Pacifi c Opportunities Leveraging Asia’s Growth This book examines how the 14 Pacifi c developing members of the Asian Development Bank can tap into projected growth in Asia. It explores how the economic and fi nancial integration between Asia and the Pacifi c can be expanded to benefi t both regions. This publication identifi es critical constraints on integration and sets out policy reforms to address these constraints. PACIFIC OPPORTUNITIES: LEVERAGING ASIA’S GROWTH ASIA’S LEVERAGING OPPORTUNITIES: PACIFIC About the Asian Development Bank ADB’s vision is an Asia and Pacifi c region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to the majority of the world’s poor. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. PACIFIC About the Asian Development Bank Institute ADBI, located in Tokyo, is the think tank of ADB. ADBI’s mission is to identify eff ective OPPORTUNITIES development strategies and improve development management in ADB’s developing member countries. ADBI has an extensive network of partners in the Asia and Pacifi c region and globally. ADBI’s activities are aligned with ADB’s strategic focus, which includes LEVERAGING ASIA’S GROWTH poverty reduction and inclusive economic growth, the environment, regional cooperation and integration, infrastructure development, middle-income countries, and private sector development and operations. ASIAN DEVELOPMENT BANK INSTITUTE Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan www.adbi.org ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org PACIFIC OPPORTUNITIES LEVERAGING ASIA’S GROWTH Creative Commons Attribution-NonCommercial-NoDerivs 3.0 IGO license (CC BY-NC-ND 3.0 IGO) © 2015 Asian Development Bank and Asian Development Bank Institute Asian Development Bank Asian Development Bank Institute 6 ADB Avenue, Mandaluyong City Kasumigaseki Building 8F 1550 Metro Manila, Philippines 3-2-5 Kasumigaseki, Chiyoda-ku Tel +63 2 632 4444; Fax +63 2 636 2444 Tokyo 100-6008, Japan www.adb.org; openaccess.adb.org www.adbi.org Some rights reserved. Published in 2015. Printed in the Philippines. ISBN 978-92-9254-989-3 (Print), 978-92-9254-990-9 (e-ISBN) Publication Stock No. BKK157445-2 Cataloging-In-Publication Data Asian Development Bank and Asian Development Bank Institute. Pacific opportunities: Leveraging Asia’s growth. Mandaluyong City, Philippines: Asian Development Bank, 2015. 1. Economic integration 2. Trade and international factor movements 3. Development planning and policy I. Asian Development Bank. The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB), the Asian Development Bank Institute (ADBI) or their Board of Governors or the governments they represent. ADB and ADBI do not guarantee the accuracy of the data included in this publication and accept no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB and ADBI do not intend to make any judgments as to the legal or other status of any territory or area. 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CONTENTS Figures, Tables, and Boxes vi Abbreviations ix Foreword xi Acknowledgments xiii Executive Summary xv PART I CURRENT ECONOMIC CONDITIONS IN ASIA AND THE PACIFIC 1 Chapter 1 Introduction 3 Chapter 2 Economic Conditions and the Recent Performance of Pacific Developing Member Countries 8 Growth Performance 8 Natural Endowments and Structural Transformations 13 Growth Constraints in the Pacific 22 Chapter 3 Asia’s Growth and Opportunities for the Pacific 37 Sources of Economic Growth in Asia 37 Global and Regional Production Networks 40 Regional Cooperation and Integration 41 Opportunities for Pacific Economies 44 PART II LINKS BETWEEN PACIFIC ECONOMIES AND ASIA 55 Chapter 4 Trade Links 57 Trade in Goods 57 Trade in Services 66 iv Contents Chapter 5 Investment, Labor Migration, and Other Links 73 Foreign Direct Investment 73 Labor Movements 77 Development Assistance Ties 81 PART III STRENGTHENING LINKS BETWEEN PACIFIC ECONOMIES AND ASIA 85 Chapter 6 Enhancing Cooperation through Trade 87 Regional Pacific Coordination Mechanisms 87 International and Regional Trade Agreements 92 Benefits of Trade Liberalization 96 Chapter 7 Lessons and Priorities for Improving Economic Links 102 Lessons from Asia 103 Reform Priorities for Enhancing Pacific Links 109 Setting Priorities 113 Chapter 8 Conclusion: Fostering Mutually Beneficial Economic Links between the Pacific and Asia 114 References 123 Contents v Appendixes 1 Supplementary Tables and Figures 130 2 Notes on the Availability of Economic Statistics in Pacific DMCs 145 3 Regional Value Chains in Asia 149 4 ADB’s Approach to Helping Pacific DMCs Adapt to Climate Change 152 5 A Gravity Analysis of Trade Links between Pacific and Asian Economies 156 6 Drivers of Tourism Growth in the Pacific 161 7 Addressing Challenges in Assisting Overseas Filipino Workers 168 8 Increasing Small and Medium-Sized Enterprises’ Access to Finance through Hometown Investment Trusts 171 9 Funding Infrastructure Development from Sovereign Wealth Fund Resources 175 10 Enhancing Investment Climate Policies in Okinawa, Japan 179 11 Improving the Business Environment through Privatization in Solomon Islands 182 12 Developing Agricultural Export Opportunities in Samoa 184 13 Exchange Rate Arrangements in the Pacific 188 FIGURES, TABLES, AND BOXES Figures 1 Average Tariff Rates Applied to 25Most-Favored Nations 2 Average Number of Days to Export27 in Pacific DMCs 3 Average Number of Days to Import27 in Pacific DMCs 4 Drivers of Economic Growth in Selected48 Economies 5 Production by Sector in the Association of Southeast Asian Nations, the People’s Republic of China, and India 49 6 Share of Global Commodity Demand of the Association of Southeast Asian Nations, the People’s Republic of China, and India 51 7 Size of the Middle-Income Class Worldwide 52 8 Number of Trading Partners of Pacific61 Economies 9 Destinations of Pacific Exports 62 10 Sources of Pacific Imports 62 11 Ratio of Tourism Receipts to Gross 68 Domestic Products 12 Remittance Inflows 77 A1 International Visitor Arrivals to the Pacific146 A6.1 Direct Flight Connections and Tourism Flows within the Pacific and between the Pacific and Asia 173 A6.2 Outbound Tourist Flows from the People’s Republic of China to the Maldives and Worldwide 174 A7 Filipino Workers Employed Overseas and Remittance Flows Worldwide 180 Tables 1 Economic Indicators for Pacific DMCs 9 2 Social Indicators for Pacific DMCs 16 3 Labor Market Indicators for Pacific DMCs 18 4 Pacific DMCs Progress toward Millennium Development Goals 20 5 Cross-Border Trade of Pacific DMCs 26 6 Logistics Performance Index of Pacific28 DMCs 7 Liner Shipping Connectivity Index Values29 for Pacific DMCs 8 Doing Business Indicators for Pacific32 DMCs 9 Governance Indicators for Pacific DMCs35 Figures, Tables, and Boxes vii 10 Importance of Trade in Pacific DMCs 58 11 Major Pacific Export Products and Destinations59 by Value 12 Direction of Trade of Merchandise Imports of Pacific Economies 63 13 Direction of Trade of Merchandise Exports of Pacific Economies 64 14 International Visitor Arrivals to the Pacific 67 15 Visitor Arrivals to the Pacific (by69 place