East Asia: Regional East Asia: Regional Integration Among Integration Among Open EconomiesOpen Economies

Homi KharasHomi KharasSector Director & Chief EconomistSector Director & Chief Economist

East Asia & Pacific RegionEast Asia & Pacific RegionWorld BankWorld Bank

Presentation at National Economic & Social Development Board (NESDB), Bangkok

7 April 2006

Share of country’s intra- and extra-regional exports in Share of country’s intra- and extra-regional exports in

GDPGDP

0

10

20

30

40

50

60K

orea

Rep

. 94

-96

Kor

ea R

ep.

02-0

4

Chi

na &

HK

94-

96

Chi

na &

HK

02-

04

Tha

iland

94-

96

Tha

iland

02-

04

Em

ergi

ng E

ast

A.

94-9

6E

mer

ging

Eas

t A

.02

-04

Japa

n 94

-96

Japa

n 02

-04

NA

FT

A 9

4-96

NA

FT

A 0

2-04

EU

94-

96

EU

02-

04

Exports to Intra/GDP Rest of exports/GDP

Note: Intra-regional exports in the case of the EU and NAFTA refer to intra-exports to the region. In all other countries intra-regional exports are exports to Emerging E. Asia.

East Asia’s aggressive reduction in tariffsEast Asia’s aggressive reduction in tariffs

Source: UN-TRAINS

Changes in weighted average MFN rates (1994-2004)

-100

-50

0

50

100

150T

otal

Tra

de

Foo

d &

live

ani

mal

s

Bev

erag

es a

ndto

bacc

o

Cru

de m

ater

ials

Min

eral

fuel

/lubr

ican

ts

Ani

mal

/veg

oil

Che

mic

als/

prod

ucts

Man

ufac

ture

dgo

ods

Mac

hine

ry/tr

ansp

equi

pmt

Oth

erm

anuf

actu

red

%

World East Asia (excl. J apan)

Emerging East Asia’s countries have high shares Emerging East Asia’s countries have high shares of FDI from other East Asian countriesof FDI from other East Asian countries

Share of FDI inflows originating from emerging East Asia

0

10

20

30

40

50

60

70

Thailand Vietnam China Indonesia Malaysia Philippines Korea

%

1998-00 2001-03

Dispersion in equity returns is fallingDispersion in equity returns is falling

Sounrce: Datastream, weekly dividend-adjusted return

Dispersion of weekly equity returns

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

May-90

May-91

May-92

May-93

May-94

May-95

May-96

May-97

May-98

May-99

May-00

May-01

May-02

May-03

May-04

May-05

Developing East Asia (4)

NIEs (4)

Emerging East Asia (8)

QuestionsQuestions

1.1. Trade direction: Regionalism or Trade direction: Regionalism or Regionalization?Regionalization?

2.2. Trade pattern: Heckscher-Ohlin or Trade pattern: Heckscher-Ohlin or Krugman?Krugman?

3.3. Finance: Country differentiation or Co-Finance: Country differentiation or Co-movement?movement?

4.4. Policy priorities: Goods or Services?Policy priorities: Goods or Services?

International or International or Domestic? Domestic?

-3

-2

-1

0

1

2

3

-6 -4 -2 0 2 4 6 8

Cha

nge

in e

xtra

-reg

iona

l sha

re

(cha

nge

in:

expo

rts

to e

xtra

-reg

ion/

Wor

ld e

xpor

ts t

o ex

tra-

regi

on)

Change in intra-regional share(change in: exports to emerging East Asia/World exports to emerging East Asia)

Japan

ThailandKorea

Singapore

Philippines

China & HK

Emerging EA

Vietnam Malaysia

Cambodia

Lao

Indonesia

Taiwan

Percentage point change in extra-regional and intra-regional market shares between 1994-96 average and 2002-04 average

1. Trade direction: Regionalism vs. Regionalization1. Trade direction: Regionalism vs. Regionalization

Decomposition of intra-regional export growth, 1994 to 2004 (%)

Orientation Openness GDP

Emerging East Asia 102 11 28 64

Cambodia 19 -218 185 52

China & Hong Kong 133 12 22 99

Indonesia 73 15 20 38

Korea 124 33 44 47

Lao 13 -45 14 45

Malaysia 85 8 31 46

Philippines 168 59 78 30

Singapore 72 10 20 41

Taiwan 98 36 40 22

Thailand 96 20 64 12

Vietnam 145 -40 83 102

Japan 56 20 39 -4

Growth of intraregional

exports

Intraregional export growth accounting for changes in

change in changein change in changein

exports orientation openness economicsize

log log log logR W

R i ii iW

i i

X Xd X d d d GDP

X GDP

Regionalism vs. RegionalizationRegionalism vs. Regionalization

Statistically, China & Hong Kong, Korea and Japan import more from East Asia than predicted

East Asia dummy coefficients in regressions

China & Hong Kong Korea Japan

2.24*** 2.43*** 3.37*** [0.60] [0.64] [0.51]

1.48*** 2.53*** 3.21*** [0.55] [0.74] [0.70]

2.96*** 2.83*** 3.38*** [0.95] [0.65] [0.94]

2.87*** 3.64*** 3.52*** [0.80] [0.84] [0.90]

1994Parts & Components

2004

1994

2004

Total

2. Trade pattern: Heckscher-Ohlin vs. Krugman2. Trade pattern: Heckscher-Ohlin vs. Krugman

The explosive growth in East Asia’s parts and The explosive growth in East Asia’s parts and components trade is broadly shared across components trade is broadly shared across

most economiesmost economiesAverage annual growth rates of exports and imports of parts & components 1994-2004

0

5

10

15

20

25

30

China Korea Rep. HongKong,China

Taiwan, China Singapore Japan Emerging EastAsia*

World

%

Exports p&c Imports p&c

* Emerging East Asia: China & Hong Kong, Indonesia, Korea Rep., Malaysia, Philippines, Singapore, Taiwan (China) and Thailand.

