FDI, Trade Agreements and Value Chains Lessons from/for South Asia. Mizanur Rahman, Ph.D.

Transcription

1 Fourth Meeting of the Asia-Pacific Foreign Direct Investment (FDI) Network for Least Developed and Landlocked Developing Countries FDI, Trade Agreements and Value Chains Lessons from/for South Asia by Mizanur Rahman, Ph.D. Associate Professor of Accounting & Public Policy Director, Accounting for Capital Market Development (ACMD) University of Dhaka Organized by: United Nations ESCAP Colombo, Sri Lanka 25 November 2014

2 Key Messages The globalization of the world economy has progressed by a relative concentration of world economic activity across three economic regions. Economic interdependency has however grown stronger than the economic growth only within the East Asian economic region. International/regional/global organization of production has become the norm. The latest phase of globalization also accompanied the development of an unsustainable payment imbalance btw the US and some East Asian countries including China notably. Capital flow happened to be from the poor to the rich. As the imbalances are unwinding and the world economic crisis is yet continuing, a tectonic change is underway that the gravity of the world economy is moving away from Across the Pacific to the Indo-Pacific Region. South Asia itself in this latest phase of globalization is yet no coherent economic region and no credible framework of shared responsibility is in place. But the economic zone is poised to be increasingly integrated in the Indo-Pacific economic landscape. Integration into the global value chain brings about rising technological capabilities. Evidence from the East Asian countries indicate how China and ASEAN countries have upgraded across the value chain. Proliferation of free trade agreements (FTAs) across Asia and the Pacific and a growing coverage of non-traded and services in recent FTAs. How does a transpacific partnership will impact trade and FDIs across Asian economies? 2 Will Bangladesh be a nod & hub in the Indo-Pacific Ocean Rim? Potential and challenges to this end.

3 World PPP GDP 2005 prices) shares of SA, EA15, EU15, & NAFTA Intra-regional trade share in % in % of world PPP GDP Globalization, Regional Growth, and Economic Interdependency, The world economy & its distribution Economic interdependency NAFTA EU-15 East Asia-15 EU15 East Asia-15 NAFTA SouthAsia South Asia Year Year Sources: International Monetary Fund, World Economic Outlook Database, October 2014, the IMF Direction of Trade Statistics (DOTS) and the CEPII CHELEM Databases. 3

4 Schematic View of East Asian Production Network (Trade flows in 2010) 4

5 Triangular Trade in East Asia, (China & ASEAN) (X) (Y) (China) (Y) (X) Year Year Triangular trading index (Y/(1-X)) (China & ASEAN) Triangular trading index (China) Year Year Source: Authors' estimates based on CHELEM Database. Each series is a weighted moving average with weights being 1, 2, and 3 to the x(t-2), x(t-1), and x(t) terms respectively. (Y): (Export of final goods from China and/or ASEAN to developed markets)/(export of final goods from China and/or ASEAN to the world). (X): (Export of intermediate goods from Japan & NIEs2 to China and/or ASEAN)/(Export of intermediate goods from Japan & NIEs2 to the world). 5

6 Dynamic Competitive Advantage of Exports by Stages of Production & Geo. Locations, (Contd.) Exports by stages of production Intermediate goods Final equipment goods Final consumer goods Trading partners/year Japan China & Hong Kong South Korea & Taiwan ASEAN East Asia US EU US+EU ROW Total South Korea China & Hong Kong Japan ASEAN East Asia (inc. Taiwan) US EU US+EU ROW Total Taiwan China & Hong Kong Japan ASEAN East Asia (incl. South Korea) US EU US & EU ROW Total Kawai and Rahman, Trade and Exchange Rates in East Asia. Asian Development Bank Institute (ADBI). 6

7 Exports by stages of production Dynamic Competitive Advantage of Exports by Stages of Production & Geo. Locations, (Contd.) Intermediate goods Final equipment goods Final consumer goods Trading partners/year China Japan South Korea & Taiwan ASEAN East Asia (inc. Hong Kong) US EU US & EU ROW Total Singapore China & Hong Kong Japan South Korea & Taiwan ASEAN East Asia US EU US & EU ROW Total Indonesia China & Hong Kong Japan South Korea & Taiwan ASEAN East Asia US EU US & EU ROW Total

8 Exports by stages of production Dynamic Competitive Advantage of Exports by Stages of Production & Geo. Locations, Intermediate goods Final equipment goods Final consumer goods Trading partners/year Malaysia China & Hong Kong Japan South Korea & Taiwan ASEAN East Asia (inc. Hong Kong) US EU US & EU ROW Total Philippines China & Hong Kong Japan South Korea & Taiwan ASEAN East Asia US EU US & EU ROW Total Thailand China & Hong Kong Japan South Korea & Taiwan ASEAN East Asia US EU US & EU ROW Total

