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ASIAN TRADE AND INVESTMENT: 

ASIAN TRADE AND INVESTMENT Douglas H. Brooks Asian Development Bank 2-3 December 2003 Phnom Penh, Cambodia

Key Messages: 

Key Messages Developing Asia remains fastest growing region - GDP growth of 5.6% in 2003, 6.2% in 2004 and 6.3% in 2005, led by PRC, Viet Nam, Thailand & India Strong growth in 2003 in spite of multiple shocks - high oil prices, terrorism, Iraq conflict, and SARS epidemic Inflation generally low in 2003-2005 Current account surplus average 2.5% of GDP over 2003-2005 Foreign exchange reserves of developing Asia total $1.2 trillion Weak business investment keeps growth in many countries below long term potential Domestic demand, particularly consumption, increasingly play an important role in growth Intraregional trade with PRC is major driver of growth in Asia Risks and uncertainties remain

Baseline Assumptions on External Conditions: 

Baseline Assumptions on External Conditions

Economic Indicators: Developing Asia, 2002-2005: 

Economic Indicators: Developing Asia, 2002-2005

Economic Indicators: Developing Asia, 2002-2005: 

Economic Indicators: Developing Asia, 2002-2005

Economic Indicators: Developing Asia, 2002-2005: 

Economic Indicators: Developing Asia, 2002-2005

East Asia: 

East Asia Domestic demand and exports drive growth in PRC. Exports, mainly to PRC, and domestic demand underpin growth in East Asia. Continued strong trade integration with PRC. Continued accumulation of foreign exchange reserves. Major structural imbalances exist in PRC; PRC could face major risks and uncertainties. Other East Asian countries, particularly Korea, need to balance domestic demand, exports to PRC, and exports to rest of the world.

Contribution to Growth East Asia: 

Contribution to Growth East Asia

Contribution to Growth East Asia: 

Contribution to Growth East Asia

Growth of East Asian Exports to PRC: 

Growth of East Asian Exports to PRC

Southeast Asia: 

Southeast Asia Recovery in industrial countries to benefit Southeast Asia. PRC market offers huge opportunity and challenge. Growth in Thailand and Viet Nam driven by domestic demand and exports. Consumption remains strong in Indonesia, Philippines, Thailand, and Viet Nam. Firmer recovery in business investment in Indonesia, Malaysia, and Thailand. Singapore should come out of recession in 2004-2005. Current account to remain in surplus; foreign exchange reserves comfortable. Fiscal consolidation a priority in Indonesia, Philippines, Malaysia, and Thailand. Indonesia and Philippines growing below potential. Reforms to raise productivity, competitiveness, and growth needed.

Contribution to Growth Southeast Asia: 

Contribution to Growth Southeast Asia

Contribution to Growth Southeast Asia: 

Contribution to Growth Southeast Asia

Contribution to Growth Southeast Asia: 

Contribution to Growth Southeast Asia

Share of ASEAN-5 Exports to PRC: 

Share of ASEAN-5 Exports to PRC

Growth Rate of ASEAN-5 Exports to PRC: 

Growth Rate of ASEAN-5 Exports to PRC

South Asia: 

South Asia Rising agricultural incomes and strengthening exports to benefit South Asia. Strong growth forecast for India; continued recovery in Bangladesh and Pakistan. Modest growth in Nepal due to political uncertainties. Continuation of peace process supports growth in Sri Lanka. Current account surpluses projected for India and Pakistan; India accumulates foreign exchange reserves. Fiscal consolidation, a priority for all South Asia countries. Reforms to liberalize and open the economies and a major investment program in physical infrastructure essential for higher growth for all South Asia.

Risks and Uncertainties: 

Risks and Uncertainties Recurrence of SARS: Milder impact as lessons learnt Threats of Terrorism Risks on tourism growth Risks on investment sentiment Volatile oil prices: average price forecasts higher Long-term interest rate rise Possible if strong recovery anticipated If US fiscal budget deficit balloons further Derail recovery in early stage (impact on housing refinance and investment) Jobless recovery in US and unemployment high in Europe and Japan Derail recovery through weaker consumer spending 6. Sharp exchange rate adjustments 7. Overheating of investments in PRC

Key Messages: 

Key Messages Developing Asia remains fastest growing region - GDP growth of 5.6% in 2003, 6.2% in 2004 and 6.3% in 2005, led by PRC, Viet Nam, Thailand & India Strong growth in 2003 in spite of multiple shocks - high oil prices, terrorism, Iraq conflict, and SARS epidemic Inflation generally low in 2003-2005 Current account surplus average 2.5% of GDP over 2003-2005 Foreign exchange reserves of developing Asia total $1.2 trillion Weak business investment keeps growth in many countries below long term potential Domestic demand, particularly consumption, increasingly play an important role in growth Intraregional trade with PRC is major driver of growth in Asia Risks and uncertainties remain  

Foreign Direct Investment: 

Foreign Direct Investment The surge in flows of FDI in the last 2 decades has had important effects on global value chains of production, on developing countries (DCs), and on attitudes towards such investment. Attitudes towards FDI and experiences with it in DCs affect host economy policies, which in turn affect subsequent experiences. Both FDI policies and experiences, as well as their perceived feedback, influence attitudes toward negotiating a multilateral framework for investment (MFI).

Recent Trends and Effects: 

Recent Trends and Effects Very rapid growth in global FDI 1980-2000, though sharp fall in 2001. Especially rapid growth 1985-90 (general opening up) and 1995-2000 (M&As, Asian crisis LatAm privatizations). In most years, FDI grew faster than global trade and GDP.

