Regional Economic Integration: Case for a Regional Export Credit Agency for Asia 9789812305855

Table of contents :
Contents
Foreword
About the Contributors
Introduction
1. REGIONAL TRENDS IN TRADE AND INVESTMENT IN ASIAN ECONOMIES
2. THE ROLE OF ASIAN ECAs IN TRADE FINANCING: SITUATIONAL ANALYSIS
3. REGIONAL EXPORT CREDIT AGENCY FOR ASIA (RECAA): THE NEED AND THE ROLE
4. STRUCTURE AND ACTIVITIES OF RECAA: POSSIBLE OUTLINE
Notes
References

Citation preview

Regional Economic Integration

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publications, an established academic press, has issued more than 1,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publications works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

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Regional Economic Integration Case for a Regional Export Credit Agency for Asia edited by

Rahul Sen

Institute of Southeast Asian Studies Singapore

Capital Publishing Company India

First published in Singapore in 2005 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 E-mail: [email protected] Website: http://bookshop.iseas.edu.sg First published in India in 2005 by Capital Publishing Company P.B. No. 7135, 7/28 Mahaveer Street Ansari Road, Daryaganj New Delhi 110002, India for exclusive rights for distribution of this book in India, Pakistan and Bangladesh. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2005 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the publisher or its supporters or of the institution to which the authors belong. ISEAS Library Cataloguing-in-Publication Data Regional economic integration : case for a regional export credit agency for Asia / edited by Rahul Sen. (ISEAS current economic affairs series) 1. Export credit—Asia. 2. Exports—Asia—Finance. 3. Asia—Economic integration. I. Sen, Rahul, 1965– II. Series. HG3754 A8S47 2005 ISBN 981-230-277-8 Typeset in Singapore by Superskill Graphics Pte Ltd Printed in Singapore by Seng Lee Press Pte Ltd

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Contents Foreword

vii

About the Contributors

ix

Introduction

xi

1

2

REGIONAL TRENDS IN TRADE AND INVESTMENT IN ASIAN ECONOMIES Rahul Sen

1

THE ROLE OF ASIAN ECAs IN TRADE FINANCING: SITUATIONAL ANALYSIS Arijit Saraswati

49

3

REGIONAL EXPORT CREDIT AGENCY FOR ASIA (RECAA): THE NEED AND THE ROLE 67 Arijit Saraswati

4

STRUCTURE AND ACTIVITIES OF RECAA: POSSIBLE OUTLINE Bhanu Abhilashi

81

Notes

91

References

93

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Foreword As an institution dedicated to the study of socio-political and economic trends, ISEAS has been monitoring the growing impulse, among countries in the region, towards regional co-operation and integration. In this light, ISEAS was particularly interested in the proposal made by Mr T.C. Venkat Subramanian, Chairman and Chief Executive Officer, Export-Import Bank of India, on the establishment of a Regional Export Credit Agency in Asia (RECAA) at the ASEAN-India Forum on 9–10 February 2004. Taking the proposal further, ISEAS organized a workshop on the same issue. The deliberations at the Workshop underscored the need for the establishment of a body to facilitate trade flows among countries in the region. The proposal is now being studied by the concerned multilateral fora in Asia.

K. KESAVAPANY Director Institute of Southeast Asian Studies

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About the Contributors Rahul Sen is Fellow, Institute of Southeast Asian Studies, Singapore.

Arijit Saraswati is Manager, Export-Import (EXIM) Bank of India, Mumbai.

Bhanu Abhilashi is Resident Representative, Export-Import (EXIM) Bank of India, Singapore.

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Introduction Regional co-operation is becoming increasingly important in today’s economy. Complexities surround the diverse set of nations and regions with factors like the hardening of the multilateral trading rules and the creation of the World Trade Organization (WTO) and unity through a consistent philosophy has been considered far from simple. However, recognizing the potential for greater regional co-operation for development, there has been an array of regional cooperation initiatives with the most institutionally advanced of the regional groupings being the European Union (EU) and the Americas having several regional common markets including Mercosur, the Andean Community, Caribbean Community and Common Market (CARICOM) and the North American Free Trade Agreement (NAFTA). Other regional initiatives include Southern African Development Community (SADC), Common Market for Eastern and Southern Africa (COMESA) in Africa; ASEAN Free Trade Area (AFTA), SAARC Free Trade Area (SAFTA) in Asia. Interest in the regional option has attracted new attention in the Asia and Pacific region in the wake of the financial crisis. This is a reflection of the perception that the distinctive features of the region’s approach to growth and economic learning need to be captured when tailoring support packages to meet the requirements of the region. In Europe, institution building has promoted co-operation through encouraging the harmonization of policies and institutions, creating a

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zone of monetary and financial stability, and leading to a measure of political integration. In Asia, however, the motivations for regional co-operation are different from Europe’s and are in their infancy. Regional Trade Agreements (RTAs) have been in intense discussions in the recent years. According to some estimates, there are currently 285 RTAs in existence. All countries in the developing world, with the sole exception of Mongolia, are involved in some form of RTA or other. Considering the mixed objectives (political, security and economic considerations) with which the RTAs emerge, there will be an increasing number of such agreements, irrespective of the efficiency of multilateral trading systems. In fact, such regional or preferential liberalization would lead to further liberalization through the process of ‘competitive liberalization’. Under the competitive liberalization strategy, while the developed countries will have the objectives of protecting their investment interests, and new market access, the developing countries will have the overall objective of attracting infrastructure investment, which could contribute to their economic growth. Globalization is seen as one of the most important factors in shaping the economic development. Participating in the global economy provides immense opportunities and has a major bearing on trade, capital flows, the global environment, decentralization and urban development and would require nations to seek a dynamic equilibrium at international, regional and sub-regional level. This has been shown by the success of countries with an outward-oriented strategy. By contrast, inward-looking development strategies lead to slower growth.

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Asia is a vibrant economic region of the world. The region has made tremendous progress in the last four decades. In 1964, the per capita income of Asia was US$95, lagging behind Africa (US$150) and Latin America (US$550). Today, after sustained growth over the years ably assisted by regional multilateral agencies like Asian Development Bank (ADB), Asia stands on top among the developing world. Asia now accounts for 24 per cent of global Gross Domestic Product (GDP), 60 per cent of total global forex reserves and accounts for 55 per cent of world population (consumers). However, the share of Asia in global trade is not commensurate with its inherent economic strengths. The share of Asia in global trade has moved up from 15 per cent in 1980 to 26 per cent in 2003, primarily due to aggressive growth in exports and imports in China. The intra-regional trade amongst Asian countries have increased from 9 per cent (of global trade) in 1988 to 11 per cent in 2003. The growth again is partly due to the import boom witnessed in China which benefited a number of Asian countries in their export performance. Role of ECAs Export Credit Agencies (ECAs) or Exim Banks play a vital role particularly in Asia in promoting and facilitating their countries’ international trade. Exim Banks support their countries’ exports through a variety of financing programmes like Supplier’s Credit, Buyer’s Credit, and Lines of Credit in order to help their exporters to meet the global competition effectively and ensuring that their exporters do not lose out

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due to uncompetitive financing packages. Exporters from AAA rated OECD countries are backed by their ECAs or Exim Banks with very attractive credit packages while bidding for large global contracts. Exim Banks in the developing world are unable to match such credit packages as their cost of funds are much higher compared to their counterparts in the OECD block. In the Asian region, except Japan Bank for International Cooperation (JBIC), which is an amalgamation of Japan Exim Bank and OECF (erstwhile concessional funding arm of Japanese Government), other Exim Banks are comparatively weaker in their abilities to match ECAs from OECD group. An interesting paradox is that the developing countries in Asia invest their forex reserves in AAA rated banks and institutions in OECD countries earning marginal returns, while Exim Banks from these developing countries borrow from these OECD markets at much higher rates of interest to finance their exports. This situation can be rectified if there are strong AAA rated institutions in Asia where such forex reserves could at least be partially parked and from whom borrowings could be raised by such Exim Banks for financing their countries’ exports. Such an arrangement will ensure that Asian forex reserves are recycled to support further development activities within the region. Another aspect of Asian region is that number of countries in the region have relatively less developed economies and need substantial investment for industrial infrastructure, which could partly come from relatively better developed economies within the region by way of export credits to finance import of individual projects by these weaker economies. Most ECAs will not be wishing to support any export transactions to these countries as their

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economic parameters may not be acceptable commercially. Without support, these economies will fall deeper into economic inactivity creating a vicious circle. If there is a regional multilateral agency that can provide credit enhancement to such weaker economies, development activities will increase. Trade promotes investment and the vicious circle can be turned into a virtuous circle. The factors that have influenced decline in trade finance in recent times include: • The interaction between perceived risks and the leveraged positions of banks The Vicious (Virtuous) Circle

Lack (Availability) of Trade Credit

Fall (Rise) in Country Rating

Less (More) Exports

Subdued (Robust) Economic Growth

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• • •

Introduction

Lack of insurance Herd behaviour among trade finance providers Change in the banking sector

Asian ECA Forum Trade facilitation constitutes an important element of the strategy to enhance bilateral trade and investment relations. Towards this end, co-operation in financial services assumes a pivotal role in facilitating financial exchanges among participating countries. Further, regional co-operation is becoming increasingly important in today’s economy. In such an environment, co-operation among ECAs is vital for the successful completion of an international project. With a view to enhance co-operation and forge a stronger link among its member institutions, the first meeting of Asian ECAs was held in India, at the initiative of the Export-Import Bank of India (Exim India) in 1996, which led to the formation of the Asian ECA Forum. Members comprise ECAs from India, China, Japan, Indonesia, Korea, Malaysia, Thailand, and Philippines. These are the eight countries in Asia, which have Exim Banks, playing their typical role of promoting international trade and investment of their countries. All the eight Exim Banks are fully owned by their sovereign governments. The Annual Meetings deliberate upon measures to foster long-term relationship within the Asian ECAs Community, share experience and strengthen financial co-operation to promote intra-regional trade and investment. The task of the Asian ECA Forum is to enhance cooperation and forge a stronger link among its member

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institutions, thereby fostering a long-term relationship within the Asian ECAs community. The Annual Meetings serve as a forum for discussing a wide range of issues focused on fostering common understanding as well as exchanging and sharing information. Together, the endeavour is to meet the challenges faced as an export credit agency in Asia and explore possible areas for further regional co-operation. The first two meetings of Asian ECAs took place in Bangalore and Mumbai, India, both in 1996, hosted by Exim India. The discussions focused on formalising an annual meeting and developing a common agenda. Substantial progress has been made over the past eight years since these two meetings in India, with the support and active participation of the member ECAs. The periodicity of the meeting was made annual and each member ECA decided to host the Annual Meeting by rotation. The Annual Meetings were held in member countries to discuss a wide range of topics. Specific topics covered at each meeting were decided in advance and reviewed during the time leading up to the meeting, in addition to any further ideas that emerged in the course of the year. Despite a relatively short history, each meeting proved to be a valuable opportunity with participants having learned a great deal from sharing each other’s experience and engaging in active dialogue. A concrete step towards regional co-operation emerged at the Seoul meeting (2001) where member ECAs decided to work on the concept of ‘Multilateral Letter of Credit Confirmation Facility’. The concept was firmed up and the member ECAs signed a multilateral agreement in Kuala Lumpur (2002). Member ECAs further consolidated the arrangement by signing bilateral agreements with other

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ECAs. Exim India signed with Exim Malaysia and Exim Thailand at Manila, Philippines (2003) and is in the process of signing with other Exim Banks. A step further in this direction will be to explore the possibility of setting up a regional ECA (Exim Bank) with the support of regional multilateral agency like Asian Development Bank. This concept has found general favour among the member ECAs. The Need & Role Regional ECA can facilitate regional economic integration through increased intra-regional trade in Asia. There may be some legitimate doubts expressed as to why a Regional Export Credit Agency for Asia (RECAA) is required and whether it will be conflicting with country level ECAs. To understand this contention there is need to consider certain key aspects of the Asian economies as a prelude to the concept. Asian economies are significantly dependent on each other for international trade. While Asian economies are major recipients of FDI among developing countries, intra-Asian FDI flow is modest. Further, there is a distinct decline in export growth rates and investment inflows of the less developed economies of Asia in recent years and International Credit Ratings are not sufficiently investment friendly. Another factor is that majority of Asian countries are low to middle income countries, which creates difficulty in accessing international finance and often availability, rather than cost of finance, acts as a constraint.

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Objective of a Regional Export Credit Agency for Asia (RECAA) The objective of RECAA will be to improve access to trade finance for Asian economies, through credit enhancement and risk mitigation measures and thereby, contribute to enhance intra-regional and extra-regional trade & investment. RECAA will seek to achieve its above objective by positioning itself as a regional supra national with high credit rating (AA-minimum). RECAA will be a Refinancing/ Rediscounting/Reinsurance institution and not a Direct Financier. RECAA would complement rather than duplicate or supplant existing multilateral, regional, sub-regional and national institutions, which would increase the level of intra and extra Asian trade and investment. Some Recent Developments At a recent conference in Singapore, organized by the Institute of South East Asian Studies (ISEAS) Singapore, I was a luncheon speaker on the topic “Avenues for cooperation in Financial Services between India and ASEAN”. While outlining various avenues for co-operation, the undersigned mentioned the concept of a Regional Export Credit Agency for Asia as a viable vehicle for promoting intra-regional trade and investment amongst Asian countries and that such an institution can be strategically located in a vibrant financial centre like Singapore that can contribute to closer co-operation in financial services among national and international banks and institutions. Encouraged by the response from the participants at the conference, a brain

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storming session was organized by ISEAS a few weeks later, at which leading international banks based in Singapore deliberated with experts from ISEAS and Exim Bank of India, bringing in new ideas and suggestions. Exim Bank of India subsequently made a presentation at the 10th Annual Meeting of Asian ECAs at Beijing, P.R. China on 11 May 2004 at which heads of all participating ECAs (China, Japan, India, Korea, Philippines, Thailand, Indonesia, Malaysia and Australia) and senior officials of the co-financing division of Asian Development Bank and an official of International Monetary Fund, Washington, U.S.A. were also present. ADB, while generally welcoming the concept, suggested that as a first step, the Bank (ADB) could consider introducing ‘Regional Export Credit and Finance Scheme’ that will partially achieve the intended objectives of the regional export credit agency. ADB made a presentation on the concept with the help of a consultant, engaged for developing the above programme. Subsequently, during the recent Annual Meeting of the ADB at Jeju Island (Korea) in May 2004, the co-financing division of the ADB organized a seminar on the subject (Guarantee Products and Risk Sharing Partnerships) at which a panel of international speakers including the undersigned deliberated on the various aspects of the proposed ADB Facility and interacted with the audience, comprising international bankers, insurance experts, ADB officials amongst others. There was a general consensus that there is need for level playing field among the ECAs, the proposed ADB facility is a step in the right direction and that with Basel II norms prescribing capital adequacy for country exposure, there may be reluctance on the part of commercial banks to take exposure on weaker economies. ADB officials

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indicated that they would examine the various suggestions and comments of the participants at the conference and would deliberate on the concept further with select group of experts to chalk out future course of action. *

*

*

It is worth recalling that the Governor of the Asian Development Bank (ADB), during his inaugural speech at the recent Annual Meeting (May 2004), drew attention to the pioneering role played by ADB since its establishment in 1966 in the development and transformation of Asian economies from weakness to strength, from laxity to vibrancy. Every Asian country had or still has a development financial institution (DFI) and ADB’s role and operation did not conflict with the national DFI. In the same way, a regional export credit agency, if established with ADB’s support and participation, will not conflict with the national ECAs but will only be complimentary and source of strength.

