nep-sea New Economics Papers
on South East Asia
Issue of 2009‒10‒10
eighteen papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Stability of East Asian Currencies during the Global Financial Crisis By Junko Shimizu; Eiji Ogawa
  2. Aggregate and Sectoral Productivity Growth in Thailand and Indonesia By Peter Warr
  3. Return and Volatility Spillovers among the East Asian Equity Markets By Kamil Yilmaz
  4. Asian Trade: Long-Term Patterns and Key Policy Issues By Prema-chandra Athukorala; Hal Hill
  5. Child Labor and Trade Liberalization in Indonesia By Kis-Katos, Krisztina; Sparrow, Robert
  6. The Effectiveness of Private Versus Public Schools in Indonesia: Comment By Mohamad Fahmi
  7. School Choice and Earnings: A Case of Indonesia By Mohamad Fahmi
  8. Monetary Model of Exchange Rate for Thailand: Long-run Relationship and Monetary Restrictions By Liew, Venus Khim-Sen; Baharumshah, Ahmad Zubaidi; Puah, Chin-Hong
  9. Promoting Southern Asia as an exotic destination : a viable asset or a short term perspective ? By Matthieu Thiercy
  10. Research and Productivity in Thai Agriculture By Waleerat Suphannachart; Peter Warr
  11. Monetary Policy and Asset Prices in a Small Open Economy: A Factor-Augmented VAR Analysis for Singapore By Hwee Kwan Chow; Keen Meng Choy
  12. The Transmission of Financial Stress from Advanced to Emerging Economies By Irina Tytell; Selim Elekdag; Ravi Balakrishnan; Stephan Danninger
  13. The Role of Demographics in Precipitating Crises in Financial Institutions By Macunovich, Diane
  14. Is China's Export-Oriented Growth Sustainable? By Kai Guo; Papa M'B. P. N'Diaye
  15. Measures of Underlying Inflation in Sri Lanka By Magnus Saxegaard; Souvik Gupta
  16. Deteriorating Public Finances and Rising Government Debt: Implications for Monetary Policy By Lillian Cheung; Chi-Sang Tam; Jessica Szeto
  17. Does the IV estimator establish causality? Re-examining Chinese fertility-growth relationship By Tilak Abeysinghe; Jiaying Gu
  18. Unilateral measures and global emissions mitigation By Chatterji, Shurojit; Ghosal, Sayantan; Walsh, Sean; Whalley, John

  1. By: Junko Shimizu; Eiji Ogawa
    Abstract: In this study, we investigate the movements of the nominal effective exchange rates (NEER) of East Asian currencies and the Asian Monetary Unit (AMU), which is the weighted average of East Asian currencies, during the course of the global financial crisis. We found that the NEER were more stable in countries that adopted the currency basket system even during the financial crisis. Comparisons made between the NEER and a combination of the AMU and AMU Deviation Indicators show intra-regional exchange rates among the East Asian currencies, and that there have been strong relationships between them before and after the global financial crisis. Accordingly, monitoring both the AMU and the AMU Deviation Indicators is effective in stabilizing the NEER of East Asian currencies. In this respect, our findings indicate that the AMU Deviation Indicators as well as the AMU will play a very important role in the surveillance of the stability of intra-regional exchange rates.
    Keywords: currency basket system, effective exchange rate, global financial crisis, East Asian currencies
    JEL: F31 F36
    Date: 2009–09
  2. By: Peter Warr
    Abstract: Total factor productivity growth is studied in this paper for two countries, Thailand and Indonesia, from 1980 to 2006. The analysis is conducted at both the aggregate and sectoral levels. A feature of the analysis is the decomposition of aggregate total factor productivity growth into two components: productivity growth in individual sectors, and a resource reallocation effect: the movement of resources from low productivity to high productivity sectors. In both countries, virtually all factor productivity growth at the sectoral level derived from agriculture, but the reallocation of resources away from agriculture was a much larger source of aggregate productivity growth.