Growth of World Exports & FDI Outflows (average annual growth rate): 

Growth of World Exports & FDI Outflows (average annual growth rate) Source: Exports – WEO database; FDI outflows – UNCTAD FDI database.

Index of World Exports, FDI Outflows, and Output, 1990-2002 (1990=100): 

Index of World Exports, FDI Outflows, and Output, 1990-2002 (1990=100) Source: Exports & GDP – WEO Database; FDI Outflows – UNCTAD FDI database.

Recent Trends and Effects: 

Recent Trends and Effects Among recipients, Asia-Pacific economies increasingly important; in 2002, PRC emerged #1. Some reordering of major recipients during 1990s; note continuing negative flows from Indonesia.

FDI Top 10 in Developing Asia: 

FDI Top 10 in Developing Asia

FDI Top 10 in Developing Asia … : 

FDI Top 10 in Developing Asia …

FDI Top 10 in Developing Asia … : 

FDI Top 10 in Developing Asia …

Domestic Policy Changes: 

Domestic Policy Changes Host country policy framework plays a critical role in determining the effects of FDI on a recipient country. A key argument concerns the nexus between trade and FDI liberalization. Trade reform alters the incentive of production for the domestic market relative to exports, resulting in a fundamental shift in the behaviour of MNEs and in the FDI cost-benefit calculus from ‘rent-seeking’ to ‘efficiency-seeking’ FDI.

FDI Regimes: 

FDI Regimes Dual policy regimes FDI regimes have become more open but considerable selectivity across sectors and firms. Typically a mix of both ‘rent-seeking’ and ‘efficiency-seeking’ FDI, reflecting partial reform of trade regimes, and the political economy of dispensing patronage, e.g. FDI policy may differ between regions. Large inter-industry differences in protection, and thus incentives. SOEs typically receive preferential treatment, especially in PRC, India and Viet Nam, and their MNE joint venture partners. Most countries offer fiscal or financial incentives. These vary by sales orientation, the technology introduced by the foreign investor, location of investment, and other factors. The regulatory regime frequently offers more than one entry option.

FDI Regimes …: 

FDI Regimes … Dual policy regimes (cont’d.) ‘Dual policy regimes’ are particularly pronounced in the more recently reformed economies; e.g., at one extreme FDI flowing into joint ventures with SOEs, often in protected, uneconomic sectors, producing negative value added at international prices, alongside other foreign investors entering ‘comparative advantage’ sectors – SMEs, labour-intensive, export-oriented activities. No such thing as a single FDI ‘model’. Even among the relatively successful late reformers, policy progress is invariably uneven and unpredictable; e.g., Viet Nam in the 1990s. Note partial reform is desirable providing it can be a precursor to successful economy-wide liberalization.

FDI Regimes …: 

FDI Regimes … Reform: rhetoric versus reality Crucial to distinguish between formal FDI and trade regimes, and their operation in practice. Reform at the centre does not necessarily ensure that liberalization will proceed smoothly; e.g., India, also Korea – considerable bureaucratic ambivalence towards recent reforms. Frequently, the investment boards charged with regulating FDI have limited general authority. Especially in larger states, sub-national policy regimes matter increasingly. Moreover, as international barriers to commerce decline, paradoxically sub-national barriers are sometimes rising.

The Commercial Environment: 

The Commercial Environment As economies open up, governments have to make the transition from protectionist/regulatory regimes to an emphasis on promotion and efficiency. The ‘three I’s’: incentives, infrastructure, and institutions. Note too that domestic investors are invariably the key players in any economy.

International Investment Agreements: 

International Investment Agreements Wide variety of resource endowments, policy regimes, and experiences with FDI different views toward international investment agreements. MFN treatment obliges the host country to offer national treatment to both foreign and domestic investors. Over 2,100 BITs and 2,200 double taxation treaties. BITs generally contain binding commitments on expropriation, transfer of funds, and compensation. BIT implementation not always effective, and there is not a strong link between their existence and FDI flows. BITs appear to complement, rather than substitute for, institutional quality.

The TRIMs Agreement: 

The TRIMs Agreement TRIMs are a subset of the incentives and regulations designed to influence FDI. The most common are local content requirements and export performance requirements, also trade balancing measures. TRIMs Agreement formulated in the Uruguay Round. The Agreement recognizes that certain investment measures distort trade and are not consistent with GATT/WTO principles.

The Ongoing Divide: 

The Ongoing Divide Investment again on the agenda for the WTO Doha round but members are still far from in agreement on investment issues. Since the TRIMs Agreement came into effect in 1995, operational details have caused contention between developed and developing countries.

The Ongoing Divide … : 

The Ongoing Divide … Several DCs are of the view that TRIMs etc are domestic investment issues that should therefore not involve WTO officials. India and others also assert that the mandate of the WTO is confined to trade and does not extend to investment. Asymmetries in the obligations and in the distribution of benefits, limited capacity to negotiate, and limited resources for implementation.

The Ongoing Divide … : 

The Ongoing Divide … Liberalization of investment is more constrained by political factors than is trade. Many DCs wish to ensure the benefits of a future agreement outweigh the risks of trade sanctions before they are willing to commit to negotiations. Many DCs lack the capacity to negotiate effectively on a wide-ranging agenda. Developed countries already meet the standards likely to be negotiated, placing proportionately greater burden on DCs.

The Ongoing Divide … : 

The Ongoing Divide … Joint Brazil/India submission to the WTO’s Committee on TRIMs in October 2002, arguing that the TRIMs Agreement should be amended to provide DCs flexibility to implement development policies. Still unclear if the WTO will negotiate investment related issues further.