nep-sea New Economics Papers
on South East Asia
Issue of 2007‒09‒09
fifteen papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Determinants of Foreign Direct Investment in East Asia: Did China Crowd Out FDI from Her Developing East Asian Neighbours By Li-gang Liu; Kevin Chow; Unias Li
  2. Assessing Bond Market Integration in Asia By Ip-wing Yu; Laurence Fung; Chi-sang Tam
  3. Sngapore economy:the way ahead By Venu Menon, Sudha
  4. The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future By Michael G. Plummer
  5. Sense and Nonsense on Asia's Export Dependency and The Decoupling Thesis By Dong He; Lillian Cheung; Jian Chang
  6. How Efficient Has Been China's Investment? Empirical Evidence from National and Provincial Data By Dong He; Wenlang Zhang; Jimmy Shek
  7. Assessing Financial Market Integration In Asia - Equity Markets By Ip-wing Yu; Laurence Fung; Chi-sang Tam
  8. Singapore economy:An overview By Menon, Sudha Venu
  9. A Framework for Stress Testing Bank's Credit Risk By Jim Wong; Ka-fai Choi; Tom Fong
  10. Governance, leadership and economic growth in Singapore By Venu Menon, Sudha
  11. East Asia and Global Imbalances: Saving, Investment, and Financial Development By Hiro Ito; Menzie Chinn
  12. An Assessment of the Impact of Rice Tariff Policy in Indonesia; A Multi-Market Model Approach By Bambang Sayaka; Sumaryanto; André Croppenstedt; Stefania DiGiuseppe
  13. Long-Term Farming Trends. An Inquiry Using Agricultural Censuses By Gustavo Anríquez; Genny Bonomi
  14. Investing in Indonesia ' s education : allocation, equity, and efficiency of public expenditures By Yavuz, Elif; Ragatz, Andy; Fengler, Wolfgang; Arze del Granado, F. Javier
  15. European Community--Sugar : cross-subsidization and the World Trade Organization By Howse, Robert; Hoekman, Bernard

  1. By: Li-gang Liu (Research Department, Hong Kong Monetary Authority); Kevin Chow (Research Department, Hong Kong Monetary Authority); Unias Li (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper applies a gravity model to investigate the determinants of foreign direct investment (FDI) in East Asia. We find that economic fundamentals (such as market size, per capita income, and country risk indicators), economic and cultural ties, and information asymmetry are important determinants for FDI. Of the sub-components that measure country risks, we find that both the level and the volatility of exchange rate matter in attracting FDI, as do some institutional quality indicators such as government stability and the degree of corruption in recipient countries. Globally, it appears that inward FDI among high-income OECD economies declined substantially on average over the sample periods under investigation. Meanwhile, inward FDI of the high-income OECD economies in emerging market economies, particularly those in Latin America and Asia, gained substantially relative to their economic fundamentals. Our empirical results indicate that the ASEAN-4 (Indonesia, Malaysia, the Philippines, and Thailand) received above-average inward FDI from the high-income OECD economies, even over the period of the 1997-98 Asian financial crisis, after controlling for their economic fundamentals. By contrast, China¡¦s FDI from the high-income OECD economies was below-average relative to its economic fundamentals. Thus, it is difficult to establish that China has crowded out FDI from her developing ASEAN neighbours. Both Hong Kong and Singapore have received more FDI on average from the European Union (EU), the US, and Japan. The FDI from these three economies in ASEAN-5 (Singapore plus ASEAN-4) was above the average over the sample periods studied. In contrast, only Japan invested more than the average in Greater China (Mainland China plus Hong Kong) in the 1990s. However, this was not the case for either the EU or the US.
    Date: 2006–11
  2. By: Ip-wing Yu (Research Department, Hong Kong Monetary Authority); Laurence Fung (Research Department, Hong Kong Monetary Authority); Chi-sang Tam (Research Department, Hong Kong Monetary Authority)
    Abstract: Development of the local bond markets has been a top priority for financial reforms in the region after the Asian financial crisis. Various initiatives have also been taken to foster the development of the regional bond market. This paper looks into the degree of integration of sovereign (government) bond markets in Asia. It provides a survey of indicators and measures to monitor the development, measure progress and assess the state of bond market integration in the region. Our empirical results broadly show that there is only weak bond market integration in the region and very little progress has taken place since 2003. The apparent lack of progress may be due to the "local" or "idiosyncratic" factors in some Asian economies.