    Keywords: total factor productivity growth, Thailand, Indonesia
    JEL: O47 Q10 O30
    Date: 2009
  3. By: Kamil Yilmaz (Koc University)
    Abstract: This article examines the extent of contagion and interdependence across the East Asian equity markets since early 1990s and compares the ongoing crisis with earlier episodes. Using the forecast error variance decomposition from a vector autoregression, we derive return and volatility spillover indices over the rolling sub-sample windows. We show that there is substantial difference between the behavior of the East Asian return and volatility spillover indices over time. While the return spillover index reveals increased integration among the East Asian equity markets, the volatility spillover index experiences significant bursts during major market crises, including the East Asian crisis. The fact that both return and volatility spillover indices reached their respective peaks during the current global financial crisis attests to the severity of the current episode.
    Keywords: Stock returns, Volatility, Spillovers, Vector autoregression, Variance decomposition
    JEL: G1 F3
    Date: 2009–09
  4. By: Prema-chandra Athukorala; Hal Hill
    Abstract: This paper offers an analytical interpretation of Asian trade patterns since the late 1960s, in the context of three general, conditioning factors: rapid growth and structural change, host country commercial policy environments, and institutional and technological factors governing global trade and investment patterns. Highlighting the diversity of trade structures and export performance across Asia, the paper documents the successive waves of policy reforms leading to the adoption of export-oriented strategies first in Japan and the four NIEs, then the ASEAN Four, followed by China and the Indo China states, and most recently India. Particular attention is paid to the rapidly growing phenomenon of ‘international production fragmentation’, that is, the geographic separation of activities involved in producing a good (or service) across two or more countries, and its implications for both the analysis of trade flows and trade policy. Our analysis of China’s rise as a global trading giant demonstrates that the alleged fears of China ‘crowding out’ small, latecomer exporters are overstated, as is the associated notion of ‘export pessimism’. Finally, notwithstanding India’s recent rapid growth, the comparative analysis highlights the small scale of its international trade, as compared to East Asia in general and China in particular.
    Keywords: Asia, China, India, trade patterns, production fragmentation
    JEL: F10 F11 O24
    Date: 2009
  5. By: Kis-Katos, Krisztina (University of Freiburg); Sparrow, Robert (Institute of Social Studies)
    Abstract: We examine the effects of trade liberalization on child work in Indonesia. Our estimation strategy identifies geographical differences in the effects of trade policy through district level exposure to reduction in import tariff barriers. We use a balanced panel of 261 districts, based on four rounds (1993 to 2002) of the Indonesian annual national household survey (Susenas), and relate workforce participation of children aged 10-15 to geographic variation in relative tariff exposure. Our main findings show that increased exposure to trade liberalization is associated with a decrease in child work among the 10 to 15 year olds. The effects of tariff reductions are strongest for children from low skill backgrounds and in rural areas. Favorable income effects for the poor, induced by trade liberalization, are likely to be the dominating effects underlying these results.
    Keywords: poverty, trade liberalization, child labor, Indonesia
    JEL: J13 O24 O15
    Date: 2009–08
  6. By: Mohamad Fahmi (Department of Economics, Padjadjaran University)
    Abstract: I reestimate Bedi and Garg estimation of differential earnings of public-private junior secondary school in Indonesia. I replicate Bedi and Garg method by using Bedi and Garg’s sample data and creating a new sample data base on the original updated IFLS1 data (Indonesia Family Life Survey 1 codename IFLS1-RR). I use the same methodology as Bedi and Garg with the latest Stata command to confirm Bedi and Garg’s major conclusion. Using selmlog and decompose Stata techniques, I find the evidence that contradictive with Bedi and Garg’s conclusion as the public schools graduated earn higher than other graduates from private schools.
    Keywords: School effectiveness, earnings, Indonesia
    JEL: J31
    Date: 2009–09
  7. By: Mohamad Fahmi (Department of Economics, Padjadjaran University)
    Abstract: Public schools in Indonesia are widely perceived have better inputs and to be superior to private schools. Public schools also benefit advantages of high-scoring peer effect as entry to some junior secondary public schools in urban area is based on national score test in elementary school. In this paper, I attempt to confirm the perception of superiority of public school in Indonesia by comparing the yearly earnings of four types of schools group; Public, Private Secular, Private Islam, and Private Christian. I use a large-scale longitudinal observation of individual and household level on socioeconomic and health survey, Indonesia Family Life Survey (IFLS) 2000 to estimate the effectiveness junior secondary education in Indonesia. To correct for sample selection bias, I use the two-step method proposed by Bourguignon et al. As a result of insignificant all selectivity bias coefficients, I use the OLS estimation to calculate the earnings decompositions. The insignificant selection bias coefficients suggest that the OLS estimation is unbiased. I use the Blinder-Oaxaca decomposition with Reimers’ decomposition technique to estimate earning differential between public and three types of private school graduates. The results of earnings decomposition from OLS estimation, suggest that earning of people who graduate from public school are 25 per cent and 35.2 per cent higher than their counterparts from private nonreligious and private Islam. On the other hand, student who schooled at private Christian school enjoys 0.28 per cents higher earnings that public.