Total exports

China & Hong Kong have experienced a China & Hong Kong have experienced a notable technological upgradingnotable technological upgrading

Product Category 1994 2004 1994 2004 1994 2004 1994 2004 1994 2004Labour-intensive and resource-intensive manufactures 46.4 30.9 20.7 15.2 8.1 8.4 14.9 11.7 15.3 12.4

Leather, textiles, apparel, and footwear 34.2 21.5 14.5 10.2 2.6 2.6 7.1 5.1 8.6 6.5

Low skill-, technology-, capital- and scale-intensive manuf. 4.9 7.5 7.5 7.8 3.4 3.8 7.5 7.2 6.6 6.8Fabricated metal products 2.4 3.1 2.1 2.2 1.7 1.9 2.6 2.5 2.2 2.2

Medium skill-, technology-, capital- and scale-intensive manuf. 11.0 15.6 24.5 23.9 30.0 29.9 29.7 30.8 25.8 26.0Rubber and plastic products 2.3 2.2 1.8 1.7 1.4 1.7 2.1 2.0 1.7 1.7Non-electrical machinery 2.4 4.7 8.9 8.3 11.4 11.2 12.7 12.4 10.5 10.0Electrical machinery other than semiconductors 6.0 8.0 6.3 6.9 5.1 5.5 4.8 4.5 4.9 5.1Road motor vehicles 0.3 0.7 7.5 7.0 12.2 11.5 10.1 11.8 8.7 9.2

High skill-, technology-, capital- and scale-intensive manuf. 23.7 35.4 33.0 39.7 30.5 32.4 24.2 28.3 26.3 29.4Chemical and pharmaceutical products 3.3 3.4 4.8 6.6 8.3 10.1 12.3 15.6 9.0 11.0Computers and office equipment 3.9 12.1 8.4 10.0 6.1 5.5 3.5 3.4 4.9 5.0Communications equipment and semiconductors 11.6 15.9 15.8 18.6 8.3 9.1 3.9 4.8 7.6 8.7Scientific instruments, watches and photographic equip. 4.8 3.9 3.7 4.3 3.4 4.2 2.7 3.0 3.1 3.3

Remaining exports 14.1 10.6 14.3 13.4 28.0 25.4 23.7 22.1 26.0 25.4Note : Category definitions from Mayer, Butkevicius and Kadri (2002). Trade between China and Hong Kong not computed in the values presented above. East Asia= emerging East Asia plus Japan.

Source: COMTRADE, SITC Rev. 2. Data reported by member countries.

WORLDExport composition by factor intensity, 1994 & 2004 (%)

China & HK NAFTA EUEast Asia

Share of foreign affiliates (FA) in total China’s trade, Share of foreign affiliates (FA) in total China’s trade,

1992-20041992-2004

Foreign affiliates played a key role in China’s explosive growth of parts & components trade

Source: Gaulier et al. (2005).

Japan/NIEs

New Traditional

Manufacturing

Country 1

Part A

Manufacturing

Country 2

Part B

Japan/NIEs

Quality Control A

B

A

BChina/

ASEAN

A

B

Japan/NIEs

Japan/NIEs

Sent for Assembly

Sent for Assembly

Sent for Assembly

A

BGrouping into kits or further processing

The fragmentation of production by multinational corporations has changed the allocation of production networks in East Asia

3. Finance: Country differentiation vs. Co-3. Finance: Country differentiation vs. Co-movementmovement The influence of external The influence of external

news is increasing.news is increasing. On average, equity markets in On average, equity markets in

East Asia are showing greater East Asia are showing greater integration with the region, integration with the region, Japan, and the US.Japan, and the US.

0

5

10

15

20

25

30

35

40

45

50

Before crisis After crisis%

Regional Japan US

0 10 20 30 40 50 60

After

Before

After

Before

After

Before

After

Before

After

Before

After

Before

After

Before

After

Before

%

Regional Japan US

Singapore

Hong Kong

Taiwan

Korea

Indonesia

Malaysia

Philippines

Thailand

news

itGtG

JtJ

RtL

ected

itit eeeZR

exp

1

Variance of news: 22222

,it

GtG

JtJ

RtRit eee

Variance ratio

2

2

it

JtRJ

it

eVR

j = Region, Japan, Global (US)

4. Policy Priorities: Goods vs. 4. Policy Priorities: Goods vs.

ServicesServices

Manufacturing

China

India

90100110120130140150160

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Services

60708090

100110120130140

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

India

China

Main MessagesMain Messages

1.1. East Asia is integrating, but at a different pace in East Asia is integrating, but at a different pace in trade, finance and services.trade, finance and services.

2.2. Integration is driven by the private sector, with Integration is driven by the private sector, with public regionalism in a supporting role.public regionalism in a supporting role.

3.3. Regional integration is complementing global Regional integration is complementing global integration combining best practices from the integration combining best practices from the region with the best from the world.region with the best from the world.

4.4. The public policy agenda is largely behind-the-The public policy agenda is largely behind-the-border in trade facilitation, improving investment border in trade facilitation, improving investment climate, liberalizing services, and encouraging climate, liberalizing services, and encouraging FDI and domestic capital market development.FDI and domestic capital market development.