    Keywords: Financial integration, Kalman filter, Cointegration, Synchronisation, Dynamic correlation
    JEL: C13 C22 F36 G15
    Date: 2007–06
  3. By: Venu Menon, Sudha
    Abstract: Singapore consistently ranks high among 'most attractive countries for international business' and has achieved a per capita GDP level comparable to levels of developed western nations. Though the economy was affected by Asian financial crisis, the country's sound macroeconomic fundamentals, as well as the government's efforts to cut business costs, resulted in economic rebound in 1999 and 2000. However, from 2001 to 2003, the economy was hard hit again by the global recession as well as by the slump in the technology sector. The outbreak of SARS in 2003 further slammed the economy by substantially reducing tourism and consumer spending. Since mid-2003, Singapore's economy has recovered rapidly due to a favorable external environment, supportive macroeconomic policies, and continued structural reforms. While near-term prospects are favorable, sustaining robust growth over the medium term will require the country to meet the rising challenges from low-cost regional economies. Against this context, this article attempts to analyze the growth prospects of Singapore economy in the present era of globalization, competition and multilateral trade agreements. Section one attempt to analyze competition from India China and Malaysia and the recent strategies adopted by Singapore to address the challenge. Section two examines the current economic overview of Singapore. Section three evaluates the priority areas of Singapore –investment in education, R&D, addressing ageing problem, rowing high trust services [legal services, financial services, maritime and aviation], IT Connectivity and energy hub, increase in international trade and branding Singapore as a global city.
    Keywords: Singapore; Asia; economy
    JEL: O10
    Date: 2007–07–26
  4. By: Michael G. Plummer (Johns Hopkins University SAIS-Bologna, Italy and Ganeshan Wignaraja, Asian Development Bank)
    Abstract: Bilateral and regional cooperation initiatives in Asia have been growing in importance over the last five years. These accords span the real and financial sectors; rather than following the more typical pattern of Òtrade first, money laterÓ, recent policy initiatives involve the simultaneous implementation of trade and monetary/financial accords. Given this sequence, is there a case for monetary union in East Asia? Is there a case for expanded free-trade areas (FTAs) in the region? This paper attempts to answer these questions using a variety of empirical techniques, including a Computational General Equilibrium (CGE) model, to evaluate the economics of monetary/financial integration and various configurations of FTAs in Asia. We conclude that, at present, the post-sequencing of economic integration in Asia is developing such that trade agreements will ultimately complement the movement toward financial and monetary integration. While the political constraint on monetary union is real, it is argued that FTAs should help relax this constraint, adding a political complement to the trade complement.
    Date: 2007–07
  5. By: Dong He (Research Department, Hong Kong Monetary Authority); Lillian Cheung (Research Department, Hong Kong Monetary Authority); Jian Chang (Research Department, Hong Kong Monetary Authority)
    Abstract: It has often been argued that East Asia needs to switch from an export-led growth model to a domestic-demand led growth model so as to reduce its vulnerability to a sharp slowdown in the US economy. This paper argues that, indeed, in the foreseeable future, East Asia's business cycle is unlikely to decouple with that of the US, but the switch-of-growth-model argument is problematic because it mixes up the effects of external trade on an economy's cyclical developments and its long-term growth potential. The paper argues that the desirable way to reduce external vulnerabilities is to diversify export markets and to further strengthen domestic institutions and policies in order to reduce the impact of temporary shocks, not by reducing the degree of openness or the share of exports in GDP. The paper further argues that the rising size of domestic demand in Mainland China will overtime help the rest of the region to diversify its export markets away from the major industrialized countries.
