Free ebooks ==> www.Ebook777.com THE FUTURE OF THE ASEAN ECONOMIC INTEGRATION Kiki Verico www.Ebook777.com Free ebooks ==> www.Ebook777.com The Future of the ASEAN Economic Integration www.Ebook777.com Kiki Verico The Future of the ASEAN Economic Integration Kiki Verico The Institute for Economic and Social Research (LPEM), Faculty of Economics and Business, University of Indonesia, Jakarta, Indonesia ISBN 978-1-137-59612-3 ISBN 978-1-137-59613-0 DOI 10.1057/978-1-137-59613-0 (eBook) Library of Congress Control Number: 2016957799 © The Editor(s) (if applicable) and The Author(s) 2017 The author(s) has/have asserted their right(s) to be identified as the author(s) of this work in accordance with the Copyright, Designs and Patents Act 1988 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made Cover illustration: © epa european pressphoto agency b.v / Alamy Stock Photo Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Macmillan Publishers Ltd The registered company address is: The Campus, Crinan Street, London, N1 9XW, United Kingdom Free ebooks ==> www.Ebook777.com In memory of my late father, Ma’as Sary (1943–1988) You have always been my inspiration To my mother, Nahdiar Ma’as, Without you none of this would be possible www.Ebook777.com Preface Empirical experiences from the European Union’s (EU) economic integration, which has been adopted as theory in regional economic integration studies, show that neighboring countries within a region can achieve economic integration having undergone phases from trade (Free Trade Area/FTA) to investment (Custom Union and Common Market) before finally achieving financial integration (Single Monetary Union and a Single Currency) This theory was first proposed by Jacob Viner in 1950 and continued by Bela Balassa in 1961 who argues that this process requires formal institutionalization at the regional level Southeast Asian countries have a similar formal institution at regional level, ASEAN (Association of Southeast Asian Nations), established in 1967 Currently ASEAN’s commitment is to transform Southeast Asia’s economic integration from free flows of goods (FTA) to that of investment, services, and capital at the end of 2015 and afterwards named the ASEAN Economic Community (AEC) The center point of this regional economic integration process is intra-regional trade, which connects both trade and investment at the regional level Intra-regional trade is created by ASEAN Free Trade Area (AFTA) and in turn affects long-term investment and free flows of people The latter is part of the AEC It is, therefore, essential to observe the impact of AFTA on intra-regional trade and further the impact of intra-regional trade on the long-term investment inflows (Foreign Direct Investments/FDI) vii viii Preface Historical perspectives prove that ASEAN’s economic integration process has been largely influenced by the international dynamic situation, which includes, for example, the end of the Vietnam War, which led to the first ASEAN summit taking place in 1976, almost ten years after ASEAN’s establishment in 1967 ASEAN commitments on AFTA in 1992 had been decided just after the end of the Cold War in 1989 The ASEAN enlargement to the APT was also affected by the dynamic changes affecting the ‘Greater East Asian’ (Bowles and MacLean 1996) region after China adopted a market economy, joined the WTO, and became one of the largest economic entities, in terms of nominal GDP, in the world To some extent, ASEAN needs external factors to stimulate its internal reform and cooperation Given its open regionalism, which contrasts with that of the EU’s closed regionalism, ASEAN has several other economic cooperations