T.C. VENKAT SUBRAMANIAN Chairman of the Board & Chief Executive Officer Export-Import Bank of India

(Note: The views expressed in the Introduction are of the author and not of the institution to which he belongs.)

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Trade and Investment in Asia

1

1 Regional Trends in Trade and Investment in Asian Economies Rahul Sen

Introduction The process of globalization of the world economy, which has led to an increased integration of financial and capital markets among different countries, irrespective of their levels of development, have had far reaching implications for the economic, social and political systems, both within and between these countries. This process, which has been increasing in its pace and scope, has significantly affected the performance of the Asian economies in the global market in recent years, with a major financial and economic crisis hitting most of the East Asian economies in the year 1997–98. Globalization and its effects on the Asian economies have also brought in to sharp focus the high costs of information and perception gaps among economic agents and have increased the need for closer economic and financial co-operation among them. This has led to an increased trend in regionalism in Asia wherein new regional trading arrangements are proliferating in Asia either in or 1

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among congruent geographical regions for greater subregional co-operation within a multilateral framework. Proposals have also put forward on financial co-operation, with one of the proposals being to set up a Regional Export Credit Agency for Asia (RECAA)1 to further strengthen financial co-operation and facilitate trade financing among the Asian economies. This paper2 provides a background on this proposal by focusing on the regional trends in trade and investment in Asian economies, focusing also on these new regional initiatives within the different geographical regions in Asia.3 The chapter is organized as follows: an overview of the major economies in Asia; the empirical evidence on linkages between trade and growth; the trends in international trade flows among these economies; investment flows; and finally the emerging regionalism in Asia and the ongoing economic co-operation between the major economic entities in Asia, viz. ASEAN, China, India and Japan. An Overview of Asian Economies in a Global Context The following observations may be made on the basis of selected macroeconomic indicators of the Asian economies in Table 1.1: 1.

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The Asian economies constitute more than half of the world’s population, about a quarter of the world’s income measured in current values, and about a third of the income measured in Purchasing Power Parity (PPP) terms in 2003. On this trend, the region could account for one-third of world output by the year 2005.

2

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Trade and Investment in Asia

2.

3.

4.

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3

However, on a per capita basis, the income of these economies was close to half of the world’s average in current value terms and slightly more than three-fifths in PPP terms in 2003. The Asian economies include countries such as China, India, and Korea which are currently among the fastest growing countries in the world. The share of these Asian economies in total foreign direct investment (FDI) in the world remained rather small (13.6 per cent) in 2003. FDI as a percentage of income is about a third of the corresponding share for the world as whole. This reflects the fact that most of the FDI is between the developed countries, particularly the United States and Europe. These economies accounted for about a quarter of the world’s merchandise trade and more than half of the foreign exchange reserves. However, there are significant differences with respect to levels of economic development, domestic market size, and openness to the international markets among these economies in Asia. On the one hand, Japan and Korea are the only two developed economies among this group, and are both located in East Asia. On the other hand, the region has two of the world’s most populous economies, i.e. China and India, consisting of a population of 2.3 billion people, compared to about 0.5 billion for all the ten-member ASEAN economies. This can be contrasted with the presence of two highly globalized entrepôt, city-state economies, viz. Hong Kong and Singapore, that consist of a domestic market of only about 10 million between

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TABLE 1.1 Important Economic Indicators of Select Asian Countries in 2003 Sl. No. Countries

GDP GDP Growth (US$ bn) (%)

Population (mn)

Per capita GDP (US$)

PPP GDP (2002) (US$ bn)

East Asia 1 China 2 Hong Kong 3 Japan 4 Korea* 5 Taiwan

1467.0 162.2 4367.0 476.4 282.5

8.6 3.0 2.7 6.3 3.2

1295.2 6.9 127.2 47.8 22.6

1132.6 23507.2 34331.8 9966.5 12500.0

5732.0 177.7 3261.2 784.4 N.A

Southeast Asia 6 Brunei** 7 Cambodia 8 Indonesia 9 Laos 10 Malaysia 11 Myanmar 12 Philippines 13 Singapore 14 Thailand 15 Vietnam

N.A 4.0 215.0 2.1 99.0 8.6 76.6 91.1 140.5 37.5

N.A 5.0 4.1 5.5 4.7 2.5 4.3 0.8 6.3 7.1

N.A 14.2 216.3 5.7 25.0 49.6 84.6 4.2 64.0 81.4

N.A 281.7 994.0 368.4 3960.0 173.4 905.4 21690.5 2195.3 460.7

N.A 20.6 664.4 9.3 216.8 N.A 321.5 97.4 418.2 180.3

674.4

4.5*

545.0

1237.4

1928.5

146.8 1061.6 24.0 150.7 19.1

353.5 538.2 229.2 479.1 958.1

235.6 2695.0 31.9 291.8 65.4

3446.9

2364.1

15203.5

ASEAN South Asia 16 Bangladesh 17 India 18 Nepal# 19 Pakistan 20 Sri Lanka TOTAL

51.9 571.4 5.5 72.2 18.3 8148.8

5.3 8.1 –0.6 5.8 5.5 4.6*

Note: Merchandise trade figures excluding services. # 2002 figures * Indicates average values ** Brunei: Not Available Source: Economist Intelligence Unit Reports

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TABLE 1.1 – continued

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Per capita GDP in PPP (US$)

Exports (US$ bn)

4425.6 25753.6 25638.4 16410.0 N.A

427.3 225.9 455.6 161.5 137.7

394.5 230.2 354.2 152.1 115.2

821.8 456.2 809.8 313.6 252.9

56.0 281.2 18.5 65.8 89.5

52700 13718 9326 1972 1445

3.6 8.5 0.2 0.4 0.5

N.A 1450.7 3071.7 1631.6 8672.0 N.A 3800.2 23190.5 6534.4 2215.0

N.A 2.1 61.8 0.4 95.6 3.1 34.6 141.7 76.0 20.4

N.A 2.7 37.7 0.5 77.1 2.4 36.9 121.3 65.3 22.7

N.A 4.7 99.5 0.9 172.7 5.4 71.5 263.0 141.3 43.1

N.A 118.1 46.3 40.6 174.4 63.2 93.3 288.7 100.6 115.0

N.A 54 –1523 25 3203 129 1111 7655 1068 1200

N.A 1.4 –0.7 1.2 3.2 1.5 1.5 8.4 0.8 3.2

3538.5

435.6

366.5

802.1

118.9

12922.0

2.3*

1604.9 2538.6 1329.2 1936.3 3424.1

6.9 57.2 0.5 11.7 5.3

9.6 74.1 0.9 12.5 6.6

16.5 131.3 1.4 24.2 11.9

31.8 23.0 25.8 33.5 65.0

45 3449 10 823 242

0.1 0.6 0.2 1.1 1.3

4410.8

1925.2

1716.5

3641.7

44.7

97687.0

1.2*

5

Total Trade/ FDI FDI/ Imports Trade GDP Inflow GDP (US$ bn) (US$ bn) (%) (US$ mn) (%)

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6

5.

6.

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them, but has one of the highest levels of per capita GDP, only after Japan. The contrast is even more glaring when one observes the differences in the degree of openness within Asia as indicated by its trade/GDP ratio, and attractiveness to FDI inflows. It is observed that except for Singapore and Hong Kong which are by nature highly open economies because of their entrepôt status, five other economies in ASEAN are also significantly tradeoriented economies, with their trade ratios almost close to or above 100 per cent of that of their GDP. In contrast, most of the South Asian economies appear to be much less dependent on trade for their growth prospects. India, which is the largest and one of the fastest growing economies in South Asia, exhibits a trade-openness ratio of about 23 per cent of its GDP, compared to about 56 per cent for another rapidly growing market economy in East Asia, viz. China, which incidentally is about three times larger than that of Japan. In terms of FDI inflows, China attracted the highest amount of FDI inflows in Asia in 2003, about US$53 billion compared to ASEAN (US$13 billion)4 and Japan (US$9 billion). In South Asia, the highest FDI inflows were recorded by India (US$3.5 billion). However, it is important to note here that the above data may not be directly comparable across the Asian economies, as many of them report FDI inflows according to their country definitions, which may not necessarily be consistent with international standards.5

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The Relationship between Trade and Growth: The Empirical Evidence As noticed in the previous section, there are significant differences with respect to openness to international trade and investment among the major economies in Asia. These have also been largely responsible for the differential impact on the growth of these economies. Indeed, bulk of the empirical literature using crosscountry data has supported the view that international trade in goods has been growth inducing.6 However, the effect of trade openness on growth has not been straightforward for the Asian economies. Thus, while many of the highly open economies in East Asia and in ASEAN experienced “miracle” growth in the decade of the 1980s and early 1990s, their growth prospects were affected adversely in the 1997–98 period by the East Asian economic crisis that was triggered by the devaluation of the Thai Baht on 2 July 1997. In contrast, some of the economies in Asia which did not practise a higher degree of trade orientation were not so adversely affected. This has prompted some economists to put forward a “revisionist view” of trade and growth (Rodriguez and Rodrik 2000). Indeed, while a number of studies have unearthed a positive association between trade and growth, many have been unable to ascertain the direction of causality. In this context, a recent study by Frankel and Romer (1999) examined a cross-section of 100 countries during the period since 1960. They conclude that while results vary on the basis of the specific data set and equations used for a particular set of countries, openness in general does appear

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to have a statistically and economically significant effect on growth. Trends in Merchandise Trade Flows in Asian Economies Tables 1.2 and 1.3 show the share of merchandise exports and imports of these Asian economies in global trade and in Asia’s total trade in the year 2002. It is observed that these countries in Asia accounted for about a quarter of global exports and imports. The Asian countries that had recorded the highest share in global merchandise trade were Japan (accounting for about 6.5 per cent of global exports and about 5.1 per cent of global imports), followed by China (accounting for about 5 per cent of global exports and 4.5 per cent of global imports), and Hong Kong. The ASEAN grouping together also accounted for about 5–6 per cent share in global trade, and accounted for more than a quarter of Asia’s total exports and imports. South Asian economies, including India accounted for less than 1 per cent of global exports and imports during this period. India, however, contributed to about 4.5 per cent of Asia’s exports and imports, while the other South Asian economies did not even contribute 1 per cent of Asia’s total merchandise trade. The above clearly indicates that East Asia and ASEAN economies have played a much more significant role in global merchandise trade and in Asia’s total merchandise trade, compared to its South Asian counterparts. This could perhaps be explained by the high reliance on export-oriented growth strategy being followed by most of the East Asian and ASEAN economies over the past few decades, compared

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TABLE 1.2 Share of Exports in Asia and World in 2002 Share in Share in Total Exports Asia’s World (US$ mn.) Exports (%) Exports (%)

Sl. No. Countries East Asia 1 China 2 Hong Kong 3 Japan 4 Korea 5 Taiwan

325711 200199 416632 161480 129850

28.52 17.53 36.49 14.14 11.37

5.07 3.12 6.49 2.52 2.02

Southeast Asia 6 Brunei 7 Cambodia 8 Indonesia 9 Laos 10 Malaysia 11 Myanmar 12 Philippines 13 Singapore 14 Thailand 15 Vietnam ASEAN

3416 1740 57144 397 93385 2629 35185 125087 68851 15713 403547

0.30 0.15 5.00 0.03 8.18 0.23 3.08 10.95 6.03 1.38 35.34

0.05 0.03 0.89 0.01 1.45 0.04 0.55 1.95 1.07 0.24 6.29

South Asia 16 Bangladesh 17 India 18 Nepal 19 Pakistan 20 Sri Lanka

5442 50447 543 9886 4680

0.48 4.42 0.05 0.87 0.41

0.08 0.79 0.01 0.15 0.07

1708417

149.61

26.62

TOTAL

Note: Considering Asia’s total exports as US$1141.9 billion and total global exports as US$6418.6 billion in 2002, as given in IMF DOTS. Source: IMF, Direction of Trade Statistics, Yearbook 2003.

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10

Regional Economic Integration

TABLE 1.3 Share of Imports in Asia and World in 2002 Share in Share in Total Imports Asia’s World (US$ mn.) Imports (%) Imports (%)

Sl. No. Countries East Asia 1 China 2 Hong Kong 3 Japan 4 Korea 5 Taiwan

295440 207761 337149 152123 105080

21.15 14.87 24.14 10.89 7.52

4.45 3.13 5.08 2.29 1.58

Southeast Asia 6 Brunei 7 Cambodia 8 Indonesia 9 Laos 10 Malaysia 11 Myanmar 12 Philippines 13 Singapore 14 Thailand 15 Vietnam ASEAN

1635 2476 31285 736 79506 2951 35397 116482 64721 19976 355165

0.12 0.18 2.24 0.05 5.69 0.21 2.53 8.34 4.63 1.43 25.43

0.02 0.04 0.47 0.01 1.20 0.04 0.53 1.76 0.98 0.30 5.35

South Asia 16 Bangladesh 17 India 18 Nepal 19 Pakistan 20 Sri Lanka

7848 64960 876 11238 6023

0.56 4.65 0.06 0.80 0.43

0.12 0.98 0.01 0.17 0.09

1543663

110.51

23.26

TOTAL

Note: Considering Asia’s total imports as US$1396.8 billion and total global exports as US$6636.9 billion in 2002, as given in IMF DOTS. Source: IMF, Direction of Trade Statistics, Yearbook 2003.