    Keywords: Export-led growth, domestic demand-led growth, decoupling
    JEL: F13 F43 O24 O11
    Date: 2007–04
  6. By: Dong He (Research Department, Hong Kong Monetary Authority); Wenlang Zhang (Research Department, Hong Kong Monetary Authority); Jimmy Shek (Research Department, Hong Kong Monetary Authority)
    Abstract: China's investment has been growing very strongly. The share of gross capital formation in GDP in China has also been higher than in other East Asian economies during their high growth period in the 1970s-80s. Many commentators have argued that such high rates of investment growth have been driven by irrational incentives and have been largely inefficient, will cause a build up of non-performing loans in the banking system, and will also lead to over-capacity and deflation. Others, however, have argued that China is still capital scarce, returns to capital are high, and therefore high rates of investment are both desirable and sustainable. This paper attempts to shed new light on the debate. We analyse both the allocative efficiency and the dynamic efficiency of China's spending on capital. The allocative efficiency measures the extent to which resources have been invested in places where potential rates of return on capital are high. The potential rates of return can be calculated as the marginal products of capital derived from an aggregate production function. The dynamic efficiency measures the extent to which the capital-output ratio exceeds the optimal level. The optimal level of the capital stock is determined by a rate of investment, at which level the Chinese residents at the present enjoy the highest level of consumption without sacrificing the level of consumption in the future. We first construct China's total capital stock at national and provincial levels, estimate the Cobb-Douglas and CES production functions, and compute the marginal products of capital. Assuming that the Chinese economy was operating on the production frontier, the marginal products of capital at the aggregate level have been relatively high in the past two decades, and have not shown clear signs of decline in recent years. We find that China's marginal product of capital compares favourably with those observed in the major industrialised economies and in the Asia region. We also find that the marginal products of capital have been higher in the coastal areas than in the less developed areas of western and central China, but the marginal products of infrastructure capital have been higher in the inland areas than in the coastal areas. These results are robust to different assumptions made in constructing the data of capital stock.
    Date: 2006–11
  7. By: Ip-wing Yu (Research Department, Hong Kong Monetary Authority); Laurence Fung (Research Department, Hong Kong Monetary Authority); Chi-sang Tam (Research Department, Hong Kong Monetary Authority)
    Abstract: Financial integration has strong implications for financial stability. On the one hand, financial integration among economies helps improve their capacity to absorb shocks and foster development. On the other hand, intensified financial linkages in a world of increasing capital mobility may also harbour the risk of cross-border financial contagion. This paper provides a survey of indicators to monitor the development, measure progress and assess the state of equity market integration in Asia. A combined use of these indicators would provide information on different dimensions of integration and thus give regulators a more balanced picture of the general trend of equity market integration in the region. Our empirical results broadly show that a lot of progress has been witnessed between 1994 and 2001 in achieving greater integration among the Asian equity markets. However, the extent of financial integration remains weak and the integration process appears to have stalled since 2002.
    Keywords: Financial integration, Kalman filter, Cointegration, Common component, Synchronisation, Dynamic correlation
    JEL: C13 C22 F36 G15
    Date: 2007–04
  8. By: Menon, Sudha Venu
    Abstract: ABSTRACT Singapore plays a leading role in changing the destiny of post colonial countries in Asian region, by heralding the unique success path of economic growth, industrial competitiveness coupled with political stability and transparency. Even though the country was constrained by geographical limitations and a vast natural resource base, the city- state was able to lay the foundations of economic prosperity and diversity through effective utilization of its entrepot status. When other Asian countries faced a chequered history of economic under development, political instability and social unrest, Singapore attempted a brave step towards liberalization, international trade and capitalistic growth strategy which ultimately made the country a ‘brand’ among other countries. Now Singapore serves as a regional headquarters for more than 3000 multinational companies and has world class financial and service sectors and above all highly efficient physical infrastructure. The country consistently ranks high among 'most attractive countries for international business' and has achieved a per capita GDP level comparable to levels of developed western nations. Against this context, this article attempts to provide a brief overview of Singapore, its economic history, macro economic trends and social and demographic profile. The main objective of the article is to present the growth and development of a small city state into the most vibrant and thriving economic destination across the world
    Keywords: Singapore; economy; Southeast Asia
    JEL: O1
    Date: 2007–05–30
  9. By: Jim Wong (Research Department, Hong Kong Monetary Authority); Ka-fai Choi (Research Department, Hong Kong Monetary Authority); Tom Fong (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper develops a framework for stress testing the credit exposures of Hong Kong's retail banks to macroeconomic shocks. It involves the construction of macroeconomic credit risk models, each consisting of a multiple regression model explaining the default rate of banks, and a set of autoregressive models explaining the macroeconomic environment estimated by the method of seemingly unrelated regression. Specifically, two macroeconomic credit risk models are built. One model is specified for the overall loan portfolios of banks and, to illustrate how the same framework can be applied for stress testing loans to different economic sectors, the other model is specified for the banks' mortgage exposures only. The empirical results suggest a significant relationship between the default rates of bank loans and key macroeconomic factors including Hong Kong¡¦s real GDP, real interest rates, real property prices and Mainland China's real GDP. Macro stress testing is then performed to assess the vulnerability and risk exposures of banks' overall loan portfolios and mortgage exposures. By using the framework, a Monte Carlo method is applied to estimate the distribution of possible credit losses conditional on an artificially introduced shock. Different shocks are individually introduced into the framework for the stress tests. The magnitudes of the shocks are specified according to those occurred during the Asian financial crisis. The result shows that even for the Value-at-Risk (VaR) at the confidence level of 90%, banks would continue to make a profit in most stressed scenarios, suggesting that the current credit risk of the banking sector is moderate. However, under the extreme case for the VaR at the confidence level of 99%, banks' credit loss would range from a maximum of 3.22% to a maximum of 5.56% of the portfolios, and if a confidence level of 99.9% is taken, it could range from a maximum of 6.08% to a maximum of 8.95%. These estimated maximum losses are very similar to what the market experienced one year after the Asian financial crisis shock. However, the probability of such losses and beyond is very low.