that involve its members, such as direct bilateral trade agreements between members and non-members of ASEAN; sub-regional economic cooperation which involves limited member states of ASEAN; then regional cooperation involving ASEAN members as well as regional-plus which incorporates all ASEAN members with non-members under the so called “ASEAN umbrella.” This study attempts to analyze the impacts of bilateral, subregional, and regional economic cooperation to investment (FDI inflows) This objective is essential for ASEAN if it is to shift its economic integration from trade to investment As for the regional-plus framework, this study will analyze the impact on not only shifting ASEAN’s economic integration from trade to investment but also the impact from investment to financial integration afterwards In sum, this study will discuss all relevant arrangements of economic cooperation that could integrate trade, investment, and financial aspects in Southeast Asia from various level of cooperations of bilateral, sub-regional, regional, and regional plus frameworks ASEAN in Descriptive Data View Data of the World Trade Organization (WTO) in 2006 show that Asian regional trade depends more on the Asian region itself than from any other region This can be seen through Asia’s intra export in which 50 percent Preface ix of Asian total trade goes to Asian countries while the remaining 50 percent goes to the rest of the world, as shown in Table P.1 (Appendix) Table P.1 shows Europe as the most prominent region for regional economic cooperation as their intra-regional merchandise trading achieves 73.6 percent in 2006 North America’s intra trade is around 53.9 percent Africa depends more on Europe in which 40.8 percent of their export in 2006 went to Europe, while Latin America depends more on North America with 31.4 percent of their export going to North America Meanwhile the Middle East depends more on the Asian market with 52.6 percent of their exports in 2006 going to Asia Naturally, most of the region’s countries rely on their trade activities to their own region given the closer distance, lower cost in trade-related services such as export import insurance and transportation cost, as well as similarities in demand factors within countries in the region In Asia, one of the regions with a potential bright future for strong regional economic integration is ASEAN with its ASEAN Free Trade Area (AFTA), which completed its percent tariff rates among members in 2015 and will enter the economic community afterwards Given this, it is essential to understand the potential capacity of AFTA in terms of enhancing trade liberalization and its connection to investment creation According to Table P.1 in terms of trade Asia depends more on its region Historically in Asia, Southeast Asian countries have good trade relations with East Asian countries They both are very close to each other and have had a long history of interdependent relations Regional economic integration can promote FDI inflows and economic development in individual countries of the region (Aggarwal, 2008) Therefore, the role of FDI inflows becomes important to see the connectivity between ASEAN and East Asian countries This is useful to assess potential interconnection between Southeast and East Asian countries From a historical perspective, Japan, China, and South Korea have played an important role in promoting Southeast Asia economic networks Japan established a Regional Production Network (RPN) in Southeast Asia to produce automotive and electronic products in several ASEAN countries in the 1930s (Akamatsu 1944; Kojima 1978; Urata 1993) China had Guanxi, a traditional