Global Economic Challenges to ASEAN Integration and Competitiveness: A Prospective Look REPSF Project 03/006a Authors: Peter Lloyd and Penny Smith Final Report September 2004 The views expressed in this report are those of the authors, and not necessarily those of the ASEAN Secretariat and/or the Australian Government. Global Economic Challenges to ASEAN Integration and Competitiveness: A Prospective Look ABSTRACT This report takes a forward-looking view of ASEAN in the context of a rapidly changing world economy. It is concerned solely with ASEAN as an agreement affecting economic relations among the member economies, that is, with the ASEAN Economic Community. It focuses on issues of economic integration. Economic integration is equated to a single market which in turn is equated to the Law of One Price holding in all markets. The report explores what a commitment to the goal of a single market or complete economic integration implies. It requires the elimination of both border and beyond-the-border measures that discriminate against foreign goods or persons and sometimes too the harmonisation across borders of standards, laws and regulations that inhibit trade. The report also considers additional issues that have emerged in regional trading agreements concerning border–related transactions costs, fiscal union and monetary union. Forecasts are made regarding growth rates in the ASEAN economies, changes in the global trade environment and emerging risks. The policy implications for the ASEAN Economic Community of the goal of a single market are considered. Recommendations are made for the Vientiane Action Programme. REPSF Project 03/006a: Final Report i Global Economic Challenges to ASEAN Integration and Competitiveness: A Prospective Look CONTENTS ABSTRACT...............................................................................................................................i CONTENTS..............................................................................................................................ii LIST OF TABLES ...................................................................................................................iv LIST OF FIGURES..................................................................................................................iv ABBREVIATIONS AND ACRONYMS.....................................................................................v EXECUTIVE SUMMARY........................................................................................................vii INTRODUCTION......................................................................................................................1 1. THE CHANGING WORLD ECONOMY................................................................................2 1.1 Trends in World Trade ..............................................................................................2 1.1.1 Trends in trade in goods, services and FDI.......................................................2 1.1.2 Trends and changes in foreign exchange markets ...........................................5 1.2 Globalisation..............................................................................................................7 1.3 Regionalisation..........................................................................................................8 2. GLOBAL AND REGIONAL INTEGRATION........................................................................9 2.1 What is economic integration? ................................................................................9 2.1.1 “Economic integration” = A Single Market = the Law of One Price ...................9 2.1.2 What is required for the Law of One Price to hold?.........................................12 2.2 Why integration is important; an efficiency issue ...............................................13 2.3 Modalities of global integration .............................................................................15 2.4 Modalities of regional integration..........................................................................16 2.5 The long run effects of integration: convergence of prices and incomes.........18 2.5.1 Convergence of prices ....................................................................................18 2.5.2 Convergence of incomes.................................................................................19 2.5.3 Accelerating the rate of economic growth. ......................................................20 3. NEW ISSUES ARISING FROM ECONOMIC INTEGRATION...........................................22 3.1 Taxes and fiscal unions..........................................................................................22 3.2 Foreign exchange markets and monetary unions ...............................................23 3.3 Empirical studies of non-traditional border restrictions; missing trade............24 3.4 Competitiveness in an integrated world economy ..............................................26 3.4.1 The meanings of competitiveness...................................................................26 3.4.2 Competitiveness in the sense of the real effective exchange rate ..................28 3.4.3 Competitiveness in the sense of freedom of trade and investment.................31 3.4.4 What should be done about competitiveness?................................................34 4. STYLES OF REGIONAL ECONOMIC INTEGRATION .....................................................35 4.1 A typology of RTAs based on integration.............................................................35 4.2 Progress towards economic integration in RTAs ................................................36 4.3 Styles of economic integration ..............................................................................42 4.3.1 The EU Style ...................................................................................................42 4.3.2 NAFTA Style....................................................................................................44 4.3.3 CER.................................................................................................................45 4.4 Competition between styles...................................................................................48 5. SOME SPECIFIC FORECASTS ........................................................................................50 5.1 Economic growth rates...........................................................................................50 5.1.1 Growth rates of per capita incomes in the ASEAN economies .......................50 5.1.2 The development gap......................................................................................51 5.2 Changes in the global trade environment.............................................................55 5.2.1 WTO and multilateral liberalisation..................................................................55 5.2.2 Regional trading agreements ..........................................................................56 REPSF Project 03/006a: Final Report ii Global Economic Challenges to ASEAN Integration and Competitiveness: A Prospective Look 5.2.3 Monetary unions..............................................................................................61 5.3 Emerging risks in the 21st century.........................................................................63 5.3.1 Terrorism.........................................................................................................63 5.3.2 Oil Prices and Energy Policy ...........................................................................63 5.3.3 Natural and Technological Disasters...............................................................64 5.3.4 Issues of Public Health....................................................................................64 5.3.4.1 Communicable Diseases ....................................................................64 5.3.4.2 Non Communicable Diseases.............................................................64 6. POLICY IMPLICATIONS AND RECOMMENDATIONS FOR THE VIENTIANE ACTION PROGRAMME....................................................................................................65 6.1 The global context – globalisation and regionalisation ......................................65 6.2 ASEAN current objectives......................................................................................67 6.3 What the goal of a single market implies..............................................................69 6.4 Advancing the ASEAN Economic Community towards a single market ...........70 6.4.1 ASEAN progress towards a single market to date ..........................................70 6.4.2 Closing the development gaps in ASEAN .......................................................72 6.4.3 The Recommendations of the High-Level Task Force ....................................74 6.4.4 Further possibilities for economic integration ..................................................76 6.5 Recommendations ..................................................................................................81 REFERENCES.......................................................................................................................83 APPENDIX 1: ABOUT THE AUTHORS ................................................................................90 REPSF Project 03/006a: Final Report iii Global Economic Challenges to ASEAN Integration and Competitiveness: A Prospective