    Date: 2006–10
  10. By: Venu Menon, Sudha
    Abstract: Although Singapore inherited the same British model of governance as other Commonwealth states, its governing system has become widely known for efficiency and competence, especially in terms of its role in generating an “economic miracle.” Economic growth has remained consistently high—at an average annual rate of 9.8 percent in the 1970s and 8.2 percent in the 1980s. Between 1988 and 1997, its Gross Domestic Product or GDP increased more than 2.5 times; between 1993 and 1997, it continued to rank very high in terms of its business-friendly environment; and by 1994, its per capita GDP (US$20,000) surpassed that of Australia, Canada, and the UK. These state-led economic achievements make Singapore a good case for studying contemporary reforms in governance based on the principle of the rolling back of the state’s economic management. While most countries have adopted the above mentioned business oriented governance reforms due to the alleged inefficiency and mismanagement of the public sector, the Singapore government has introduced such reforms despite its efficient and well-managed public sector. Moreover, although many developing countries with heavy external debt have adopted privatization and deregulation, liberalized trade and investment, and restructured their state bureaucracy according to the principles of the “New Public Management” (NPM), often in response to conditions imposed by international aid agencies, Singapore is virtually free from external debt and thus free from such direct external pressure to adopt these reforms.Against this context this article tries to explain the role of governance and leadership in administration which fostered economic growth in Singapore. Singapore governance system has been consistently rated by Transparency International as one of the most politically transparent and least corrupt governments in the world, but is also often being criticized for excessive interference in social issues.The article highlights how rapid socio economic transformation and quality of life was made possible through the ruling political party’s [PAP] brave attempt to liberalize the economy and attract foreign capital through various measures. The pervasive role of government is visible in all aspects of economic life in Singapore making it classic example of the direct relationship between transparency and economic development.
    Keywords: Singapore; governance; Asia
    JEL: O2
    Date: 2007–08–28
  11. By: Hiro Ito; Menzie Chinn
    Abstract: We investigate the role of budget balances, financial development and openness, in the evolution of global imbalances. Financial development -- or the lack thereof -- has received considerable attention as a possible contributing factor to the development of persistent and expanding current account imbalances. Several observers have argued that the depth and sophistication of US capital markets have caused capital to flow from relatively underdeveloped East Asian financial markets. In this paper, we extend our previous work by examining the effect of different types and aspects of financial development. Our cross-country analysis, encompassing a sample of 19 industrialized countries and 70 developing countries for the period of 1986 through 2005, yields a number of new results. First, we confirm a role for budget balances in industrial countries when bond markets are incorporated. Second, empirically both credit to the private sector and stock market capitalization appear to be equally important determinants of current account behavior. Third, while increases in the size of financial markets induce a decline in the current account balance in industrial countries, the reverse is more often the case for developing countries, especially when other measures of financial development are included. However, because of nonlinearities incorporated into the specifications, this characterization is conditional upon other factors. Fourth, a greater degree of financial openness is typically associated with a smaller current account balance in developing countries.