01 AEI Ch 1

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Trade and Investment in Asia

11

to South Asia, where the inward-looking and import substitution strategies have been followed in the past decade. However, in order to analyse the extent of intra-regional trade within these countries in Asia, it is also important to look at the bilateral trade flows among them. Tables 1.4 and 1.5 present a detailed matrix on bilateral trade flows within these Asian economies in 1995 and in 2002. It is observed that South Asian economies (with the possible exception of Nepal) have directed less than a quarter of their exports to other Asian economies, while the reverse is true for East Asian and ASEAN economies. It is also observed that the share of exports being directed towards Asia from most of these economies declined in 2002, compared to that in 1995. In 2002, while nearly half of Chinese and about a third of Japanese and Korean exports were directed towards Asian economies, less than a quarter of India’s exports were destined for Asia. This indicates that merchandise trade involving East Asian economies and ASEAN have been much more intra-Asian oriented than that of South Asia, whose exports have been largely directed towards the United States and Europe. In order to illustrate this, it may be useful to analyse the shares of exports accruing to the top Asian trading partners of the four major Asian economies, viz. China, Japan, Korea, ASEAN and India over 1995–2002. Tables 1.6 and 1.7 thus estimate the intra-Asian export shares of these economies, for the period 1995 and 2002 respectively. In case of China, in the year 2002, it is observed that more than half of its exports to Asia and about a third of its total exports have been directed towards Hong Kong and Japan, followed by ASEAN (7.2 per cent) and Korea (4.8

01 AEI Ch 1

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12

Regional Economic Integration

TABLE 1.4 Trade Matrix of Select Asian Countries in 1995 (In US$ millions) Exports to Exports from China East Asia China Hong Kong Japan Korea Taiwan

Hong Kong

Japan

Korea

Taiwan

N.A 57861 21934 9144 14785

36003 N.A 27780 10682 16710

28466 10596 N.A 17048 14329

6688 2804 31292 N.A 2563

3095 4619 28984 3882 N.A

Southeast Asia Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam ASEAN

N.A 5 1742 9 1889 136 209 2759 1642 362 8753

5 11 1657 N.A 3941 58 822 10126 2921 257 19798

1883 7 12288 5 9199 86 2740 9219 9477 1461 46365

531 N.A 2917 N.A 2015 12 442 3243 801 235 10196

84 9 N.A 5 2280 38 568 4813 1354 439 9590

South Asia Bangladesh India Nepal Pakistan Sri Lanka

18 283 N.A 119 3

116 1821 1 602 58

103 2130 2 542 200

7 394 N.A 271 37

5 251 1 175 N.A

113571 192765 58.92

119781 336027 35.65

54252 135110 40.15

Select Asia Total 112900 Total Imports 132163 Share 85.42

50602 N.A N.A

Source: IMF, Direction of Trade Statistics (DOTS), Yearbook 2002.

01 AEI Ch 1

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Trade and Investment in Asia

13

TABLE 1.4 – continued

Exports to

Brunei

01 AEI Ch 1

Cambodia

Indonesia

Laos

Malaysia

Myanmar

34 24 131 23 52

52 39 77 N.A 27

1438 1062 9969 2958 N.A

48 8 29 N.A 5

1281 1547 16802 2951 3952

618 63 158 86 24

N.A N.A N.A N.A 289 1 3 1466 64 N.A 1823

N.A N.A 80 N.A 78 N.A N.A 500 334 95 1087

13 4 N.A N.A 970 95 126 N.A 811 54 2073

N.A 3 N.A N.A 1 N.A N.A 41 354 21 420

33 13 987 N.A N.A 38 314 22665 1554 111 25715

N.A N.A 60 N.A 229 N.A 2 637 N.A N.A 928

1 5 N.A 3 N.A

N.A 2 N.A 1 N.A

5 501 N.A 105 16

N.A N.A N.A N.A N.A

6 355 N.A 46 22

2 21 N.A 3 N.A

2096 2960 70.81

1285 1573 81.69

13

18127 40629 44.62

510 589 86.59

52677 77620 67.87

1903 2342 81.26

21/12/04, 4:57 PM

14

Regional Economic Integration

TABLE 1.4 – continued

Exports to Exports from Philippines

Singapore

Thailand

Vietnam

ASEAN

East Asia China Hong Kong Japan Korea Taiwan

1030 2009 7100 1493 1537

3500 4944 23006 6689 5116

1752 1615 19719 2428 3421

722 637 922 1351 901

10475 11948 77913 17979 15035

Southeast Asia Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam ASEAN

21 N.A 590 N.A 651 1 N.A 1928 414 41 3646

313 38 3767 N.A 14960 192 994 N.A 7917 690 28871

372 146 703 83 2868 37 799 6824 N.A 101 11933

N.A 21 288 88 269 N.A 124 1790 468 N.A 3048

752 225 6475 171 20315 364 2362 35851 11916 1113 79544

2 122 N.A 30 10

23 807 1 88 73

5 461 N.A 60 19

3 97 N.A 31 1

47 2371 1 367 141

16979 28282 60.03

73118 124394 58.78

41413 73692 56.20

South Asia Bangladesh India Nepal Pakistan Sri Lanka Select Asia Total Total Imports Share

7713 8359 92.27

215821 500664 987056

Source: IMF, Direction of Trade Statistics (DOTS), Yearbook 2002.

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Trade and Investment in Asia

15

TABLE 1.4 – continued

Exports to

Bangladesh

Nepal

Pakistan Sri Lanka

Total Exports Share

633 500 348 568 180

765 803 2543 1126 312

53 74 60 13 14

789 76 1240 359 125

239 364 429 331 N.A

87206 31784 170589 51988 49268

148955 173556 443047 131312 N.A

58.55 18.31 38.50 39.59 N.A

N.A N.A 90 N.A 55 4 5 589 192 N.A 935

N.A 26 381 N.A 821 146 20 1877 290 10 3571

N.A N.A N.A N.A 4 N.A N.A 85 129 N.A 218

N.A 1 119 N.A 716 28 7 306 205 N.A 1382

N.A N.A 103 N.A 186 1 9 377 216 N.A 892

3255 279 24030 181 39532 737 6975 66486 27501 3515 172491

3388 357 45428 311 73724 1198 17371 118187 57201 5621 296700

96.07 78.15 52.90 58.20 53.62 61.52 40.15 56.25 48.08 62.53 58.14

N.A 960 4 153 12

36 N.A 25 39 32

10 107 N.A 3 N.A

26 70 N.A N.A 43

11 383 1 55 N.A

361 8487 35 2207 523

3129 30537 324 7991 3801

11.54 27.79 10.80 27.62 13.76

4293 6496 66.09

01 AEI Ch 1

India

Select Asia Total

9252 552 4110 34484 767 11461 26.83 71.97 35.86

15

2705 4481 60.37

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16

Regional Economic Integration

TABLE 1.5 Trade Matrix of Select Asian Countries in 2002 (In US$ millions) Exports to Exports from China East Asia China Hong Kong Japan Korea Taiwan Southeast Asia Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam ASEAN South Asia Bangladesh India Nepal Pakistan Sri Lanka

N.A 78744 39958 23754 38082

220 22 2903 9 5253 124 1356 6863 3553 1013 21316

12 2067 5 236 12

Hong Kong 58483 N.A 25432 10146 14922

48483 10745 N.A 15143 13553

0.73 8 1242 0.06 5307 22 2359 11475 3699 235

1377 68 12045 6 10530 100 5293 8935 10000 2299

24348

50653

101 2272 0.81 478 57

Select Asia Total 204186 Total Imports 295440 Share 69.11

Japan

136240 207761 65.58

Korea 15508 3905 28612 N.A 4832

420 3 4107 0.1 3140 51 1339 5208 1398 428 16094

56 1900 6 142 140

13 1135 0.9 247 33

140821 337149 41.77

70380 152123 46.27

Taiwan 6590 4438 26312 6632 N.A

0.05 5 2067 3 3509 31 2485 6196 1968 408 16672

3 501 0.69 0 12 61161 105080 58.20

Note: Figures are rounded off unless less than US$1 million Source: IMF, Direction of Trade Statistics (DOTS), Yearbook 2003.

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Trade and Investment in Asia

17

TABLE 1.5 – continued

Exports to

Brunei

01 AEI Ch 1

Cambodia

Indonesia

21 58 319 27 13

252 339 70 115 213

3427 865 6237 3146 1010

N.A 0.11 32 0 257 0.29 3 456 40 2

0.01 N.A 69 0.02 55 0.07 8 352 515 158

32 0.63 N.A 0.16 1802 29 205 4100 1681 49

790.4

1157.1

7898.9

0.93 3 0.01 3 0

0.05 3 0 7 0

7 580 0.03 81 8

1235 1635 75.56

2156 2476 87.08

23260 31285 74.35

17

Laos 54 6 18 4 1

0 0.87 1 N.A 3 0 0 26 404 70 505 7

0 6 0 0 0 594 736 80.69

Malaysia

Myanmar

4975 1983 11016 3218 4437

725 64 115 143 162

4 18 2030 0.35 N.A 70 1647 21807 2835 297

0 0 54 0 239 N.A 4 524 324 6

28708

1151

6 585 0.27 64 9

1 58 0 8 0.27

55002 79506 69.18

2427 2951 82.25

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18

Regional Economic Integration

TABLE 1.5 – continued

Exports to Exports from Philippines

Singapore

East Asia China Hong Kong Japan Korea Taiwan

2042 2308 8457 2950 1784

6969 4053 14183 4222 5329

Southeast Asia Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

0.49 2 778 0.02 1335 2 N.A 3039 1274 256

194 77 5349 0.45 15958 97 2472 N.A 5554 853

ASEAN

6686

30554

South Asia Bangladesh India Nepal Pakistan Sri Lanka Select Asia Total Total Imports Share

0.33 389 0.14 26 6 24649 35397 69.64

27 1053 4 53 72 66519 116482 57.11

Thailand

Vietnam

ASEAN

2959 2155 13217 2335 2905

2150 769 2135 2240 2516

23574 12600 55767 18400 18370

413 10 1227 85 3972 831 1083 5710 N.A 219

0.01 27 393 67 664 4 103 2082 947 N.A

643.51 135.61 9933 153 24285 1033 5525 38096 13574 1910

13550

4287.01

95288

11 705 0.32 67 14

8 225 0.03 31 9

61.31 3607 4.8 340 118.27

37918 64721 58.59

14370 19976 71.94

228131 355165 64.23

Note: Figures are rounded off unless less than US$1 million Source: IMF, Direction of Trade Statistics (DOTS), Yearbook 2003.

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Trade and Investment in Asia

19

TABLE 1.5 – continued

Exports to

Bangladesh 1068 442 429 506 359

0 0 246 0.22 226 22 6 749 229 3 1481.22

N.A 1042 5 104 10 5446 7848 69.40

01 AEI Ch 1

India 2673 1444 1869 1384 712

0.23 0.11 1302 0 1761 195 89 2649 413 49

Nepal

Pakistan Sri Lanka

105 37 17 18 3

1243 96 720 405 0

Select Asia Total

Total Share Exports (%)

338 349 285 305 287

158065 34056 139443 52939 53038

325711 200199 416632 161480 129850

48.53 17.01 33.47 32.78 40.85

0.03 0 6 0 8 0 1 69 22 0

0.33 0.5 265 0.01 524 14 8 393 228 7

0 0 153 0 233 1 8 382 152 5

2442 220 31366 162 49523 1469 17113 74152 31683 5344

3416 1740 57144 397 93385 2629 35185 125087 68851 15713

71.48 12.66 54.89 40.90 53.03 55.89 48.64 59.28 46.02 34.01

6458.34 106.03

1439.84

934

213475

403547

52.90

306 11533 279 1433 571

5442 50447 543 9886 4680

5.63 22.86 51.44 14.50 12.20

39 N.A 260 49 171

4 172 N.A 2 0.88

27 148 0.93 N.A 29

2 756 0.17 71 N.A

15059 465 4109 64960 876 11238 23.18 53.07 36.56

3327 6023 55.24

19

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20

Regional Economic Integration

TABLE 1.6 Matrix of Export Shares of Select Asian Countries in 1995 (In percentages) Exports to Exports from China

Hong Kong

Japan

Korea

Taiwan

East Asia China Hong Kong Japan Korea Taiwan

N.A 33.34 4.95 6.96 N.A

24.17 N.A 6.27 8.13 N.A

19.11 6.11 N.A 12.98 N.A

4.49 1.62 7.06 N.A N.A

2.08 2.66 6.54 2.96 N.A

Southeast Asia Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam ASEAN

N.A 1.40 3.83 2.89 2.56 11.35 1.20 2.33 2.87 6.44 2.95

0.15 3.08 3.65 N.A 5.35 4.84 4.73 8.57 5.11 4.57 6.67

55.58 1.96 27.05 1.61 12.48 7.18 15.77 7.80 16.57 25.99 15.63

15.67 N.A 6.42 N.A 2.73 1.00 2.54 2.74 1.40 4.18 3.44

2.48 2.52 N.A 1.61 3.09 3.17 3.27 4.07 2.37 7.81 3.23

0.58 0.93 N.A 1.49 0.08

3.71 5.96 0.31 7.53 1.53

3.29 6.98 0.62 6.78 5.26

0.22 1.29 N.A 3.39 0.97

0.16 0.82 0.31 2.19 N.A

South Asia Bangladesh India Nepal Pakistan Sri Lanka

N.A: Not Available Source: IMF, Computed from Direction of Trade Statistics (DOTS), Yearbook 2002.

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Trade and Investment in Asia

21

TABLE 1.6 – continued

Exports to

01 AEI Ch 1

Brunei

Cambodia

Indonesia

Laos

Malaysia

Myanmar

0.02 0.01 0.03 0.02 N.A

0.03 0.02 0.02 N.A N.A

0.97 0.61 2.25 2.25 N.A

0.03 N.A 0.01 N.A N.A

0.86 0.89 3.79 2.25 N.A

0.41 0.04 0.04 0.07 N.A

N.A N.A N.A N.A 0.39 0.08 0.02 1.24 0.11 N.A 0.61

N.A N.A 0.18 N.A 0.11 N.A N.A 0.42 0.58 1.69 0.37

0.38 1.12 N.A N.A 1.32 7.93 0.73 N.A 1.42 0.96 0.70

N.A 0.84 N.A N.A N.A N.A N.A 0.03 0.62 0.37 0.14

0.97 3.64 2.17 N.A N.A 3.17 1.81 19.18 2.72 1.97 8.67

N.A N.A 0.13 N.A 0.31 N.A 0.01 0.54 N.A N.A 0.31

0.03 0.02 N.A 0.04 N.A

N.A 0.01 N.A 0.01 N.A

0.16 1.64 N.A 1.31 0.42

N.A N.A N.A N.A N.A

0.19 1.16 N.A 0.58 0.58

0.06 0.07 N.A 0.04 N.A

21

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22

Regional Economic Integration

TABLE 1.6 – continued

Exports to Exports from Philippines

Singapore

Thailand

Vietnam

ASEAN

East Asia China Hong Kong Japan Korea Taiwan

0.69 1.16 1.60 1.14 N.A

2.35 2.85 5.19 5.09 N.A

1.18 0.93 4.45 1.85 N.A

0.48 0.37 0.21 1.03 N.A

7.03 6.88 17.59 13.69 N.A

Southeast Asia Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam ASEAN

0.62 N.A 1.30 N.A 0.88 0.08 N.A 1.63 0.72 0.73 1.23

9.24 10.64 8.29 N.A 20.29 16.03 5.72 N.A 13.84 12.28 9.73

10.98 40.90 1.55 26.69 3.89 3.09 4.60 5.77 N.A 1.80 4.02

N.A 5.88 0.63 28.30 0.36 N.A 0.71 1.51 0.82 N.A 1.03

22.20 63.03 14.25 54.98 27.56 30.38 13.60 30.33 20.83 19.80 26.81

South Asia Bangladesh India Nepal Pakistan Sri Lanka

0.06 0.40 N.A 0.38 0.26

0.74 2.64 0.31 1.10 1.92

0.16 1.51 N.A 0.75 0.50

0.10 0.32 N.A 0.39 0.03

1.50 7.76 0.31 4.59 3.71

N.A: Not Available Source: IMF, Computed from Direction of Trade Statistics (DOTS), Yearbook 2002.