9 Trade Patterns and RCAs of East Asian Economies (Relative Structures and Dynamic Comparative Advantage of Mfg. Exports) (by stages of production and geographical locations) Intermediate goods accounted for % of manufactured exports from Japan and the NIEs in The intra-regional share was two-thirds for Japan and three-fourths for the NIEs. China alone imported 50% of them. From 1990 to 2010 the share of final goods declined in their overall export structure, but the intra-regional share increased by 7% points for Japan, and 10% points for the NIEs. The corresponding extra-regional share declined by 15% points for Japan and South Korea, and 18 % points for Taipei,China. Three-fourths of Chinese exports were final goods in 2010 and of this 60% went to the US and EU-15. Within the final goods the share of final equipments increased by 28% points, only to be offset by the falling share of final consumer goods. Relative export structures of ASEAN countries are heterogeneous, but a deepening integration within ASEAN and between ASEAN and China is evident. The RCA index across commodity space and country space focuses on the evolution of each country s comparative advantage in the regional value chain, not the world. The finings show that Japan and the NIEs gained comparative advantage across product lines not only vis-à-vis ASEAN and China but more so each other. For final goods a falling RCA index for Japan and the NIEs was closely mirrored in its rising value for China. China s progression from the simple assembly of imported inputs to more integrated forms of production is remarkable. ASEAN countries,with the exception of Singapore, bear strong comparative advantage across product lines but generally within ASEAN. 9

10 An Evaluation of South Asian Free Trade Area (SAFTA) &the present scenario of trade and investments in the region SAFTA supersedes SAPTA. The predecessor SAPTA was signed in 1993 and it became operational in SAPTA achieved little towards freer trade within South Asia and no progress for the removal of non-tariff barriers. SAFTA was signed in 2006 and the agreement provided for a two-stage tariff reduction to achieve free trade. It requires that LDCs will bring down tariffs to 20 % within the first three years and to the free trade level within 8 years. In effect, all the SAFTA countries continue to a have a long list of sensitive products and almost 53% of current intra-saarc imports are restricted under the sensitive list (Athukorala, 2013). A variety of non-tariff barriers continue to frustrate regional trade integration. SAFTA does not cover liberalization of investment. A fast-track approach seems emerging. Three bilateral FTAs, India- Bhutan, India-Sri Lanka, and Pakistan-Sri Lanka, are signed. Four others involving Bangladesh, India, Pakistan, and Sri Lanka are under negotiation. The change is largely de jure and little de facto. Non-tariff barriers are large and seriously impeding the flow of goods, people and capital. 10

11 Foreign Direct Investment (FDI) Inflows to South Asia Year Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka South Asia FDI to South Asia (in % of Global FDI inflows) India's Share in FDIs to South Asia Source: Athukorala (2013), p

12 Proliferation of FTAs in Asia 12

13 Services Coverage of Asian FTAs 13

14 Factors Explaining East Asia s FTA Proliferation The deepening of East Asian production networks whereby product value chains are increasingly fragmented across borders in the region. This happened when the developed economies including the US and Europe notably continued to remain as the foremost destination of East Asian exports of final equipment and consumer goods. The deepening of European and North American economic regionalism. Expansion of EU-15 into central and eastern Europe and the Baltic. The Asian financial crisis in and a heightened sense of shared responsibility across East Asian countries. The slow progress of the WTO Doha Round of trade negotiations. 14

15 South Asia and East Asia in Future Trans-Pacific Partnership (TPP) Negotiations have been underway towards the Trans-Pacific Partnership (TPP), which aims to be the next generation or 21 st century trade agreement. TPP is of interest for several reasons. It is of interest not only because it will US and Japan, but more so because it will overlap numerous other FTAs (e.g., FTA btw India and AFTA). Most importantly, TPP will go beyond trade and trade policy and essentially cover trade in services, technical barriers to trade and intellectual property. Negotiations are also addressing new issues which have never been a part of trade agreements, such as competition policy, regulatory coherence and standards for labor and environment. Potential implications of TPP for other Asian countries such as China and South Asian economies. In addition to the traditional trade creation and trade diversion effects, TPP will also cause preference erosion and trade diversion for non-member countries. 15

16 ASEAN FTA and Trans-Pacific Partnership (TPP) 16

17 Existing FTAs among TPP and Asian Economies 17

18 Exports to Top Five Destinations for TPP and Asian Economies (Merchandise exports, f.o.b., % in 2012) 18

19 Imports from Top Five Sources for TPP and Asian Economies (Merchandise imports, f.o.b., % in 2012) 19

20 Potential Gains and Losses due to TPP via Top Five Trade Flows 20

21 Five-year average of growth rate GDP growth rate (in per cent) (in per cent) Bangladesh Economy Its Size and Pattern of Growth Acceleration A. Bangladesh Economy (Its size and growth, ) B. Growth Acceleration of GDP and Per capita GDP of Bangladesh Economy: Growth rate of GDP Growth of per capita GDP Year Year Panel-A shows GDP of Bangladesh economy (at 1995/96 prices) in billion BDT and growth rate of GDP, both actual and Hodrick-Prescott smoothed series, over the period. Panel-B shows growth acceleration in both GDP and per capita GDP. A 5-year averaging of annual growth rates is done for identifying growth acceleration between periods. Source: Author's estimates from National Income Accounts Statistics of Bangladesh Bureau of Statistics (2000, 2005, 2014). 21