business network within ethnic Chinese in Southeast Asia (Wang 2001) This network is also known as x Preface ECBN (Ethnic Chinese Business Network) and works based on trust and usually avoids formal agreements between them China holds a non-formal yet solid business network in Southeast Asia (Peng 2002) A regional production network producing final goods has been established between South Korea and Southeast Asian countries South Korea established production networks in Southeast Asia originally in Cambodia, Laos, Myanmar, Vietnam (also referred to as CLMV), and Thailand, then to other Southeast Asian countries (Cheong 2011) Korea’s largest trading partners in Southeast Asia are the ASEAN-6, ASEAN’s founding members with the largest share starting from Singapore, Indonesia, Malaysia, Thailand, and Philippines; while among the ASEAN-4, which are its CLMV members, the largest Korean trading partner is Vietnam Korea’s exports to ASEAN are mostly of heavy industry, chemical products, and light industries while Korean’s dominant imports from ASEAN are primary products, raw materials, and energy sources China, Japan, and South Korea play important roles in promoting and enhancing production networks between East Asia and other Asian countries especially Southeast Asian countries Global production networks (GPN) in Asia have promoted more intermediate goods transaction than that of consumption and capital goods China, Japan, and South Korea are among the largest FDI investors in Southeast Asia This economic cooperation has been stimulated by market-driven factors that are crucial in helping ASEAN to move from intra-regional trade to investment integration and finally to financial integration Bowles and MacLean (1996) argue that East Asia shows increasing interest in Southeast Asia in particular on regional trade and investment This makes the ASEAN+3 (APT of ASEAN and China, Japan, & South Korea) compose economic integration of advanced technology products from Japan and South Korea, skilled-labor intensive from China, and labor-intensive products from ASEAN Enhanced relations between intra-regional trade and direct long-term investment inflows are the key success factor for the establishment of further compact economic integration ASEAN needs external countries that have the potential to become member states starting from its FTA such as the ASEAN+1 FTA then to become part of the economic community, common market, and finally, Free ebooks ==> www.Ebook777.com Preface xi financial integration Why? Take for instance the indicator of the annual GNI/capita (US$) the convergence of which is one of the most important long-term issues in ASEAN Unlike the EU, which has high-income countries in terms of GNP per capita, with a large size in terms of proportion of population and value added, ASEAN’s high-income country members such as Singapore and Brunei are small in terms of size (GDP and population) yet a large-population-sized country, Indonesia, is not a high-income country Therefore, ASEAN’s power is not at the center, but appears more like a “doughnut-shape” without a single country playing as the center of power Details in GNI per capita of ASEAN members are described in Fig P.1 (Appendix) Open and soft regionalism principles help ASEAN to enlarge its economic cooperation to other countries This will be a very important factor for achieving economic convergence in Southeast Asia ASEAN has member states with varying economic levels They come from different GNI per capita levels For instance, Singapore and Brunei are classified as high income countries (above US$ 12,736 per capita per year), while Malaysia and Thailand are upper-middle-income