01 AEI Ch 1

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Trade and Investment in Asia

23

TABLE 1.6 – continued

Exports to

01 AEI Ch 1

Bangladesh

India

Nepal

Pakistan

Sri Lanka

Share in total exports

0.42 0.29 0.08 0.43 N.A

0.51 0.46 0.57 0.86 N.A

0.04 0.04 0.01 0.01 N.A

0.53 0.04 0.28 0.27 N.A

0.16 0.21 0.10 0.25 N.A

58.55 18.31 38.50 39.59 N.A

N.A N.A 0.20 N.A 0.07 0.33 0.03 0.50 0.34 N.A 0.32

N.A 7.28 0.84 N.A 1.11 12.19 0.12 1.59 0.51 0.18 1.20

N.A N.A N.A N.A 0.01 N.A N.A 0.07 0.23 N.A 0.07

N.A 0.28 0.26 N.A 0.97 2.34 0.04 0.26 0.36 N.A 0.47

N.A N.A 0.23 N.A 0.25 0.08 0.05 0.32 0.38 N.A 0.30

96.07 78.15 52.90 58.20 53.62 61.52 40.15 56.25 48.08 62.53 58.14

N.A 3.14 1.23 1.91 0.32

1.15 N.A 7.72 0.49 0.84

0.32 0.35 N.A 0.04 N.A

0.83 0.23 N.A N.A 1.13

0.35 1.25 0.31 0.69 N.A

11.54 27.79 10.80 27.62 13.76

23

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24

Regional Economic Integration

TABLE 1.7 Matrix of Export Shares of Select Asian Countries in 2002 (In Percentages) Exports to Exports from China

Hong Kong

Japan

Korea

Taiwan

N.A 39.33 9.59 14.71 29.33

17.96 N.A 6.10 6.28 11.49

14.89 5.37 N.A 9.38 10.44

4.76 1.95 6.87 N.A 3.72

2.02 2.22 6.32 4.11 N.A

Southeast Asia Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam ASEAN

6.44 1.26 5.08 2.27 5.63 4.72 3.85 5.49 5.16 6.45 5.28

0.02 0.46 2.17 0.02 5.68 0.84 6.70 9.17 5.37 1.50 6.03

40.31 3.91 21.08 1.51 11.28 3.80 15.04 7.14 14.52 14.63 12.55

12.30 0.17 7.19 0.03 3.36 1.94 3.81 4.16 2.03 2.72 3.99

N.A 0.29 3.62 0.76 3.76 1.18 7.06 4.95 2.86 2.60 4.13

South Asia Bangladesh India Nepal Pakistan Sri Lanka

0.22 4.10 0.92 2.39 0.26

1.86 4.50 0.15 4.84 1.22

1.03 3.77 1.10 1.44 2.99

0.24 2.25 0.17 2.50 0.71

0.06 0.99 0.13 N.A 0.26

East Asia China Hong Kong Japan Korea Taiwan

N.A: Not Available Source: IMF, Computed from Direction of Trade Statistics (DOTS), Yearbook 2003.

01 AEI Ch 1

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Trade and Investment in Asia

25

TABLE 1.7 – continued

Exports to

01 AEI Ch 1

Brunei

Cambodia

Indonesia

Laos

Malaysia

Myanmar

0.01 0.03 0.08 0.02 0.01

0.08 0.17 0.02 0.07 0.16

1.05 0.43 1.50 1.95 0.78

0.02 N.A N.A N.A N.A

1.53 0.99 2.64 1.99 3.42

0.22 0.03 0.03 0.09 0.12

N.A 0.01 0.06 N.A 0.28 0.01 0.01 0.36 0.06 0.01 0.20

N.A N.A 0.12 0.01 0.06 N.A 0.02 0.28 0.75 1.01 0.29

0.94 0.04 N.A 0.04 1.93 1.10 0.58 3.28 2.44 0.31 1.96

N.A 0.05 N.A N.A N.A N.A N.A 0.02 0.59 0.45 0.13

0.12 1.03 3.55 0.09 N.A 2.66 4.68 17.43 4.12 1.89 7.11

N.A N.A 0.09 N.A 0.26 N.A 0.01 0.42 0.47 0.04 0.29

0.02 0.01 N.A 0.03 N.A

N.A 0.01 N.A 0.07 N.A

0.13 1.15 0.01 0.82 0.17

N.A 0.01 N.A N.A N.A

0.11 1.16 0.05 0.65 0.19

0.02 0.11 N.A 0.08 0.01

25

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26

Regional Economic Integration

TABLE 1.7 – continued

Exports to Exports from Philippines

Singapore

Thailand

Vietnam

ASEAN

East Asia China Hong Kong Japan Korea Taiwan

0.63 1.15 2.03 1.83 1.37

2.14 2.02 3.40 2.61 4.10

0.91 1.08 3.17 1.45 2.24

0.66 0.38 0.51 1.39 1.94

7.24 6.29 13.39 11.39 14.15

Southeast Asia Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam ASEAN

0.01 0.11 1.36 0.01 1.43 0.08 N.A 2.43 1.85 1.63 1.66

5.68 4.43 9.36 0.11 17.09 3.69 7.03 N.A 8.07 5.43 7.57

12.09 0.57 2.15 21.41 4.25 31.61 3.08 4.56 N.A 1.39 3.36

N.A 1.55 0.69 16.88 0.71 0.15 0.29 1.66 1.38 N.A 1.06

18.84 7.79 17.38 38.54 26.01 39.31 15.70 30.46 19.72 12.16 23.61

South Asia Bangladesh India Nepal Pakistan Sri Lanka

0.01 0.77 0.03 0.26 0.13

0.50 2.09 0.74 0.54 1.54

0.20 1.40 0.06 0.68 0.30

0.15 0.45 0.01 0.31 0.19

1.13 7.15 0.88 3.44 2.53

N.A: Not Available Source: IMF, Computed from Direction of Trade Statistics (DOTS), Yearbook 2003.

01 AEI Ch 1

26

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Trade and Investment in Asia

27

TABLE 1.7 – continued

Exports to

01 AEI Ch 1

Bangladesh

India

Nepal

Pakistan

Sri Lanka

Share in total exports

0.33 0.22 0.10 0.31 0.28

0.82 0.72 0.45 0.86 0.55

0.03 0.02 N.A 0.01 N.A

0.38 0.05 0.17 0.25 N.A

0.10 0.17 0.07 0.19 0.22

48.53 17.01 33.47 32.78 40.85

N.A N.A 0.43 0.06 0.24 0.84 0.02 0.60 0.33 0.02 0.37

0.01 0.01 2.28 N.A 1.89 7.42 0.25 2.12 0.60 0.31 1.60

N.A N.A 0.01 N.A 0.01 N.A N.A 0.06 0.03 N.A 0.03

0.01 0.03 0.46 N.A 0.56 0.53 0.02 0.31 0.33 0.04 0.36

N.A N.A 0.27 N.A 0.25 0.04 0.02 0.31 0.22 0.03 0.23

71.48 12.66 54.89 40.90 53.03 55.89 48.64 59.28 46.02 34.01 52.90

N.A 2.07 0.92 1.05 0.21

0.72 N.A 47.88 0.50 3.65

0.07 0.34 N.A 0.02 0.02

0.50 0.29 0.17 N.A 0.62

0.04 1.50 0.03 0.72 N.A

5.63 22.86 51.44 14.50 12.20

27

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Regional Economic Integration

per cent). Chinese exports to another large market economy in Asia, viz. India, constituted less than 1 per cent of its total exports. However, compared to 1995, it is observed that the share of Hong Kong and Japan declined quite significantly, while that of China’s exports to India rose by more than 60 per cent during this period. In case of Japan, ASEAN has been its top export destination within Asia constituting about 13.4 per cent of total Japanese exports in 2002. However, this share has declined compared to 1995. Singapore and Thailand constituted nearly half of the share of Japanese exports to ASEAN during both these periods, followed by Malaysia. However, China was the second most favoured destination attracting about 9.6 per cent of Japanese exports in 2002, followed by Korea and Taiwan (about 6–7 per cent each). In fact, the share of Japan’s exports to China nearly doubled over that in 1995 (4.9 per cent), when it was the fifth most favoured destination for Japanese exports. Japanese exports to India in 2002 constituted a negligible (0.45 per cent) share in its total value, and was even lower than that in 1995. In case of Korea, close to a half of its exports to Asia and about a quarter of its total exports have been directed towards China (14.7 per cent) and ASEAN (11.4 per cent), followed by Japan (9.4 per cent) and Hong Kong (6.3 per cent) in 2002. It is interesting to note here that in 1995, it was ASEAN and Japan which together accounted for more than half of Korea’s exports to Asia, with China accounting for only about 7 per cent of Korea’s total exports. Korean exports to India constituted less than 1 per cent of its total exports, and remained similar over the 1995–2002 period.

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29

The trade pattern of ASEAN reveals that intra-ASEAN exports constitute about a quarter of ASEAN’s total exports directed towards Asia, and its share has declined in 2002, compared to about 28.6 per cent in 1995. Japan remained the second most favoured destination of ASEAN’s exports to Asia over the period, constituting about 12.5 per cent of the total in 2002 (declining from 15.6 per cent in 1995), followed by Hong Kong (6 per cent) and China (5.3 per cent). However, in 2002, the share of ASEAN’s exports to China was nearly 80 per cent higher than that in 1995, while it declined by about 10 per cent in the case of Chinese exports to Hong Kong. It is observed that only about 1.6 per cent of ASEAN’s exports have been directed towards India in 2002, which saw a 33 per cent increase in its export share compared to that in 1995. In the case of Singapore, the most open and globalized economy in ASEAN, about 30 per cent of its total exports (constituting domestic exports and a significant proportion of re-exports)7 were destined for other ASEAN economies (particularly Malaysia), while Hong Kong has been the second most favoured destination for its exports in Asia, attracting 9.2 per cent of the total in 2002. This is followed by Japan (7.1 per cent) and China (5.5 per cent). Singapore’s total exports to China saw an increase in share of about 136 per cent over 1995–2002, increasing from about 2.3 per cent in 1995 to over 5 per cent in 2002. Singapore’s total exports to India (almost 40 per cent of which were contributed by re-exports) constituted only about 2.1 per cent of its total exports in 2002, but its share increased by a third of its value in 1995.

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Regional Economic Integration

The most favoured export destination of India has been ASEAN, which accounted for about 7.1 per cent of India’s exports in 2002, with Singapore accounting for about 2.1 per cent, followed by Malaysia and Thailand. Hong Kong and China were the second most favoured export destination for India’s exports accounting for 4 per cent each, followed by Japan (3.7 per cent) and Korea (2.2 per cent). While India’s export shares to Japan and Hong Kong declined significantly over the 1995–2002 period, that of Korea and China registered a significant increase. In particular, the share of China in India’s total exports increased from 0.93 per cent in 1995 to about 4.1 per cent in 2002, an increase of about 340 per cent over a seven-year period, while that of Korea registered a three-fourth increase. The shares of exports of other South Asian economies to ASEAN and East Asian economies have been on the lower side, rarely exceeding 1 to 2 per cent (Tables 1.6 and 1.7). The above clearly indicates that while the East Asian and the Southeast Asian economies seem to be more closely linked by bilateral trade flows, this has not been the case for South Asia, which has significant potential to expand trade with the rest of the Asian economies. India, in particular has significant scope for expanding its merchandise trade linkages with ASEAN and East Asia. Its rapid expansion of bilateral trade and investment with China and Korea over 1995–2002 indicates that its policy objectives are geared towards achieving the same. It is important to note here that the analysis so far has not included services trade, which is emerging as a rapid engine of growth for many Asian economies. This has been largely due to the fact that bilateral trade data on services

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trade in Asian economies continues to remain unavailable. If services transactions are to be included, the scope for expansion of trade between India, ASEAN and East Asian economies, is likely to be much larger than observed from the export share figures. This is indicated from Figures 1.1 and 1.2, which show that while Japan and ASEAN’s share were declining in world trade in commercial services during the 1990s, that of India, China and Korea have increased. However, Japan and ASEAN still continue to dominate services trade in Asia, accounting for nearly half of the total of Asia’s trade in commercial services in 2002. Indeed, studies like Rajan and Sen (2002), Asher et al. (2003), Asher and Srivastava (2003), Sen et al. (2004) and Sen (2002) have attempted to qualitatively analyse the potential for services trade co-operation, particularly between India and ASEAN and also East Asian economies, and assert that services trade in certain Asian economies have outperformed merchandise trade in recent years, and could provide significant avenues for mutual economic co-operation. Investment Flows in Asian Economies The crucial role of foreign direct investment (FDI) in the global economy has now well accepted. It is recognized that the FDI has the potential to facilitate technological diffusion and promote greater trade and integration of the developing economies with the global market. Thus, it plays a catalytic role in economic development, and has increasingly become the largest single component of private capital flows to developing countries.