    JEL: F32 F41
    Date: 2007–09
  12. By: Bambang Sayaka (Agricultural and Development Economics Division, Food and Agriculture Organization); Sumaryanto (Agricultural and Development Economics Division, Food and Agriculture Organization); André Croppenstedt (Agricultural and Development Economics Division, Food and Agriculture Organization); Stefania DiGiuseppe (Agricultural and Development Economics Division, Food and Agriculture Organization)
    Abstract: Rice is of key importance to Indonesia’s national and household level food security. The choice of tariff policy has important implications for consumers and producers with policy makers having to decide between the trade-offs implied for the various stakeholders. In this study we use a multi-market model to assess the impact of hypothetical rice tariff changes on household welfare and other variables of interest to rice policy-makers. A reduction in the rice tariff from 30 to 0% reduces rice supply and wheat demand and stimulates rice demand and soybean supply. Rice imports increase from 0.8 to 2 million tons. Rural households except for the Java-top income group, see incomes fall. In terms of purchasing power all households gain very significantly. Eliminating rice tariffs increases crop diversification and more so in those areas and for those income groups which started off least diversified. It is clear that the higher retail rice price resulting from a 30% ad-valorem tariff rate imposes significant cost on the 90% of Indonesian households, including most of the very poor households, who are net rice buyers. The implied income gains appear relatively modest but do accrue to middle and poorer households especially in Java. On the other hand an increase in the tariff from 30 to 50% eliminates rice imports, reduces soybean output and stimulates wheat demand. Rural households, except for the Java-top income group, see incomes rise although the effect is relatively modest. In terms of purchasing power households are all worse off.
    Keywords: Indonesia, multi-market model, household welfare, rice, tariffs, crop diversification.
    JEL: Q11 Q18
    Date: 2007
  13. By: Gustavo Anríquez (Agricultural and Development Economics Division, Food and Agriculture Organization); Genny Bonomi (Agricultural and Development Economics Division, Food and Agriculture Organization)
    Abstract: This paper provides a long-term and global view at current farming trends by analyzing a specially created database of farming characteristics of 17 countries across 43 different agricultural censuses representing the different developing regions of the world. The study shows that while agricultural land appears to be a constraint in central and East Asia, it has been under expansion in Latin America, Northern Africa, and most of Sub Saharan Africa. We also estimate that 9 out of 10 farms are small (i.e. smaller than 2 ha). These farms are more specialized in staple crops than their larger counterparts, and exhibit slower productivity growth.
    Keywords: Small Farms, land distribution, agricultural census, productivity.
    JEL: Q10 Q15
    Date: 2007
  14. By: Yavuz, Elif; Ragatz, Andy; Fengler, Wolfgang; Arze del Granado, F. Javier
    Abstract: What are the current trends and main characteristics of public education spending in Indonesia? Is education spending insufficient? Are expenditures in education efficient and equitable? This study reports the first account of Indonesia ' s aggregated (national and sub-national) spending on education, as well as the economic composition of education spending and its breakdown by programs. It presents estimations of the expected (average) level of education spending for a country with its economic and social characteristics. This analysis sheds light on the efficiency and equity of education spending by presenting social rates of return by level of education, by assessing the adequacy of current teacher earnings relative to other paid workers and the distribution of teachers across urban, rural, and remote regions, and by identifying the main determinants of education enrollment. It concludes that the current challenges in Indonesia are no longer defined by the need of additional spending, but rather the need to improve the quality of education services, and to improve the efficiency of education expenditures by re-allocating teachers to undersupplied regions and re-adjusting the spending mix within and between education programs for future additional spending in the sector. The study finds that poverty and student-aged labor are also significant constraints to education enrollment, stressing the importance of policies aimed at addressing demand-side factors.
    Keywords: Education For All,Primary Education,Tertiary Educat ion,Teaching and Learning,
    Date: 2007–08–01
  15. By: Howse, Robert; Hoekman, Bernard
    Abstract: An important recent World Trade Organization dispute settlement case for many developing countries concerned European Union exports of sugar. Brazil, Thailand, and Australia alleged that the exports have substantially exceeded permitted levels as established by European Union commitments in the WTO. This case had major implications for both European Union sugar producers and developing countries that benefited from preferential access to the European Union market. It was also noteworthy in the use of economic arguments by the WTO dispute settlement panel, which held that the excess sugar exports were in part a reflection of illegal de facto cross-subsidization-rents from production that benefited from high support prices being used to cover losses associated with exports of sugar to the world market. Although in principle the economic arguments of the panel could apply to many other policy areas, in practice WTO provisions greatly limit the scope to bring similar arguments for trade in products that are not subject to explicit export subsidy reduction commitments of the type that were made for sugar and other agricultural commodities.
    Keywords: Economic Theory & Research,Trade Law,Tax Law,Food & Beverage Industry,Agribusiness & Markets
    Date: 2007–08–01

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