22 Sectoral Contribution to Growth Acceleration between 1985/1994 and 1995/2014 (In 1995/96 producer prices) Sector GDP growth over 1984/85~ 1993/94 (billion taka) GDP growth over 1994/95~ 2003/04 (billion taka) GDP growth over 2004/05~ 2013/14 (billion taka) Incremental GDP (from to ) (billion taka) Sectoral share in incremental GDP in (%) Incremental GDP (from to ) (billion taka) Sectoral share in incremental GDP in (%) =(2-1) 5 6=(3-2) 7 Agriculture Crop production Fisheries Others Industry Manufacturing Large & medium Small scale Construction Others Services Total GDP

23 5 (in % of GDP) in percent of GDP Billion US dollars Foreign trade, trade gap, inward flow of remittances and accumulation foreign exchange reserves Panel A: Foreign trade, Panel B: Inward flow of remittances & Forex reserves, Imports Exports Year Year Panel-A shows exports and imports in goods and services in percent of GDP. Panel-B shows inward flow of remittances in percent of GDP in the left scale and the pattern of reserve accumulation in billions of US dollars in the right scale. Source: Bangladesh Bank (2014). 23

24 0 5 M2 in per cent of GDP M2 in percent of GDP Annual DSE turnover in per cent of GDP Remittances, Monetary Expansion, and Asset (Stock) Market Bubble & Bust in Bangladesh Panel A: Foreign Remittances and M2/GDP Ratio, Panel B: Monetray Expansion and Stock Market Bubble and then Bust, Year Year Panel A shows remittances and expansion on monetary aggregates in Bangladesh. The vertical bars represent inward foreign emittances in billion US dollars and shall be read on the left scale. The line shows m2 in percent of GDP on the right scale. Panel B depicts an association between cheap money and surge in the stock market turnover in the Dhaka Stock Exchange (DSE), which then followed by a bust in Sources: Dhaka Stock Exchange (2012), Bangladesh Bank (2012). 24

25 Bay of Bengal Industrial Growth Belt (BIG-B) Initiative BIG-B is an initiative of Prime Minister Sheikh Hasina and Prime Minister Shinjo Abe and mutually agreed upon in their Tokyo Summit in March 26, The initiative will likely help Bangladesh evolve as a node & hub in the latest phase of globalization in which the gravity of the world economy is moving away from the Asia-Pacific region to the Indo-Pacific region. BIG-B is comprised of three pillars. The first pillar is industry and trade and consists of constructing a long-awaited deep sea port at the Matarbari Island. The second pillar is an energy infrastructure including the development of a massive supply base of primary energy (such as coal, LNG and oil). The planned energy infrastructure is envisioned to satisfy 50% of the forecasted 40,000MW power demand by The third pillar is transportation and involves the construction of Dhaka-Chittagong- Cox s Bazar transport artery. JICA and the government of Bangladesh have already signed an agreement to this end and a flagship project named Matarbari Ultra Super Critical Power Project is expected to start commercial production by 2022 or earlier. Parallels are strong btw BIG-B on the one hand and Japan s Pacific Belt in the 1960s and then Thailand s Eastern Seaboard Development Program in 1980s on the other hand. 25

26 Economic Opportunities from BIG-B BIG-B is a set of basic infrastructures. It will reduce both production costs and transactions. A sustained reallocation of labor will occur form lowproductivity activities to high-value added activities. Labor productivity will observe a quantum jump. Supply schedules of firms and so the aggregate supply curve will thus shift to the right. To the extent global organization of production concentrates in the Dhaka-Chittagong-Cox s Bazar industrial zone, it would accompany both FDI and technology diffusion. A shift in the long-run growth path is thus likely. The second opportunity is to evolve as a nod & hub in the global supply chain in the Indo-Pacific economic region. That implies Bangladesh to be a platform of final stages of assembling and exporting to the world. The third opportunity lies with a substantial expansion of aggregate demand via rising foreign spending on home goods from an untapped market consisting of the land-locked Nepal, Bhutan and India s seven North-Eastern states. The fourth dividend will arise from free-flow of labor, capital and goods across borders in South Asia and it is that incentives to pursue illegal migration and cross-border terrorism will significantly subside.

27 Potential Challenges to Vision 2021 Governance (broadly defined) problem comes first. It arises from low capacity of institutions and policy incoherence across sectors and institutions. Outcomes of ineffective governance are many. They are namely (a) an environment of weak enforceability of laws and rules, (b) a low tax-gdp ratio and hence a constrained fiscal space of the government, (c) serious information problem in private corporations (d) pervasive expropriation of the interests of external shareholders and bondholders/depositors by insiders, (e) ineffective capital markets, low equity base and concentrated ownership structure, (f) excessive financial leverages by corporate managers, (g) mounting problems and so higher borrowing costs, (h) depressed private sector investments. The rising demand for employment but the new labor force lacks in relevant and transferable skills. Inadequate provision of basic infrastructures in areas of energy, transport, water supply, sanitation and communication. Deepening integration with the world economy--market access opportunities in the developed countries, international migration, FTAs, and so on. 27