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32

0

1

2

3

4

5

6

7

8

9

10

Source: WTO

1985

1987

1991

China Japan ASEAN

1989

1993

1995

1999

India Korea, Republic of

1997

Year

2001

FIGURE 1.1 Share of Asian Economies in World Trade in Commercial Services, 1985–2001

32 Regional Economic Integration

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%

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33

0

5

10

15

20

25

30

35

40

45

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Source: WTO

China Japan ASEAN

India Korea, Republic of

Year

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

FIGURE 1.2 Share of Major Asian Economies in Asia’s Total Trade in Commercial Services, 1985–2002

Trade and Investment in Asia 33

%

34

Regional Economic Integration

In recent years, world FDI flows have been growing faster than that of world output or trade, and their sectoral composition has also changed significantly over the past decades, with more FDI being directed towards the service sector rather than the manufacturing sector for many developing economies. Table 1.8 indicates the trends in FDI inflows in major Asian economies and their contribution to domestic capital formation in these economies. As indicated earlier, the data may not be directly comparable, since FDI inflows are reported according to country definitions, which may or may not include all the components of FDI as defined according to the international standards. It is observed that in 2002, world FDI inflows were worth US$651 billion, with the Asian economies in South, East and Southeast Asia accounting for about 13.6 per cent (US$89 billion) of the total. China accounted for the largest recipient of global FDI inflows in Asia (53 per cent), followed by Hong Kong (15.5 per cent), Singapore (8.6 per cent), Japan (7.0 per cent) and India (3.8 per cent).8 Among ASEAN, Singapore has been the largest recipient of global FDI directed towards Asia, followed by Malaysia, Vietnam and the Philippines. However, except for China, Hong Kong, and Singapore, none of the other Asian economies attracted more than 1 per cent of world FDI inflows. Being entrepôt and highly open city-state economies, it is not surprising that Hong Kong and Singapore are the two-most FDI-dependent economies, as indicated by the significant contribution of FDI to their GDP and domestic capital formation (GDCF). It is observed that more than a quarter of the domestic investment (GDCF)

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35

in the new ASEAN members (Myanmar and Cambodia) has also been through FDI inflows. Compared to these trends, FDI contributed to only about 10.5 per cent of GDCF in China and 3.2 per cent in the Indian economy. On the other hand, FDI into China contributed to about 3.6 per cent of its GDP, while that into India contributed only about 0.6 per cent, indicating a much lower level of utilization of FDI inflows in the Indian economy. It is, however, important to remember here that India has been reporting FDI mostly in terms of equity flows and not at project cost, as in case of China, which includes reinvested earnings, intra-company loans and other components along with equity inflows. If India’s FDI inflows were to be also reported at project cost, this difference in FDI/GDP ratio between China and India is likely to be much less than is observed from the reported data.9 Detailed data on bilateral investment flows within all the Asian countries remain unavailable. However, there is evidence that FDI inflows between ASEAN and China, as well as ASEAN and India have been increasing significantly in recent years, with Japan remaining the largest investor in ASEAN among Asian economies. Figure 1.3 shows the cumulative FDI inflows in ASEAN from the major Asian economies in 1995–2001. It is observed that Japan has invested about US$22 billion worth of FDI in ASEAN over this period, while Hong Kong and Taiwan have invested about US$4–5 billion. In comparison, China’s cumulative investments in ASEAN was only US$0.8 billion during this period, while India’s investments were only worth US$0.2 billion. It is, however, expected that the ongoing regionalism

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TABLE 1.8 Trends in FDI Inflows in Select Asian Countries in 2001/02 FDI Inflow Gross Fixed Capital Formation (US$ million) (US$ million)

Sl. No. Countries East Asia 1 China 2 Hong Kong 3 Japan 4 Korea 5 Taiwan

46846 13718 6243 1972 1445

444757 37569 1068658 127474 N.A

Southeast Asia 6 Brunei 7 Cambodia 8 Indonesia 9 Laos 10 Malaysia 11 Myanmar 12 Philippines 13 Singapore 14 Thailand 15 Vietnam

1035 148 –3279 25 3203 192 1111 7655 1068 1200

N.A 543 30300 N.A 22043 664 15001 22375 29134 10526

South Asia 16 Bangladesh 17 India 18 Nepal 19 Pakistan 20 Sri Lanka

45 3403 10 823 242

10924 105387 1081 7694 3675

Note: World FDI inflows was worth US$832825 million in 2001, and US$651188 million in 2002. East Asia, South Asia and Southeast Asia together attracted FDI inflows worth US$88613 million in 2002. N.A: Not Available Source:UNCTAD, World Investment Report, 2003; IMF, IFS, January 2004.

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TABLE 1.8 – continued

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FDI/GFCF (%)

FDI/GDP (%)

Year

Share in World FDI Inflows (%)

10.53 36.51 0.58 1.55 N.A

3.6 8.5 0.2 0.4 0.5

2001 2002 2001 2002 N.A

5.62 2.11 0.75 0.30 0.22

N.A 27.26 –10.82 N.A 14.53 28.92 7.41 34.21 3.67 11.40

N.A 1.4 –0.7 1.2 3.2 1.5 1.5 8.4 0.8 3.2

N.A 2001 2001 N.A 2002 2001 2002 2002 2002 2002

0.16 0.02 –0.39 0.00 0.49 0.02 0.17 1.18 0.16 0.18

0.41 3.23 0.93 10.70 6.59

0.1 0.6 0.2 1.1 1.3

2002 2001 2002 2002 2002

0.01 0.41 0.00 0.13 0.04

37

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38

0

5

10

15

20

25

Source: ASEAN FDI Statistics Database 2002

Japan China Hong Kong

Cumulative FDI inflows

Korea

Taiwan

Countries

India

FIGURE 1.3 Cumulative FDI Inflows in ASEAN from Major Asian Economies, 1995–2001

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US$ billion

Trade and Investment in Asia

39

efforts between ASEAN and China and ASEAN and India, and its focus on investment co-operation would lead to a quantum jump in these investment figures in future. Emerging Regionalism in Asia: The Major Trends10 Regionalism has increasingly being embraced by major Asian economies in the course of the past decade, which has led to the proliferation of several regional trading agreements involving most of the Asian economies under study. While the ASEAN Free Trade Area (AFTA) involving the ASEAN economies and the South Asian Preferential Trade Agreement (SAPTA) emerged as two major regional groupings involving Southeast Asia and South Asia during the past two decades, recent years have witnessed a rapid proliferation of such regional trading agreements also involving East Asian countries, viz. Japan, China and Korea. With Singapore taking the lead towards bilateral FTAs in ASEAN with the signing of the ANZSCEP agreement with New Zealand, there is also a surging interest among the ASEAN members in negotiating bilateral FTAs with their major trading partners as a single grouping, during the past two years, besides individual ASEAN countries continuing to negotiate on FTA deals with their emerging trading partners. This section analyses in particular three major RTAs involving ASEAN, which aims to integrate ASEAN with China, Japan and India, thus leading towards some sort of a pan-Asian Economic Community as envisaged in a recent study by Kumar (2002). These are the ASEAN-China FTA

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(ACFTA), ASEAN-Japan Closer Economic Partnership (CEP) and the ASEAN-India FTA.

ASEAN-China FTA (ACFTA) The ACFTA is the first such agreement that China has entered into after becoming a WTO member. It is very significant for regionalism in Asia as it is going to be one of the largest FTAs ever negotiated, involving about 1.7 billion people, with a combined GDP of US$2 trillion, spanning across eleven diverse and heterogeneous economies, both in terms of their size and levels of development. The idea of an ACFTA was first mooted by Chinese Premier Zhu Rongji during the ASEAN-China Summit in November 2001. The Framework Agreement for this FTA was given concrete shape during the ASEAN Summit in Cambodia in November 2002. One of the key features of the ACFTA agreement is the “early harvest” clause. This clause commits ASEAN and China to reduce their tariffs for certain products (mainly agricultural products) within a span of three years, so as to demonstrate a reflection of their commitment to tariff reduction. The early harvest products belong to the following categories, viz. live animals, meat and edible meat offal, fish, dairy produce, other animal products, live trees, edible vegetables, and edible fruits and nuts. Tariff reduction/elimination for goods that are not included under this clause are to be negotiated through the ACFTA, with negotiations to be completed by 30 June 2004. The timetable indicates the formation of the ACFTA in goods for the older ASEAN members (ASEAN-5 plus Brunei) by 2010, and that for the newer members (i.e.

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41

Cambodia, Myanmar, Laos, PDR, and Vietnam) is scheduled to be by 2015, thus providing newer members more time to adjust to the requirements of the ACFTA. The ACFTA also aims to be comprehensive. The Framework Agreement indicates that both parties have agreed to commence negotiations for the liberalization of services and investment by this year. Five priority areas for economic co-operation have been identified in the agreement, viz. agriculture, human resource development (HRD), information and communication technology (ICT), investment and the Mekong River basin development. Implementation of capacity-building programmes and provision of technical assistance for newer ASEAN members to help catch up with the older ones have also been agreed upon in the Framework Agreement for the ACFTA. The ACFTA will enhance economic interaction between ASEAN and China and strengthen the growing mutual interdependence between them. However, it is argued that the specific impact of the ACFTA on individual ASEAN member economies is likely to be felt differentially. This would depend upon the extent to which the economic structure and composition of trade of each ASEAN member complements or competes with that of China. In such a situation, those countries whose trade composition complements that of China would clearly stand to gain more from the ACFTA than those that directly compete with China for exports in the global market. A major perceived benefit of this FTA would also be to reduce transactions costs and ensure the procurement of parts and components in the region efficiently, thus benefiting all the ASEAN countries involved in the regional production

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network along with China. The FTA would also contribute to greater regional stability by raising the costs of engaging in conflict among the countries involved, besides offering more systematic avenues to negotiate possible disputes.

ASEAN-Japan Comprehensive Economic Partnership (CEP) The Joint Declaration on the Comprehensive Economic Partnership (CEP) between ASEAN and Japan was signed on 5 November 2002 during the ASEAN-Japan Summit in Cambodia. It was decided that measures to achieve economic co-operation, including elements of a possible Free Trade Area (FTA), are to be implemented soon, and should be established within ten years, while taking into account the economic levels and sensitive sectors of each of the member countries involved in this agreement. To take into account the adjustment problems of newer ASEAN members, special and differential treatment is to be provided by Japan to those countries. The CEP aims to be comprehensive in nature and would include co-operation in trade and investment liberalization, customs procedures, standards and conformance, non-tariff measures and co-operation in financial services, information and communications technology, human resource development, small and medium enterprises, tourism, transport, energy and food security, within its ambit. The framework agreement for the CEP was signed during the ASEAN-Japan summit meeting in Bali in October 2003. It indicates that ASEAN and Japan will start consultations on the CEP on the liberalization of

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trade in goods, trade in services, and investment, from the beginning of 2004. These meetings will also discuss the basic principles of ASEAN-Japan cumulative rules of origin and customs classification and collecting and analyzing trade and custom data. The framework agreement also indicates that those ASEAN members that have not concluded bilateral Economic Partnership Agreement (“EPA”) with Japan will negotiate concessions on a bilateral basis, and that the schedules of bilateral liberalization concessions between Japan and each individual ASEAN member countries would not be renegotiated during the negotiation of the ASEAN-Japan CEP. These will instead be annexed to the CEP Agreement. Japan being one of the largest investors and trading partners of ASEAN, this CEP agreement aims to open up new opportunities by creating enhanced business opportunities for both ASEAN and Japan, each other’s markets. Strategically, this agreement is also expected to bring about greater stability and prosperity to the region. It should be noted that Japan has already signed the JSEPA agreement with Singapore and has been negotiating with Thailand, Philippines and Vietnam for bilateral FTA deals. It has already taken steps to enhance economic integration with ASEAN members, and the CEP could become the overarching framework for economic co-operation between Japan and ASEAN as a regional grouping.

ASEAN-India FTA The initiative to launch an ASEAN-India FTA was proposed by ex-Indian Prime Minister Shri Atal Bihari Vajpayee during the First ASEAN-India Summit held in Phnom Penh,

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Regional Economic Integration

Cambodia in November 2002. The idea was to negotiate a closer economic partnership agreement, with an FTA to be established within a decade. There are several factors that contributed to this outcome, thus enhancing the scope for positive dynamics of increasing economic and political relations between India and the ASEAN member countries during the previous decade. These include: 1.

2.

3.

4.

the end of the cold war and a change in the political and security environment in Asia at the beginning of the nineties, rapid pace of globalization and associated technological changes that were accompanied by economic reforms in India in 1991, which increased India’s willingness and capacity to engage with ASEAN, the financial and economic crisis in ASEAN countries in 1997–98, that reduced the medium-term growth prospects of member economies and required them to diversify their economic partners beyond the region and East Asia, and stronger institutional foundations that have increased the level and interest of participation of both India and ASEAN in various multilateral and sub-regional fora, viz. ASEAN Regional Forum (ARF), G-15, MekongGanga Co-operation (MGC) and the BIMSTEC regional grouping, besides interaction of individual ASEAN member countries with India that have been strengthened through mutual visits by heads of state.

The first ASEAN-India Summit, where this FTA was proposed, also declared India’s willingness to extend special

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and differential treatment to the newer ASEAN members, while supporting early accession to the WTO for some of those members. The proposal indicated that ASEAN and India could significantly co-operate in the area of trade, investment and human resource development. India’s strong capabilities in advanced technology and research in agriculture, biotechnology, remote sensing, ICT, pharmaceuticals and healthcare would benefit ASEAN, particularly the newer members in improving their levels of economic development. The efforts and commitment by India to intensify its economic relations is now evident with a Framework Agreement for a Comprehensive Economic Partnership between ASEAN and India being signed by the Indian Prime Minister during the Second ASEAN-India Summit in Bali in October 2003. This follows up on the recommendations of the AFTA-India linkages Task Force which had recommended the setting up of a Regional Trade and Investment Area between ASEAN and India, with much scope for comprehensive economic cooperation, beyond tariff reduction. Co-operation between ASEAN and India is expected to encompass a strategic and political partnership, thus going well beyond a traditional FTA agreement. The framework agreement on comprehensive economic co-operation between India and ASEAN provides for an early harvest programme that specifies the areas for collaboration and a common list of items for preferential tariff concessions at the initial stage. According to this Framework Agreement, the deadline for negotiations for FTA in goods would be between January 2004 and 30 June

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Regional Economic Integration

2005 and for services and investments between 2005 and 2007. Both countries have agreed to start tariff reductions under the FTA by 1 January 2006. India has agreed to eliminate tariffs for Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, Singapore, Thailand and Vietnam by 2011, with the CLMV members eliminating tariffs for India with effect from 2016. India and the Philippines have agreed to eliminate tariffs for each other on a reciprocal basis by 2016. Further, India has also agreed to extend unilateral tariff concessions to the CLMV countries on 111 items to extend special and differential treatment to the newer ASEAN members, based on their levels of development. The Framework Agreement also indicates that a trade negotiating committee (TNC) has been set up, that will begin the framing of rules of origin, the modalities for tariff reduction and the FTA in January 2004. To boost business ties, setting up of an ASEAN-India business council is also proposed. It is expected to comprise of 24 members with 2 each from ASEAN-10 and 4 from India to be nominated for a period of two years. This agreement marks a new phase of emerging and strengthening of economic relations between ASEAN and India. Once established, it is expected to link India more closely with the East Asian economies, and open a new chapter in the regionalism efforts in Asia. The aim is to increase bilateral trade between ASEAN and India to US$15 billion by 2005, and to US$30 billion by 2007. Apart from these initiatives there are several other bilateral and regional initiatives among the Asian economies that are also currently being negotiated or being implemented soon.11 In the Singapore context, an important

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agreement being currently negotiated is a bilateral Comprehensive Economic Co-operation Agreement (CECA) with India. It is to be noted that India has also signed a Framework Agreement for a bilateral FTA with Thailand, and already has a working FTA with Sri Lanka. Another recent important development is a proposal to study the feasibility of an India-China bilateral FTA (Business Standard, 25 March 2004). An important issue of concern in the context of bilateral FTAs is that of its consistency with the regional and multilateral efforts that are ongoing within the WTO. The concern is that the discriminatory preferences, complexities in the implementation of rules of origin, and cost and time spent on the implementation of these FTAs could well be a burden on the scarce negotiating resources, and may divert the Asian economies attention from the WTO. This shift towards FTAs is likely to be pronounced after the failure of multilateral trade negotiations in the recent WTO Ministerial Meeting at Cancun. There is indeed a significant scope for enhancing trade and investment flows among the Asian economies, which would lead to a more integrated Asia that would be more competitive in the global economy. The regionalism efforts ongoing in Asia are designed to wards achieving this goal. In this context, the proposal to establish a regional trade financing institution like a Regional Export-Import Bank is timely and needs to be explored further, as this would strengthen financial co-operation among the Asian economies and further trade co-operation by facilitating the easy availability of funds for trading purposes, among the Asian economies.