countries (between US$ 4,125 and US$ 12,736 per capita per year) and Indonesia, Philippines, Vietnam, Laos, and Myanmar are lower-middle-income countries (between US$ 1,045 and US$ 4,125) while Cambodia is classified as a low-income country ASEAN’s economic divergence is, therefore, higher than the EU-27, which consists of only two income groups with the majority in high income and only one country with uppermiddle-income status This high economic convergence explains why the EU has strong economic integration and fit with legally binding and closed regional integration choice The EU has a level playing field within its members and this helps the EU to attain a high level of intra-regional trade share compared with other regions Economic divergence in ASEAN is not only seen in the GNI per capita per year gap but also in the proportion of each member state’s economic size both in terms of value (GDP) and population to ASEAN’s total of these factors This indicator shows that high income countries such as Singapore and Brunei are actually small in terms of size while a lower-middle-income country such as Indonesia is big in terms of size Illustration of the size of GDP and population of ASEAN members can be seen in Fig P.2 (Appendix) www.Ebook777.com 260 Bibliography Donnenfeld, S (2003) Regional blocs and foreign direct investment Review of International Economics, 11(5), 770–788 Drysdale, P., & Garnaut, R (1993) The Pacific: An application of a general theory of economic integration In C Fred Bergsten (Ed.), Pacific dynamism and the international economic system (pp 183–223) Washington, DC: Institute for International Economics Dunning, J H (1988) Explaining international production London: Unwin Hyman Ltd Dunning, J H (1990) Economic integration and transatlantic foreign direct investment: The record assessed The international investment and business studies, Series B, no 144, Department of Economics, University of Reading Durham, J (2004) Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment of economic growth European Economic Review, 48(2), 285–306 Fleming, J M (1971) On exchange rate unification The Economic Journal, 81(323), 467–488 Foster, M J (2000) Evaluating foreign direct investments: New challenges for strategic planners The Journal of the Operational Research Society, 51(1), 45–52 Part Special Issue: OR and Strategy Frankel, J (1997) Regional trading blocs in the world economic system Washington, DC: Institute for International Economics Friedman, M (1982) Monetary policy: Theory & practice Journal of Money, Credit and Banking, 14(1), 98–118 Fukuoka, Y., & Verico, K (2015) Indonesia-China economic relations in the twenty-first century: Opportunities and challenges In Y.-C Kim (Ed.), China and ASEAN: Global production networks London: Springer Gastanaga, V., Nugent, J B., & Pashamova, B (1998) Host country reforms & FDI inflows: How much difference they make? 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M., 155 Aoki, T., 46, 191 ASEAN ASEAN umbrella, viii, 113, 124, 125, 135, 204, 205, 225, 230, 231 ASEAN+3 (ASEAN plus China, Japan and Korea), xii ASEAN Bond Markets Initiative, 80, 84 ASEAN China FTA, 43, 193, 195 ASEAN Economic Community (AEC), vii, 2, 6–7, 15, 18, 21, 22, 42, 44, 45, 54, 69, 78, 84, 101, 137, 148, 182n6, 185–202, 202n3, 214, 229 ASEAN Framework Agreement on Services, 20, 69, 82, 102, 194, 206 ASEAN Free Trade Area, vii, ix, 4, 7, 12, 20, 21, 52, 58, 93, 145, 185, 189, 206 ASEAN Minus X, 69 ASEAN-noodle-bowl phenomenon, 27 ASEAN Plus framework, 45, 206 ASEAN-Plus One, 16, 193 ASEAN-Plus Three (APT), 16, 187, 216, 217 ASEAN Surveillance Process, 79, 84, 199 ASEAN Way, 55, 56, 80, 122, 