 60 80 100 1990-1999 45 degrees East Asia & Pacific South Asia Other countries At a glance: East Asia is relatively well-integrated Share of imports and exports in parts and components on total trade2, 1990-2013 Trade openness 1: average Trade-to-GDP ratio, 19902013 85.4 90 85.0 77.8 400000 76.4 73.0 70.3 70 65.3 60 54.9 Percent 50.8 50 300000 48.0 43.3 37.5 40 50.7 45.4 40.2 56.3 53.4 43.9 30 US$ millions 80 FDI flows3 200000 100000 0 20 1990 1995 2000 2005 2010 10 0 1990-1999 2000-2007 2008-2013 East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Source: Calculations based on the World Bank WDI, COMTRADE and UNCTAD FDI databases 1. Trade openness is defined as the ratio of imports plus exports to GDP 2. Parts and components trade is defined according t o the BEC classification. 3. The lines represent the total value of inward FDIs in US$ at current prices and current exchange rates in millions At a glance: a key feature is GVC participation (import for export) GVC Integration1 100 90 80 Percent 70 60 50 40 30 20 10 0 Foreign value added share of gross exports Domestic value added in exports of intermediate products as a share of total gross exports Source: Calculations based on Calculations based on the OECD TiVA dataset and the WTO Regional Trade Agreements Information System (RTA-IS) 1. Data refers to 2011. The values for other developed, other developing and Latin America are simple averages of the shares of the countries in the group. Other developed includes: Australia, Canada, Iceland, Israel, New Zealand, Norway and Switzerland; Other developing includes: Russia, Saudi Arabia, South Africa, Tunisia and Turkey. Latin America includes: Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico. 2. The size of the nodes is proportional to the number of PTA partners Trade and FDI are strongly linked in the era of “Trade in Tasks”: technology and innovation are the key channels leading to sustained growth Efficient trade logistics are key, but the challenge for developing countries is not just to integrate with the global economy, but to do so in a way that allows them to learn, absorb new technological capabilities, and upgrade their productive structures. Myanmar has geographical comparative advantage • Shares border with countries that make up 40% of global population, % of global GDP • Rising consumer classes and restructuring of industrial employment • Global value chain offers Myanmar to accelerate industrialization (no need to build the whole chain). 7 6 5 4 Adjusted openness 8 9 And there is plenty of room for Myanmar to trade more 4.0 6.0 8.0 ln GDP per capita, PPP dollars Other countries Myanmar 10.0 ASEAN Fitted values 12.0 Trading partners can be further diversified Share of imports 1991-93 ASEAN Share of exports 2011-13 1991-93 2011-13 Share of trade 1991-93 2011-13 46.4 35.7 36.3 12.9 42.3 28.8 Singapore 27.5 7.6 12.5 1.6 21.2 5.9 Thailand 9.6 20.0 20.1 4.4 14.5 15.4 Malaysia 7.4 3.8 2.4 3.6 5.1 3.7 Indonesia 2.2 3.1 1.2 1.2 1.7 2.5 China 26.0 40.5 22.9 32.4 24.3 39.0 Japan 9.8 6.7 6.7 11.8 8.4 8.1 Rep. of Korea 3.6 6.4 1.1 6.5 2.4 6.4 Australia & NZ 0.2 0.8 0.7 0.3 0.4 0.6 India 1.2 4.0 12.6 23.5 6.4 9.7 EU15 8.7 1.9 5.7 4.5 7.3 2.7 United States 1.3 0.5 5.0 0.2 3.0 0.4 Highly concentrated export needs attention While gas is important source of revenue and FDI, high dependence on gas exposes Myanmar to risks of macroeconomic instability (fiscal shock, chronic currency overvaluation) 40 30 20 10 Concentration index: 21% 0 10 Concentration index: 13.8% % in total exports 20 1992 to 1993 2011 to 2013 0 % in total exports 30 Share of country and product pair in total export (%) 1 1811 No. of country and product pairs 1 6818 No. of country and product pairs Challenges in business environment and constraints in freight logistics are still hampering Myanmar’s export diversification High trade costs reduces incentives for private sector to exploit new trade opportunities 3 Cambodia Myanmar 1.5 2 2.5 LPI score 3.5 4 World Bank 2014 LPI score 4 6 8 Log income per capita * Controlling for size of the country 10 12 Regional economic integration can help Myanmar further its reform agenda • Regional economic integration via regional trade agreement (RTA) is not so much about reducing tariff. Attention has shitted to: o Trade facilitation and non-tariff measures are big elephants in the room o Opening up services is not only opening up to FDI but also reforming regulations • Recent RTAs goes beyond market access and covers “behind the border” issues that requires domestic reforms by developing countries: o Competition policy and role of state-owned enterprises o Investment policies and investor’s protection o Intellectual property rights o Government procurement ASEAN and AEC play an important role in Regional Integration Schemes Under the AEC agenda, intra-ASEAN Preferential Tariffs have been successfully reduced Intra-ASEAN Preferential Tariffs, 1993-2012 Average CEPT Rates, 1993-2012 14 12 10 Percent ASEAN-5 8 6 ASEAN-10 4 CLMV 2 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: ASEC database …but growth in intra-ASEAN trade flows seems to be slowed down by NTM proliferation Tariffs, Non-tariff measures (NTMs), and Migration Measures Implemented by ASEAN 60 pending liberalizing pending discriminatory 50 green & out of force 40 amber & out of force red & out of force 30 green & in force amber & in force 20 red & in force 10 0 Brunei Cambodia Darussalam Indonesia Lao Malaysia Myanmar Philippines Source: Global Trade Alert database. Data accessed June 2012. Singapore Thailand Viet Nam Regional economic integration can help Myanmar further its reform agenda (continued) • It makes sense for Myanmar to prioritize engagement with ASEAN-led RTAs to ensure that its development interests are represented and infrastructure and institutional capacities are gradually developed • Recent ASEAN RTAs (like RCEP) has “cooperation” component that can support developing countries to design and implement domestic policy reforms • For example, harmonizing procedures and regulations cannot be done overnight • “Mega” RTA like TPP can divert trade and investment from Myanmar to other countries and erode preferences given to Myanmar in developed country markets What Myanmar may also want to expect • Integration is not only between capital cities but also between areas near land borders o How can we take advantage of that for promoting inclusive development and peace? • Regional economic integration provides economies of scale that would otherwise too small for Myanmar businesses to enter/expand o For certain profit margin and risk, larger market can help more firms to enter businesses o But increased competition can cause industrial restructuring, where good firms will survive and bad/inefficient businesses will disappear (bankrupt or purchased) o How can we help link SMEs with global value chain? Thoughtful sequencing of reform can be important • With the right policy framework, Myanmar can formulate complementary policies to minimize impact of that process o Improve workers skills to meet demand, maintain efficiency of labor market and strengthen social protection o Improve the functioning of financial market to meet demand from firms and households o Identify parts of global value chain which Myanmar already has revealed or “latent” comparative advantage and design public-private support to further develop those activities (e.g. agri-business, manufacturing, tourism) Thank You Kyei Zu Tin Ba De