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2 The Role of Asian ECAs in Trade Financing: Situational Analysis Arijit Saraswati

International trade plays a crucial role in global economic integration, contributing towards economic growth while overcoming the limitations of resource endowments across nations. With a view to enhancing international trade, a legitimate requirement for exporters would be to access finance at competitive rates and under suitable terms. In this regard, Export Credit Agencies (ECAs — also referred to as Exim Banks) play a pivotal role. ECAs are dedicated agencies for the promotion of exports, which provide shortterm, medium-term as well as long-term finance to exporters, unlike commercial banks whose export finance tenures are primarily short term in nature. The rationale for establishment of ECAs developed from the underlying factors: 1.

Industrialization increased the trade of capital goods and engineering products as also project exports. In this scenario, buyers generally require deferred payment terms to tailor their payments in conformity with the 49

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50

2.

3.

4.

Regional Economic Integration

cash flow generated by production of such imported capital goods. Buyers in developing countries generally require deferred payment terms due to paucity of foreign exchange to pay for the imports. The spread of industrialization has intensified competition in international markets for selling manufactured products, which calls for the provision of competitive credit on deferred payment terms. As exports are seen as a national priority goal in most countries, ECAs are considered as appropriate institutions for export expansion through a variety of financing programmes.

ECAs may be broadly classified as: 1. 2.

Agencies providing only export credit with export credit insurance facility from another agency. Agencies providing both export credit and export credit insurance facilities.

Export Credit Insurance is a specialized form of insurance against non-payment of trade debts. The first instance of this was found in 1919 when the British Government launched the original official export credit scheme with the objective of encouraging exports to Eastern Europe where credit risks were considered to be a serious deterrent to the development of British exports. The primary motivation of governments was to stimulate exports that would otherwise be forgone by bearing the risk facing the private sector. Since World War II more and more countries have set up their individual ECAs. The Berne Union (founded in 1934),

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currently having 51 members (including Multilateral Investment Guarantee Agency, MIGA) from 41 countries, serves as the official body for Export Credit Insurance agencies to exchange information and develop co-operation amongst one another. A typical ECA acts as an export financing institution, a commercial export insurer, a foreign investment catalyst and a project finance specialist. ECAs widely differ in role and function, resources and increasingly in ownership. However, even if they are not state owned, they are backed by the respective national governments, particularly, for supporting exports on medium and long-term credit basis. With the backing of their governments, ECAs are able to take on longer terms and higher risks than commercial banks. For instance, big projects that need large credit and carry high investment risk would simply not be viable without the involvement of ECAs. In this way, the official export credit that ECAs provide supplement commercial financing, enhancing the workings of the market. The Evolution of the Asian ECAs A key feature of the developmental strategies of the Asian economies, which have recorded high growth rates, is the strong export orientation of these countries. Significant export performances of the Asian economies have considerably contributed towards achieving high economic growth. As a consequence, export growth rates of the Asian economies have surpassed global export growth rates. In recent times, during 1999–2003, average growth rate of merchandise exports has been 8.4 per cent for East Asian

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economies, 6 per cent for Southeast Asian economies and 8.7 per cent for South Asian economies. During the same period global merchandise export growth rate averaged 5.9 per cent. The setting up of ECAs or Exim Banks has played a central role with regards to high export growth in the region. The oldest ECA in the region is the Export Import Bank of Japan12 set up in 1950. Thereafter, a number of Exim Banks have come up in line with the export-oriented strategy of the individual governments. A comparison of the major financial parameters of select Exim Banks in Asia is provided in Table 2.1. The following points can be noted with reference to Table 2.1: 1.

2.

3. 4.

The share capital of the JBIC (formerly JEXIM) is the largest in Asia consequent to the merger of JEXIM with OECF. The total loan portfolio of East Asian Exim Banks is higher compared to other Exim Banks. Nevertheless, Exim India’s total loan assets are higher compared to Exim Banks in Southeast Asia. The same can be said to be true for resources, assets and net worth of these Exim Banks. Exim Korea has the highest exposure in guarantees followed by JBIC. In Southeast Asia, Exim Thailand has the maximum exposure in guarantees.

The Asian Exim Banks extend a range of facilities/products to enhance exports of the individual countries. These facilities have evolved over a period of time and are structured in a

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53

62312 68048 5245 –1660 182044 107213

Share Capital

Net Worth

Guarantees

Net Profit

Total Assets

Resources 12623

13311

8

147

667

604

10810

1870

2545

43

333

406

134

1813

6096

8836

45

8734

2341

2271

6374

844

1071

5

1707

217

151

948

121

782

2

48

43

79

333

Source: Annual Report (AR) 2003, JBIC; AR 2002, Exim Korea; AR 2002, Exim China; AR 2002, Exim Malaysia; AR 2002, Exim Thailand; AR 2002–03, Exim India.

175957

JBIC Exim China Exim India Exim Korea Exim Thailand Exim Malaysia

Loan Assets

Bank

TABLE 2.1 Comparison between Select Asian Exim Banks (US$ Millions)

Asian ECAs in Trade Financing 53

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54

Regional Economic Integration

manner to meet the demand of the exporters. A broad overview of the major facilities offered by these Exim Banks has been provided in Table 2.2. With increasing globalization of the world economy and the establishment of the World Trade Organization, the Asian ECAs now not only perform their traditional role of providing export credits but also offer a gamut of other products as follows:

TABLE 2.2 Major Facilities of Select Asian Exim Banks Name

02 AEI Ch 2

Facilities/Products

Japan Bank for International Co-operation

1. 2. 3. 4. 5. 6. 7.

Export Loans Import Loans Overseas Investment Loans Untied Loans Guarantees Bridge Loans Equity Participation

Exim Bank of China

1. 2. 3. 4. 5.

Export Seller’s Credit Export Buyer’s Credit Concessional Loan to Foreign Countries International Guarantee On lending of Foreign Government Loans

Exim Bank of India

1. 2. 3. 4. 5. 6.

Buyer’s Credit Supplier’s Credit Working Capital Loan Lines of Credit Export Project Finance Overseas Investment Finance

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55

TABLE 2.2 – continued Name

Facilities/Products

Exim Bank of Korea

7. 8. 9. 10. 11.

Overseas Equity Participation Term Loans for Export Oriented Units Guarantees Export Bills Discounting Facility Export and Investment Facilitation Services

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Export Loan Technical Service Credit Small Business Export Credit Rediscount on Trade Bills Forfaiting Direct Loan to Foreign Buyers Project Finance Re-lending Facility for Foreign Buyers Import Credit Overseas Investment Credit Overseas Project Credit Overseas Business Credit Major Resources Development Credit Guarantees

Exim Bank of Malaysia

1. 2. 3. 4. 5.

Buyer Credit Facility Overseas Project Financing Facility Guarantee Facility Supplier Credit Facility Export of Services Facility

Exim Bank of Thailand

1. 2. 3. 4.

Working Capital Loans Term Loans Financing for Overseas Investment Export Credit Insurance

Note: The classification of facilities may differ across Exim Banks.

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56

• •

•

•

Regional Economic Integration

JBIC invests in equity in overseas projects of Japanese companies. Exim Thailand also renders its support to the development projects of neighbouring countries, which are commercially viable, provided that the projects have some relation with Thailand, viz. those which engage Thai contractors or those which produce raw material or energy for Thailand. Exim Bank of China administers Chinese Government concessional loans and lends foreign government loans. Exim India finances the entire business cycle, viz. import of technology, export product development, export production, export marketing, pre-shipment credit, post-shipment credit and overseas investment finance.

Co-operation among the Asian ECAs In order to foster close co-operation among Asian ECAs, Exim India launched an initiative in 1996 to create an informal forum by organizing a meeting of Asian ECAs in India to exchange views and identify areas of mutual cooperation. This has resulted in regular meetings of ECAs every year in different countries hosted by respective ECAs. The Annual Meetings have since taken place in Japan, China, Korea, Indonesia, Malaysia and the Philippines. The Asian ECA forum’s principle task is to develop and enhance co-operation and forge a stronger link among its member institutions, thereby fostering a long-term relationship within the Asian ECAs community. Co-operation between the Asian

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57

ECAs is essential, as it would also minimize the chances of financial crisis through exchange of information, professional knowledge and skills. In this regard the annual meetings held every year since 1996 serve as a platform for exchange of information and sharing of views in a structured manner by the member Exim Banks. There have been a number of bilateral co-operation agreements between the Asian ECAs to encourage the expansion of trade between them. For instance, co-operation agreements were signed between the Exim Bank of Japan and the Exim Bank of Korea in the early nineties to facilitate exchange of information. The two banks have also set up a co-operation channel to promote mutual interest of businesses and look for promising co-financing projects. Recently, the Exim Bank of Korea and the Exim Bank of China signed a co-operation agreement to promote exchange of information and project co-operation. The Exim Bank of India has signed Memorandum of Understanding with the Exim Bank of Thailand in 2000 and with PT. Bank Ekspor Indonesia in 2001. These MOUs facilitate locating joint venture partners, exchanging information related to trade and investment opportunities, organizing seminars and workshops. The Exim Bank of India has also extended lines of credit (LOCs) worth US$2 million to TIDCORP and US$10 million to the Exim Bank of Thailand. A recent development towards strengthening multilateral co-operation between the Asian ECAs has been the Multilateral L/C Confirmation Facility (MLCF), which is a multiparty L/C Confirmation Agreement entered into by the Export Import Bank of India, PT. Bank Ekspor Indonesia (PERSERO), Japan Bank for International

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Co-operation, Export-Import Bank of Korea, Export-Import Bank of Malaysia, and Export Import Bank of Thailand at the 8th Annual ECA Meeting held in Kuala Lumpur on 29 August 2002. The MLCF seeks to promote and facilitate intra-regional trade through risk mitigation in respect of L/Cs opened by commercial banks. Each ECA may agree to a reciprocal L/C confirmation facility with terms, such as tenor, fee, operational procedures, to be set out on the bilateral agreement. The importing ECA will nominate a set of banks in its country whose L/Cs can be confirmed by the exporting country’s ECA. Requests for L/C confirmation may come from: a. Exporter c. Importer’s bank

b. Exporter’s bank d. Importer’s ECA

Trade Financing: Recent Issues Export growth, among other things, is substantially dependent on export credit. Various forms of export credit facilities contribute in their own ways towards the growth of exports. Table 2.3 displays an example of the linkage between export credit and export performance. During the period 1998–2001, a strong degree of association (i.e., high value of correlation coefficient) was obtained between the export performance and medium-term and long term export credit13 of six of the select nine OECD countries. The correlation coefficients were particularly observed to be high for the Netherlands, France and the UK. Though export performance of Asian countries has remained better compared to the global average in recent

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702.1 6.7 268.2 1.2 302.5 3.2 419.4 4.6 542.9 3.2 238.4 1.7 179.0 0.2 235.2 0.3 200.3 0.2

1999 781.1 8.3 281.6 3.4 299.9 2.6 479.2 10.8 550.2 6.0 276.6 2.8 187.8 0.4 239.9 1.9 208.8 0.8

2000 730.8 10.7 267.3 1.9 296.0 2.5 403.5 10.0 571.4 3.6 259.9 3.0 190.3 0.2 244.2 1.2 216.1 1.5

2001

0.99

0.09

0.50

0.56

–0.15

0.53

0.92

0.92

0.24

Correlation Coeff.

Source: Statistics on Export Credit Activities, 12 August 2003, OECD and IMF, International Financial Statistics, Yearbook 2003.

Netherlands

Italy

Belgium

Canada

Germany

Japan

France

UK

982.1 9.2 271.8 1.7 305.8 4.4 387.9 6.3 543.4 4.4 214.3 2.4 177.7 0.3 245.7 0.4 201.4 0.3

USA Exports M, LT Export Credit Exports M, LT Export Credit Exports M, LT Export Credit Exports M, LT Export Credit Exports M, LT Export Credit Exports M, LT Export Credit Exports M, LT Export Credit Exports M, LT Export Credit Exports M, LT Export Credit

1998

Country

TABLE 2.3 Correlation between Exports and Export Credit for Select OECD Countries, 1998–2001 (US$ billions) Asian ECAs in Trade Financing 59

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times, a distinct decline in export growth rates can be observed for the less developed countries in the region. Figure 2.1 demonstrates the export growth rates recorded by select less developed countries of Asia. It can be concluded from the figure that export growth rates for all the countries were lower in 2003 compared to 2000 despite a modest revival in 2003. Particularly for the South Asian countries and Laos, average export growth rates remained below 10 per cent during 1998–2003. There has been a simultaneous decline in foreign direct investment (FDI) inflow into the select Asian countries in recent years (see Figure 2.2). Total FDI inflow into the select less developed Asian countries declined from US$3.0 billion in 1998 to US$2.1 billion in 2000 and further to US$1.7 billion in 2002. This has resulted in a decline in the share of these countries in total FDI received by the South, East and Southeast Asian countries from 1.47 per cent to 0.57 per cent during the given period. The steady decline in FDI to these countries can be primarily attributed to the sharp decline in FDI inflow of Vietnam, which fell from US$1.7 billion in 1998 to US$1.2 billion in 2002. Developing countries and particularly emerging economies depend significantly on trade credits to support exports at pre and post-shipment stages. A decline in trade credit limits the access to finance, which in turn results in restricting the production and trade activities of the exporters. The loss of liquidity in the trade sector also has macroeconomic consequences: it forces importers and exporters to obtain spot foreign exchange to make necessary payments and service debt falling due, thereby increasing demand in the

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-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1999 2000

Years

2001 2002 2003

Vietnam

Sri Lanka

Nepal

Myanmar

Laos

Cambodia

Bangladesh

Source: Asian Development Bank, Asian Development Outlook, 2003; EIU, Country Report, Myanmar, November 2003.

Export Growth %

FIGURE 2.1 Export Growth Rates of Select Less Developed Countries of Asia, 1998–2003 Asian ECAs in Trade Financing 61

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US$ Million

1998 1999 Years

2000

Source: UNCTAD, World Investment Report 2003.

0

200

400

600

800

1000

1200

1400

2001

2002

Vietnam

Sri Lanka

Nepal

Myanmar

Laos

Cambodia

Bangladesh

FIGURE 2.2 FDI Inflow to Select Less Developed Countries of Asia, 1998–2002

62 Regional Economic Integration

Asian ECAs in Trade Financing

63

foreign exchange market. It may also reduce the supply of spot foreign exchange, given an increased probability of delayed receipts of foreign exchange earnings of exports and a decline in exports that depend on imported inputs and materials. The resulting pressure in the exchange rate may compound the country’s external debt and payment difficulties and increase country risk, leading to further cutbacks in all funding, including trade finance.14

Following the recent financial crises, there has been a contraction in trade finance. Usually, short-term trade credit is considered as less risky compared to the medium- and long-term lending, because short-term credits are backed by receivables and often by offshore payment mechanisms. However, there are recent instances when short-term trade credit lines were withdrawn during a crisis period (viz. in Brazil). This implies that recent contractions in trade finance need to be justified over and above the fundamentals and the risks involved. The following factors can be identified to have influenced the decline in trade finance in recent times: 1.