231 Asian noodle-bowl phenomenon, Asia Pacific Economic Cooperation, 19, 81, 205, 231 Association of Southeast Asian Nations (ASEAN), vii, 185 © The Author(s) 2017 K Verico, The Future of the ASEAN Economic Integration, DOI 10.1057/978-1-137-59613-0 269 270 Index B Balassa, B., vii, 51, 62, 63, 153 Balasubramanyam, V. N., 49 Balboa, J., 54, 60, 61 Baldwin, R. E., 57, 120, 123, 143n17, 189 Bali Concord II, 71 Baltagi, B. H., 26, 47, 186 band wagon effect, 31 Barrell, R., 37 Berg, D. M., 28, 98 Bhagwati, J., 26, 51, 61, 105, 106, 114, 120, 138 Bilateral Free Trade Agreement (BFTA), 7, 21, 59, 107, 113, 115, 116, 128, 203, 223 Bilateral Free Trade Agreements, 1, 128 Blanchard, O., 86, 87 Blomström, M., 26, 48 Bowles, P., viii, x, 25, 53–5, 72, 94, 185 Buckley, P. J., 34 building block, 9, 138, 145, 201, 228 C Carriere, C., 60 Cheong, D., xvii, 26, 42, 43, 103 Chey, H-kyu, 15, 197 Chiang Mai Initiative, 18, 77, 80, 84, 197, 199, 207, 232n3 Cobb-Douglas production function, 30 Common Effective Preferential Tariff, xix, 4, 17, 20, 54, 131, 187, 206 Common Market, vii, 53, 63, 71, 73, 78, 154, 232n3 convergent, 193, 201, 228 Cordenillo, R. L., 43 Country of Origin, 59, 61, 89 Custom Union, vii, 18, 43, 45, 53, 61, 63, 65, 71, 72, 78, 91, 102, 113, 120, 121, 154, 190, 196, 201, 221n6, 228, 230, 232n3 custom union, 15, 30, 44, 45, 83, 91, 109n5, 137, 190, 197 D Daitoh, I., 47 Daquila, T. C., 59 de Melo, J., 60 Dieter, H., 51 discriminatory trade, 16, 19, 26, 53, 95, 186, 206 Donnenfeld, S., 48 dummy variable, 11, 29, 128, 130, 131, 133, 134, 159, 166, 169, 170, 174, 179, 227 Dunning, J. H., 46, 186 E economic community, ix, x, xvi, 2, 6, 8, 15, 21, 22, 26, 43, 46, 55, 70, 78, 83, 108, 146, 186, 189, 196, 200, 201, 224, 228 economic integration, vii–xi, xiv, xv, 2, 5–8, 15, 16, 18, 20–2, 26, 31, 33, 42, 44, 49–51, Index 53, 55, 56, 59, 63–6, 68, 70–5, 78, 79, 83, 91, 92, 101, 102, 104, 105, 114, 135, 136, 138, 140, 146, 148, 151, 153, 155, 166, 172, 185, 186, 188, 189, 193, 195–9, 201, 205–8, 211, 212, 214, 216–18, 221n5, 221n8, 226, 228, 229, 231 Ethnic Chinese Business Network, x, 46, 191 Edward, J. R., 30, 109n5 Egger, P., 26, 47, 186 European Coal and Steel Community, 74, 147, 148, 154 European Coal and Steel Cooperation, 146 European Economic Community, 75, 78, 83 European Single Market, 75 Exchange rates, 140, 169, 209 F financial integration, vii, viii, x, 2, 6, 8, 16, 20–2, 23n1, 24n9, 44, 51, 55–7, 63, 64, 70, 71, 75, 78–81, 83, 84, 92, 110n14, 187, 197–9, 201, 201n2, 206, 208, 212, 215–17, 219, 220n3, 228, 229, 231, 232n3 first-mover, 31, 117, 118 first mover advantage, 35, 127, 225 271 Foreign Direct Investment (FDI), vii, 1, 3, 5, 7, 52, 54, 73, 84, 95, 144n22, 203 Foster, M. J., 32, 109n5 Frankel, J., 64, 90, 91, 110n16 free flows of capital, 42, 44, 69, 71, 73, 79, 148 free flows of people, 6, 44, 151, 215, 218, 231 G global financial crisis, 76, 78 Globerman, S., 26, 48 Goh Chok Tong, 120, 150 Greenway, D., 61 Griffiths, D., 49 Guisinger, S. E., 28, 29, 98 H Hayakawa, K., 30, 60, 61, 89, 140 Hejazi, W., 41 Helpman, E., 40, 50, 52, 98, 101, 106, 134, 186, 217 Higgott, R., 51 hollowing-out, xv, 29, 34 hub-spoke, 58, 127 Huhne, C., 123, 204 Huy, L. H., 59 I intergovernmentalism, 74, 80, 114, 122 International Tripartite Rubber Organization (ITRO), 145–84, 226 Free ebooks ==> www.Ebook777.com 272 Index intra-regional trade, vii, x, xi, xiv, xvii, xviii, 4–9, 15, 18, 21, 25–30, 34, 43, 45–51, 53, 55, 57, 63, 64, 72, 76, 83, 86, 90–107, 111n22, 125, 131–3, 138, 140, 146–7, 185, 186, 189, 190, 193, 216, 218, 219, 223–5, 228 investment creation, ix, xiv, 4–8, 16, 17, 21, 24n5, 26–8, 30, 33, 36, 42, 45, 46, 48, 49, 64, 73, 85, 90, 