02 AEI Ch 2

The interaction between perceived risks and the leveraged positions of banks. In a crisis, banks generally do not differentiate between credits of different tenure and often reduce overall country exposure. As shortterm trade credit can be redeemed quickly at par, they are operationally the easiest asset class for a bank to cut at a time of increased risk. Moreover, pressures from shareholders also contribute to their reduction in trade finance exposure to these countries.

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2.

Lack of insurance. A key feature of crises situations is the tightening of cover policy by the trade credit insurers. Lack of sufficient differentiation between the different tenures of trade credit exposures by the rating agencies plays an important role in the process. Most ECAs are required to break even in their operations and the WTO rules on subsidies limit the ECAs to undertake countercyclical operations amid a crisis environment. Herd behaviour among trade finance providers like banks and trade insurers. Inadequate information about the financial condition of the corporate clients or of economic prospects of a sovereign aggravates risk perceptions and often results in herd behaviour among the creditors. Changes in the banking sector and external financing to emerging markets in recent years have also influenced a decline in trade finance during the recent crises. There has been a consolidation in the banking sector over the last 10–15 years which has left fewer banks participating in trade finance. This has resulted in a greater tendency towards similar and simultaneous decisions on cutting trade credit lines to a crisis country. Further, the return on capital trade finance services extended by several international banks to emerging markets is low compared to their other value added products (viz., investment banking business).

3.

4.

Along with the initiatives undertaken by the respective crisishit governments, several others were considered by the bilateral credit agencies and international financial

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65

institutions to deal with the problem of declining trade finance. Some of the initiatives are as follows: 1.

2. 3.

4.

5.

In order to support the stabilization efforts of the Indonesian Government, the Exim Bank of Japan (now JBIC) provided financing via the Bank of Indonesia to guarantee payment of letters of credit issued by local banks. The US Exim Bank extended short-term credit lines to Korea in the latter’s financial crisis during 1999. During the Asian financial crisis, the Asian Development Bank (ADB) provided a loan to the Exim Bank of Thailand for on lending directly and through local banks to small- and medium-sized export enterprises for pre- and post-shipment export credit. The ADB also supported trade finance in Pakistan by providing a political risk guarantee facility of international banks confirming L/Cs issued by Pakistani banks on behalf of SMEs. In collaboration with the ABN-AMRO, the International Finance Corporation (IFC) set up a trade financing facility in Pakistan in 2000. IFC also extended trade credit to Brazilian banks during the latter’s financial crisis in 2002. The IFC loans were complemented with loans syndicated among several other international banks, as well as the Inter-American Development Bank (IDB). The EBRD provided guarantees to foreign banks on their trade credit lines to diminish risk.

It has been observed that the risk attached to post-shipment export financing is higher than that of pre-shipment financing. Therefore, policies should be directed to address

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this problem. It is also critical that efforts to facilitate trade financing should not only focus on crisis periods but also on key structural changes which could enhance the efficiency of the capital markets and reduce the severity of the crisis. The following structural measures could be considered in this regard to strengthen the trade finance facilities: 1.

2.

Risk Sharing among the Multilateral Development Banks (MDBs), ECAs and Private Insurers. MDBs could explore ways to play a more prominent role in addressing the transfer and convertibility concerns of the international insurers. There may be scope for more risk sharing between the MDBs, and other public and private export credit institutions. Possible Modifications of the Incentive Structure Governing Official ECAs. ECAs may give consideration to allowing a special exception to normal credit-risk practices of bilateral ECAs in crisis situations. This may help the ECAs to participate in risk sharing arrangements with other external creditors or a central bank etc. ECAs could also be encouraged to make full use of available risk mitigants, including instruments like derivatives, third-party guarantees, collateralized lending, and local currency lending where possible. On a more optimistic note, international rules like the WTO rules on subsidies and the Consensus Arrangement or the relevant OECD guidelines, could be modified where warranted and supported by international consensus to help remove the disincentives to counter cyclical operations of ECAs.

(Note: The views expressed in this chapter are of the author and not of the institution to which he belongs.)

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3 Regional Export Credit Agency for Asia (RECAA): The Need and the Role Arijit Saraswati

Certain key aspects of the Asian economies could be considered as a prelude to the concept of Regional Export Credit Agency for Asia (RECAA). 1.

2.

3.

The Asian economies are to a significant degree dependent on each other for international trade. This is particularly true for East and Southeast Asia compared to South Asia. Therefore, there is an existing preference among the Asian economies to trade between themselves. The Asian countries are forerunners among the developing countries with respect to inflow of foreign direct investment. However, the FDI inflow is primarily concentrated in East Asia and a handful of the rest. Further, as Asian countries are not major sources for investment, intra-Asian investment flows are modest. Considering the relatively poorer countries of Asia, as shown earlier, there has been a distinct decline in 67

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68

4.

Regional Economic Integration

the export growth rates in recent years. At the same time, there has been a decline in investment flows to these countries. As far as international credit ratings are concerned, Table 3.1 displays comparative standings of the select Asian countries with respect to ratings from major sovereign rating agencies. The following conclusions can be drawn accordingly, (i) According to Euromoney, 5 countries (Cambodia, Laos, Myanmar, Bangladesh and Nepal) have rankings over 100 and only 8 countries (China, Hong Kong, Japan, Korea, Taiwan, Brunei, Malaysia and Singapore) are ranked in the top 50 countries. (ii) According to the Institutional Investor, 4 countries (Cambodia, Laos, Myanmar and Nepal) are ranked over 100 and only 8 countries (China, Hong Kong, Japan, Korea, Taiwan, Malaysia, Singapore and Thailand) are ranked in the top 50 countries. (iii) According to Fitch, S&P and Moody’s, only 6 countries (China, Hong Kong, Japan, Korea, Taiwan and Singapore) are of investment grade rating. (iv) East Asian countries have the best ratings compared to Southeast Asia and South Asia. Particularly, all the East Asian countries have investment grade ratings by Moody’s and Fitch. Better ratings are reflected in higher inflows of FDI and better access to international capital markets.

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(v) Southeast Asian countries reflect wide diversity in terms of credit ratings. Singapore is ranked within the top 20 by Euromoney and the Institutional Investor. However, Myanmar has one of the lowest sovereign ratings. Similarly, Singapore (and Malaysia according to S&P) has an investment grade rating, while Brunei, Cambodia, Laos and Myanmar are not being considered for rating by Moody’s, S&P and Fitch. In general, less developed economies in Southeast Asia have poor country ratings. (vi) In South Asia, apart from India, the other countries have low ratings, which act as an impediment in accessing international capital markets. 5.

03 AEI Ch 3

Promoting intra-Asian trade is consistent with WTO norms and providing access to trade credit at a regional level could minimize the dependence of the emerging markets of Asia on trade finance from industrial economies and help diversify risk. Following the financial crises in Asia there has been a contraction in trade financing in the region. Recent experience suggests that Multilateral Development Banks’ trade finance facilities, properly designed and implemented, can be effective in mobilizing additional private sector funding during a crisis period. MDB support could include direct provision of financing or guarantee of financing to government agencies and intermediaries for on lending to the private sector. In this context, setting up a Regional Export Credit Agency for Asia (RECAA) can be considered a justifiable proposition.

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TABLE 3.1 Comparison of Country Ratings of Select Asian Countries Euromoney (Ranking of 185 countries) Serial No.

Countries

(March 2004)

East Asia 1 2 3 4 5

China Hong Kong Japan Korea Taiwan

45 25 15 37 26

Southeast Asia 6 7 8 9 10 11 12 13 14 15

Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

34 128 86 132 46 171 70 16 53 74

South Asia 16 17 18 19 20

Bangladesh India Nepal Pakistan Sri Lanka

102 59 141 92 84

Note: Numbers denote relative country ranking

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TABLE 3.1 – continued

Institutional Investor (Ranking of 192 countries)

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S&P

Moody’s

Fitch

(September 2003)

(March 25, 2004)

(March 19, 2004)

(March 2004)

42 29 23 28 24

BBB+ A+ AA– A– AA–

A2 A1 Aa1 A3 Aa3

A– AA– AA A A+

N.A 128 87 124 37 155 65 18 44 73

N.A N.A B N.A A– N.A BB AAA BBB BB-

N.A N.A B2 N.A Baa1 N.A Ba2 Aaa Baa1 B1

N.A N.A B+ N.A BBB+ N.A BB AAA BBB BB–

91 59 108 96 80

N.A BB N.A B N.A

N.A Baa3 N.A B2 N.A

N.A BB+ N.A N.A N.A

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The Rationale for Regional Export Credit Agency for Asia (RECAA) The concept and rationale for a Regional Export Credit Agency for Asia (RECAA) is seven fold: 1.

2.

03 AEI Ch 3

First, a majority of the Asian countries are low to middle income countries facing difficulty in accessing international finance for development, particularly in the current highly globalized, highly competitive environment. The availability of export finance is often seen as a constraint in the growth of exports. This suggests that adequate attention needs to be given to ensure that the efforts to enhance exports are not hampered by a shortage of finance, which may have arisen from factors like credit curbs imposed through domestic monetary policy, low profitability of export finance for commercial banks or risk aversion in extending finance for certain export related activities like export marketing, product development. Ensuring availability of finance for exporters may involve providing adequate rediscounting facilities or the establishment of a financial institution specially devoted to export refinancing. Adequate export insurance facilities are also important. There may be instances where the availability rather than the cost of export finance acts as a constraint. Efforts to lower the cost of finance for exporters may be often self-defeating by reducing the incentive for banks to offer export finance because of low profitability of export finance. Second, the rationale for official trade finance mechanisms stems largely from the inability of a market based system, to exploit the trade opportunities and

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3.

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73

potential of confirmed trade orders because it cannot assure sufficient access to trade financing. Thus, the primary contribution of RECAA would be to boost trade by resolving the trade financing access issues. The general financial constraints faced by countries in Asia, especially the less developed economies, provide the impetus for the establishment of refinancing mechanisms to provide support to investment finance for exports, export marketing and other development measures for the manufacturing sector, as also finance for imports of inputs for export production. Most of the Asian countries suffer from adverse country risk perception and cannot access bond and equity markets, and loan markets effectively. Developing countries need to ensure the availability of finance for diversification of exports especially into new markets, as also product diversification while ensuring that indirect exporters (i.e., manufacturers supplying inputs to exporters) have access to export finance, which would encourage efficient import substitution. It is critical for the country’s economic development that exporters are assured access to the trade financing needed to fulfil export orders and respond to overseas demand. In much of the developing world the financing mechanisms, which are taken for granted in industrial nations, are rudimentary and sub-optimal. Information networks and policy environments required for banks to carry out international transactions with a fair deal of confidence are also yet to stabilize. Third, intra-Asian trade is relatively strong implying the existing preference of these countries in trading amongst each other. This has been primarily the

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74

4.

5.

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Regional Economic Integration

outcome of several trading blocs in the region. In 2001, intra-bloc trade accounted for 46.9 per cent and 23.3 per cent of total trade of the East Asian Economic Caucus15 and Association of Southeast Asian Nations (ASEAN).16 However, intra-trade between the South Asian Association for Regional Co-operation (SAARC)17 is comparatively depressed and accounted for only 4.8 per cent of the bloc’s exports. These regional trade arrangements have facilitated trade with gradual liberalization of trade impediments and not with respect to financial assistance of trade. Moreover, these trade arrangements have contributed more to a high-degree of trade at the sub-regional levels compared to an overall regional trade. RECAA can result in diversification of trade destinations and therefore, can facilitate greater degree of mutual trade dependence in the region. Fourth, although most of the FDI to the developing nations is directed towards Asia, intra-Asian direct investment flows are not strong. Most of the countries are dependent on non-regional sources for their FDI. As trade and investment are interwined, increased investment in the form of trade generating ventures would be useful for the emerging and developing countries of Asia. Fifth, information networks and other trade-aid mechanisms are still necessary for many Asian countries. Hence, proposed RECAA, which would be a multilateral re-financing agency focusing on ensuring adequate access to trade finance for member countries, would address the problem of shortage of capital. It

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6.

7.

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75

could also provide forfaiting services as an alternative trade-financing instrument. It would also provide a range of credit enhancements to access international capital markets and private sector investment. Sixth, RECAA would provide a credit enhancement facility to the needy Exim Banks in the region to enable their importers to access medium-term and long-term finance, which are important for capital good imports and project imports from the Asian countries. These forms of finance would complement the short-term trade finance and would also contribute in the recovery of such finance that declined in the face of recent financial crises. Seventh, Official Development Assistance (ODA) flows from the Development Assistance Committee (DAC) of the OECD to the select Asian economies declined from US$13.6 billion in 1996 to US$13.3 billion in 2001. The share of the select Asian countries in global ODA inflow in 2001 also stood at low of 22.8 per cent. ODA flows increased during the period only for Indonesia, Myanmar and Vietnam in Southeast Asia and for Pakistan in South Asia; otherwise the overall decline was in tune with a similar global trend. It can be argued that aid often restricts export competitiveness and supports import substitution, whereas trade orientation with export promotion results in benefits from the spillover effects of an export-led growth. Also, from the point of view of the donor country, trade generates opportunities for consumption of imported goods and services. Trade in preference to aid is,

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therefore, beneficial for both the countries. Investment flows into the developing countries also generates trade. In this context, RECAA can encourage private investment into the developing countries in the region by providing investment protection cover similar to the MIGA. This will encourage investors in stronger Asian economies to invest more in weaker Asian economies, which will contribute to the rapid industrialization of weaker Asian countries. Objectives The proposed RECAA will be the principal agency in East, Southeast and South Asia for re-financing trade and investment and would operate on business principles. The basic objective of the RECAA would be to improve the access to trade finance for Asian economies through credit enhancement and risk mitigation measures to ECAs in weaker Asian countries to facilitate acceptance of their guarantees/letters of credit by exporting Asian countries and thereby, contribute to enhancing intra-regional and extraregional trade and investment. To achieve this, the RECAA may provide refinance/ rediscounting/reinsurance facilities to Exim Banks/ commercial banks in the region to enable them to extend financial assistance to the exporters and importers of the region, at both pre- and post-shipment stages to enable banks in the region to extend short and medium/long term credit through a variety of instruments/programmes to promote intra-regional and industrial development.

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Expected Benefits from RECAA The establishment of the RECAA to facilitate trade and investment flows in the Asian region and address financial and institutional gaps in trade finance and insurance may be expected to confer several advantages for the member countries. 1. The RECAA would serve to facilitate intra-regional trade through credit enhancement and risk mitigation measures. 2. The RECAA, by virtue of being a multilateral agency, would be able to access international finance at lower cost and provide refinance/reinsurance to ensure availability of trade finance at acceptable cost to developing member countries. 3. For developing member countries, access to international trade finance at reasonable cost, in particular ensuring adequate finance for exports and export diversification into new markets and new products. 4. For developed and emerging member economies, expansion of markets for export of capital goods, technology, manufactures and assurance of payment with a view to promoting trade and developing infrastructure in less developed countries. 5. The RECAA would also provide support to Exim Banks in the region with a view to developing the small and medium exporters, who contribute significantly to the development of a country.

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6. Following the crises, there was a decline in the availability of trade finance. The RECAA would bridge this gap by refinancing relevant institutions in the region, which are engaged in financing export and imports of goods and services and related activities. 7. The RECAA would complement rather than duplicate or supplant existing multilateral, regional, sub-regional and national institutions, which would increase the level of intra and extra Asian trade and investment. 8. The RECAA would also seek to provide information and advisory services, generally on a pay-as-you-use basis in collaboration with existing institutions, national and international. The RECAA would work closely with the several regional blocs and ECAs towards facilitating exchange of information and sharing of experience. 9. The RECAA would provide a common forum for its members, the Asian shareholder governments, for coordinating their trade financing and trade promotion activities in a more efficient manner. 10. Through the RECAA, the Asian Central Banks and commercial banks, would benefit in terms of getting priority consideration in the selection of trade finance intermediaries to act as a means for financing Asian exporters and importers through lines of credit and other instruments. 11. The RECAA would serve as a vehicle for raising issues to the WTO and other multilateral bodies regarding market access, export subsidies, etc.

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Complementary Nature of Operations The RECAA, with a view to improving access to trade finance, would be a refinancing/rediscounting/reinsurance institution and would work with national ECAs to develop trade. It would not provide direct finance to exporters/ importers. This would benefit the region and complement rather than duplicate or supplant existing multilateral, regional, sub-regional and national institutions, and would increase the level of intra and extra Asian trade and investment.

(Note: The views expressed in this chapter are of the author and not of the institution to which he belongs.)

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81

4 Structure and Activities of RECAA: Possible Outline Bhanu Abhilashi

Financing Programmes and Range of Activities The RECAA would develop various products and services to fulfil its twin objectives: (i) to ensure adequate liquidity for national ECAs and thus address the funding gap that they may face and (ii) to ensure credit enhancement of the national ECAs so as to contribute to mitigation of credit risk that they may run so that the current constraints experienced by them in the form of a credit gap are addressed. Some of the facilities and techniques covering credit and insurance as well as trade information and advisory services are depicted in Figure 4.1. A brief description of the programmes/facilities of the institution is given below: 1.

REFINANCING This programme would cover granting loans and advances to national Export Credit Agencies (ECAs) and Central Banks (where there are no ECAs) by way of refinancing of loans and advances by these institutions for the purpose of trade and investment and 81

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Line of Credit Supplier's Credit

Rediscounting/ Refinancing

Credit Facility

Forfaiting

Bills Rediscounting

Information and Advisory Services

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Investment Reinsurance

Reinsurance

Risk Mitigation / Credit Enhancement

Credit Reinsurance

Special Functions

Regional Export Credit Agency for Asia (RECAA)

FIGURE 4.1 Major Functions of the Proposed RECAA

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Structure and Activities of RECAA

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also to help bridge temporary liquidity requirements. These could take the following forms: (i) Line of Credit: This programme would cover funded and non-funded facilities to national ECAs and Central Banks (where there are no ECAs) and shall be used in order to promote international trade and investment by targeting small and medium enterprises who may not avail themselves of the institutional facilities directly. Also, the import line of credit facility, covering the letter of credit confirmation and refinancing facility, would facilitate import of capital/engineering goods (including software and technology). Granting, opening, issuing, confirming or endorsing letters of credit and negotiating or collecting bills and other documents could be covered. (ii) Pre- and Post-shipment: These programmes would provide refinance to national ECAs and Central Banks (where there are no ECAs) on whole turnover basis for on lending to exporters to: (a) Enable exporters to buy raw materials and other inputs for export contracts (preshipment). (b) Extend term credit to importers (postshipment). (iii) Bills Rediscounting: In this programme, letters of credit issued by the national ECAs could be discounted purchased and/or financed. It would also free resources of the ECAs, which could in turn be used for financing other trade-related activities. Also, accepting, collecting, selling or

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negotiating bills of exchange or promissory notes arising out of transactions related to international trade can be considered. (iv) Forfaiting: This programme facilitates the financing of exports through discounting export receivables, which are evidenced by bills of exchange or promissory notes. In such a transaction, the exporter surrenders, without recourse, the rights to claim for payment on goods delivered to an importer in lieu of cash payment from the forfaiter. 2.

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REINSURANCE The reinsurance facilities could be broadly categorized under credit reinsurance and investment reinsurance. (i) Credit Reinsurance: Credit reinsurance facilities would cover investor losses arising from different forms of risks, viz., (a) Commercial risk: Commercial risk would typically relate to non-payment due to insolvency of the importer. The RECAA could have recourse to the private market of insurers to dilute the commercial risks. (b) Non-commercial risk: Non-commercial risk may arise out of civil unrest, expropriation of property, nationalization, imposition of export/ import taxes, trade embargoes, and currency transfer risk (problems relating to conversion of local currency into hard currency). The RECAA would cover non-commercial risk inside a participating country and inside countries of buyers of goods and services

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produced in a participating country. The RECAA may have partnerships with the private insurance market to cover the noncommercial risks. An important feature of the RECAA could be that the funds and interests of participating countries will not be shared. This implies that no one participating country is called upon to warrant the political risk associated with another participating country. However, an exception could be in case of goods in transit to another participating country. (ii) Investment Insurance: The objective of the investment insurance facility would be to provide a coinsurance and reinsurance facility for eligible investment projects in order to boost investment in Asia. The programme would facilitate and catalyse investment in member countries by issuing guarantees to investors and lenders, covering investments, against non-commercial risks, to and from the member countries. The credit reinsurance facility would provide reinsurance to national ECAs at a fee proportional to the risk associated with the country, project or specific risk being covered. MIGA’s exposure model as given below could be followed: Investment Exposure Ratio

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=

Total Investment facilitated/Net Exposure

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Rationale: ■ Measure of multiplier effect of usage of facility ■ Net exposure = Total guarantees issued – guarantees expired/cancelled + guarantee invoked. This reflects the actual use of resources/contingent liability ■ Traces exposures over time from issuance of guarantee to the time investment risks are re-evaluated. 3.

SPECIAL FUNCTIONS (i) Special Risk Programme: With this facility, the RECAA would share the risks of international banks extending facilities to Asian economies, banks and corporates. (ii) Export Development: This facility would help RECAA to promote non-commodity export production, to facilitate tradable infrastructural services, and enhance technology content of export production.

Capital Structure and Organization The RECAA may draw its resources from equity capital subscription from member countries supplemented by borrowings in international capital markets, lines of credit from multilateral financial agencies. The RECAA may have an authorized capital of US$1 billion with US$100 million as initial paid-up capital and the balance as callable/ guarantee capital to be paid depending upon operational

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requirements. Shareholding may be decided based on certain agreed principles. A suggested route could be by way of equity contribution being in proportion to weighted average GDP/per capita GDP/trade indices. Apart from regional shareholders (Exim Banks of member countries) others can include Central Banks in Asian countries where there are no Exim Banks, multilateral agencies like the Asian Development Bank, International Finance Corporation, non-regional development banks, international commercial banks, etc. Based on common consensus among shareholders, organizational structure could be worked out. Resources Leveraging its multilateral structure, the RECAA can mobilize funds from multilateral agencies, international capital market, etc. at competitive rates. Further, it is known that developing countries in Asia invest their forex reserves in AAA rated banks and institutions in OECD countries earning marginal returns, while ECAs from these developing countries borrow from these OECD markets at much higher rates of interest to finance their exports. The RECAA, with its high credit rating in Asia, could be the institution where such forex reserves could be partially parked and from which borrowings could be raised by such ECAs at more competitive rates for financing their countries’ exports. Such an arrangement will ensure that Asian forex reserves are recycled to support further development activities within the region.

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Conclusion It is widely acknowledged that Asia will be the engine of growth for the world. Asia (including East, Southeast, and South) currently accounts for 24 per cent of the world’s GDP, 18 per cent of world’s trade and 14 per cent of foreign direct investment inflows. The demographic balance is in Asia’s favour. It is no coincidence that the Goldman Sach’s report titled “Dreaming with BRICs: The Path to 2050”, released in October 2003, in which it is forecast that by 2050, India and China, both from Asia will be amongst the six largest economies in the world. Russia has also been identified as one of the remaining four countries, and Russia also straddles a large part of Asia. The interdependence of trade and investment is increasingly evident. Investment has emerged in recent years as the key driver of trade. There are two other major trends, which are relevant, viz. the spread of globalization, which has heightened cross-border competition, and the information technology revolution. These global trends have made it necessary for national institutions to be supplemented by regional and international bodies. Thus, the RECAA can supplement the working of national ECAs promoting and facilitating intra-regional trade and investment, through refinancing and reinsurance thus, assuring high levels of risk than what the national ECAs are capable of and also providing liquidity at a lower cost. The linkages between trade and development are well established. The ECAs are trade-financing institutions and are expected to play a greater role on the development process compared to other financial intermediaries such as

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commercial banks, whose objectives are entirely commercial. The ECAs are themselves constrained in the capacity to discharge this developmental role due to their own financial limitations and the limitations of their national governments. Thus, the benefits of increased trade and investment in a globalized world do not accrue evenly. A regional financing institution such as the RECAA can address these limitations and thus can contribute to the development of the weaker Asian countries who otherwise may be left out of the significant growth projected for Asia. In sum, a regional trade financing institution such as the RECAA can be relevant in a resurgent Asia.

(Note: The views expressed in this chapter are of the author and not of the institution to which he belongs.)

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Notes 1. This proposal was put forward by Mr T.C. Venkat Subramanian, Chairman of the Board & Chief Executive Officer of EXIM Bank, India at the first ASEAN-India Forum organized by the Institute of Southeast Asian Studies (ISEAS) in Singapore on 9–10 February 2004. 2. The author would like to thank Mukul Asher and Sadhana Srivastava for their comments and suggestions. The usual disclaimer applies. 3. For the purpose of this paper, the analysis is restricted to economies in East Asia, Southeast Asia and South Asia, as classified by the World Bank. 4. It is interesting to note that Singapore attracted nearly about US$8 billion in FDI inflows out of this total amount. The rest of it was directed largely towards Malaysia, Vietnam, Brunei, Philippines and Thailand. 5. For example, there are substantial differences with respect to reporting of FDI data by India and the above-mentioned economies. Thus, popular perceptions that China has been attracting nearly twenty times more FDI than that of India, needs to be carefully examined. Srivastava (2003) observes that FDI in China involves a significant amount of round tripping (and is thus overestimated), and the actual difference with Indian figures (which is often underestimated while comparing with IMF standards) could be just about 2.5 times. 6. Recent studies that have found a positive association between openness and trade include Coe et al. (1997), Dollar (1992), Edwards (1993, 1998) and Sachs and Warner (1995).

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7. This is so as Singapore is a regional entrepôt economy for ASEAN, and undertakes a substantial proportion of entrepôt trade, which is registered separately as “Re-exports” in Singapore’s trade statistics. This, however, may not be reflected in the trade statistics of Singapore’s trading partners (Sen 2000). 8. India is now the sixth most favourable destination for world FDI flows according to the 2003 FDI confidence index released by AT Kearney. 9. See Srivastava (2003). 10. This section largely draws on Sen (2004). 11. For a detailed table on the proposed and established RTAs in Asia, please see Pangestu and Gooptu (2003), Table 3.1, p. 42. 12. In October 1999, the Export-Import Bank of Japan (JEXIM) and the Overseas Economic Co-operation Fund, Japan (OECF) were merged to form the Japan Bank for International Co-operation (JBIC). 13. Taken as a representative for overall export credit extended by a country in a particular year. 14. IMF, “Trade Finance in Financial Crises: Assessment of Key Issues”, 9 December 2003. Inputs from this source also taken later in the Chapter. 15. Members: Brunei, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. 16. Members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. 17. Members: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

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References Asher, M.G., R. Sen and S. Srivastava. “ASEAN-India: Emerging Economic Opportunities”. In Beyond the Rhetoric: The Economics of India’s Look-East Policy, edited by Frederic Grare and Amitabh Matto, pp. 45–79. New Delhi: Manohar Publications, India, 2003. Asher, Mukul G. and Sadhana Srivastava. “India and the Asian Economic Community”. Discussion Paper no. 53. New Delhi: Research and Information Systems for the NonAligned and Developing Countries (RIS), 2003. Coe, D. and A. Hoffmaister. “North-South R&D Spillovers”. The Economic Journal 107 (1997), pp. 134–39. Dollar, D. “Outward-Oriented Developing Economies Really Do Grow More rapidly: Evidence from 95 LDCs, 1976–85”. Economic Development and Cultural Change 40 (1992): 523–44. Edwards, S. “Openness, Trade Liberalization, and Growth in Developing Countries”. Journal of Economic Literature, no. 31 (1993), pp. 1358–93. Edwards, S. “Openness, Productivity and Growth: What Do We Really Know?” Economic Journal 108 (1998), pp. 383–98. Frankel, J. and D. Romer. “Does Trade Cause Growth?” American Economic Review 89 (1999): 379–99. Kumar, Nagesh. “Towards an Asian Economic Community: The Relevance of India”. Discussion Paper 34. New Delhi: Research and Information System for Non-Aligned and other Developing Countries, RIS, 2002. Pangestu, Mari and Sudarshan Gooptu. “New Regionalism: Options for China and East Asia”. In East Asia Integrates, 93

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edited by Kathie Krumm and Homi Kharas. Washington, D.C.: World Bank, 2003. Rajan, R. and R. Sen. “A Decade of Trade Reforms in India: How it Compares with East Asia”. World Economics 3 (2002): 1–14. Rodriguez, F. and Dani Rodrik. “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence”. Mimeo, May 2000. Sachs, J. and A. Warner. “Economic Reform and the Process of Global Integration”. Brookings Papers on Economic Activity, 1995, pp. 1–118. Sen, Rahul. “Analysing Entrepôt trade in a Small Open Economy: The Case of Singapore”. ASEAN Economic Bulletin 17, no. 1 (2000): 23–35. Sen, Rahul. “Singapore-India Economic Relations in the context of their Globalization Strategies”. Ph.D. Dissertation, Department of Economics, National University of Singapore, Singapore, 2002. Sen, Rahul. Free Trade Agreements in Southeast Asia. Southeast Asia Background Series no. 1. Singapore: ISEAS, 2004. Sen, Rahul, Asher Mukul G. and Rajan, Ramkishen. “ASEANIndia Economic Relations: Current trends and Future Prospects”. Discussion Paper no. 73. New Delhi: Research and Information Systems for the Non-Aligned and Developing Countries (RIS), 2004. Srivastava, S. “What is the True Level of FDI Flows to India?” Economic and Political Weekly 38, no. 7 (2003): 608–11.

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