91, 95, 98–102, 104, 106–8, 115, 128, 131, 134, 136, 138, 140, 147, 159, 166, 186, 190, 196, 216, 219, 223–6, 228 Ito, K., 31 J Jang, Y. J., 116 K Kawamura, A., 47 Kelly, P. F., 30 Kemp, M. C., 106 Kindleberger, C. P., 49, 101, 103 Kobrin, S. J., 38 Kojima, K., ix, 46, 190 Kokko, A., 26, 48 Krugman, P., 40, 50, 52, 98, 134, 217 L Lamy, P., 25, 108n1, 119, 127, 143n15, 143n16 Lawrence, R., 65, 66, 142n7 Lee, H-H., 30 Lin, P., 34 M MacDermott, R., 26, 48, 186 MacLean, B., viii, x, 25, 53–5, 72, 94, 185 Manger, M., 4, 117, 118 Markusen, J. R., 51 Markusen, R., 50 Maskus, E., 50 Medalla, E. M., 54, 60, 61 Menon, J., 116, 117, 140, 185, 186 Most Favored Nation, 68 Motta, M., 26, 33 Musyawarah and Mufakat, 122 N Nesadurai, H. E S., 4, 17, 22, 55–7, 93, 140 non-tariff barriers, 29, 33, 35, 57 Norman, G., 26, 33 Normann, H. T., 157 O Oechssler, J., 157 open and soft regionalism, 113, 146, 221n6, 231 Optimum Currency Area, 64, 195, 199, 207, 231 P Pain, N., 37 Panagariya, A., 4, 26, 61, 105, 138 www.Ebook777.com Index Park, I., 47 Park, S., 47 Pauly, P., 41 Pelkmans, J., 60, 64 Peng, D., x, 44–6, 191 Pfaffermayr, M., 26, 47, 186 Phelan, S. E., 28, 98 Pitsuwan, S., 137 Plummer, M., 26, 42, 43 Plummer, M. G., xvii, 103 Polak, J. J., 66, 67 Poon, J. P H., 30 preferential tariff arrangement, 27 prisoner’s dilemma, 9, 12, 13, 59, 124, 126, 138, 156, 204 Pugel, T. A., 29, 38, 39, 109n5 R Ravenhill, J., 4, 25, 27, 55, 72, 94, 109n13, 125, 140, 185 regionalism, 24n7, 27, 110n18, 111n19, 220n1 Regional Production Networks, ix, 43–5, 189, 190 regional trade agreements, 4, 25, 48, 49, 121, 186 Regulatory Impact Assessment, 115 Ricci, L. A., 196 Rob, R., 36 Rose, E. L., 31 Rules of Origin, 56 S Safarian, A. E., 41 Saggi, K., 34 273 Salvatore, D., 5, 16, 23n3, 53, 87, 109n4, 143n18 Sapsford, D., 49 Schott, J., 18, 24n6, 65 Sethi, D., 28 snowballing effect, 113, 118, 123, 127, 225 Southeast Asia, vii–x, xiv–xvi, xviii, xix, 2, 4, 5, 20, 21, 24n5, 26, 27, 32, 33, 43–6, 55, 57, 58, 61, 62, 69, 77–9, 81–3, 89, 90, 93, 95, 98, 99, 102–4, 107, 109n11, 110n16, 122, 130, 131, 135, 136, 138, 139, 144n22, 145–8, 152, 153, 166, 167, 171, 179, 181, 186, 189–91, 196–9, 203, 206, 223, 226 spaghetti-bowl, 27, 138 spillover effect, 39–41 Sproul, A., 67 Steffen, H., 157 stumbling block, 9, 128, 138, 145 sub-regional integration, 146, 193 supranational, 51, 73, 74, 114, 122 T tariff discrimination, 17, 28 Thompson, E. R., 30 Thorbecke, E., 146, 153 Free ebooks ==> www.Ebook777.com 274 Index trade creation, xviii, 4, 6–9, 15, 16, 19, 21, 24n7, 26–8, 33, 48, 50, 58, 64, 73, 90–2, 95, 100–6, 108, 109n8, 111n19, 121, 131, 136–8, 203, 205, 220n1, 223, 224, 230 Treaty of Amity and Cooperation, 53, 75 U Urata, S., ix, 24n7, 46, 61, 89, 102, 103, 110n18, 127, 191, 205, 220n1 144n22, 146, 179, 181, 187, 192, 199, 201, 201n1, 226, 228, 232n2 Vettas, N., 36 Viner, J., vii, 61, 63, 64, 186 W Walz, U., 40 Wang, H., ix, 46, 191 Wan, H., 106 Y Yang Razali Kassim, 20, 82, 142n11, 206 Yoshimatsu, H., 62, 103 V Verico, K., xv, xvi, xviii, xix, 90, 92, 110n16, 111n22, 131, 138, www.Ebook777.com ... ==> www.Ebook777.com The Future of the ASEAN Economic Integration www.Ebook777.com Kiki Verico The Future of the ASEAN Economic Integration Kiki Verico The Institute for Economic and Social Research... (pulling down the world’s economic growth) The highest contribution to the world economic growth is from the framework of the ASEAN+ 6 at 42 percent, the ASEAN+ 3 at 32 percent and ASEAN at percent... on the enlargement of EU from Western to the Eastern part of Europe.” The hollowing-out assumption made the EU concerned about the risk of investing outside the European region, therefore, the