    Keywords: Parent choice, Education, School effectiveness, earnings, Indonesia
    JEL: J31
    Date: 2009–09
  8. By: Liew, Venus Khim-Sen; Baharumshah, Ahmad Zubaidi; Puah, Chin-Hong
    Abstract: This paper examines the long-run relationship between exchange rate and its determinants based on the flexible-price monetary model. Multivariate cointegration approach (Johansan 1988, 1989 and Johansen-Juselius 1990) is adopted to attain our objective of study. The empirical results provide evidence favoring the monetary approach to exchange rate for a small and open emerging economy, namely Thailand. In addition, the validity of the underlying assumptions of the monetary approach to the determination of exchange rate is established. The above findings suggest that exchange rate players may effectively monitor and forecast the exchange rate movement via the money supplies, incomes, and interest rates variables of both Thailand and Japan. Besides, one has to follow the economic development of Thailand’s major trading partner, Japan, to understanding the movement of exchange rate for Thailand. Moreover, our findings add new insights to accompaniment previous studies that documented the important influence of US in the emerging Asian economies.
    Keywords: Exchange rate; monetary model; Thailand; cointegration
    JEL: C52 F31 C01
    Date: 2009
  9. By: Matthieu Thiercy (USTV - Université du Sud Toulon-Var - UFR Lettres et Sciences Humaines - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique)
    Abstract: As soon as it was discovered by the Western world a few centuries ago, Southeast Asia started to inspire and fascinate. As centuries went by, conquistadores became travelers until these travelers became tourists: these bustling conquerors of a new kind. Straightaway, the unknown began to be subjected to our own colonialist perceptions and loose approaches of otherness. What used to be exotic, because it was untouched by the illnesses of our modern worlds, has turned into what is intrinsically within our constant reach. Exoticism has become something we deal with frequently and eagerly aim at. Our lives are full of goals we desperately seek to attain. Travels and tourism have successfully lured their practitioners into thinking this ‘better other living elsewhere' has always been within reach. If our willingness to control and define otherness according to our own standards is inherent to all tourists, it now turns out to be the contrary. Exoticism is now chasing after markets and ruling over a powerful marketing machinery that does not fail to have important consequences over destinations, hosts and guests alike. In response to that, tourists and the industry as a whole are trying to manage exoticism so that it does not turn down on what it has been primarily brought up for. However, how coherent is this willingness to manage otherness and conflict with the Other? How does Southeast Asia promote its exoticism in the first place? This is what I will try to answer in this work...
    Date: 2009–09
  10. By: Waleerat Suphannachart; Peter Warr
    Abstract: This paper examines the impact that publicly funded agricultural research has on productivity in crop production within Thailand. It tests empirically the two hypotheses that, first, publicly funded research and development (R&D) in crop production is a significant determinant of total factor productivity (TFP) in the crop sector and, second, that its social rate of return is high. The statistical analysis applies error correction methods to national level time series data for Thailand, covering the period 1970 to 2006. Emphasis is given to public research in crop production, where most publicly funded agricultural R&D has occurred. The role of international research spillovers and other possible determinants of TFP are also taken into account. The results demonstrate that public investment in research has a positive and significant impact on TFP. International research spillovers have also contributed to TFP. The results support the finding of earlier studies that returns on public research investment have been high. This result holds even after controlling for possible sources of upward biases present in most such studies, due to the omission of alternative determinants of measured TFP. The findings raise a concern over declining public expenditure on crop research, in Thailand and many other developing countries.
    Keywords: agricultural research, productivity, Thai agriculture, error correction model
    JEL: O30 Q16 C32
    Date: 2009
  11. By: Hwee Kwan Chow (School of Economics, Singapore Management University); Keen Meng Choy (School of Humanities and Social Sciences, Nanyang Technological University)
    Abstract: The ongoing global financial turmoil has revived the question of whether central bankers ought to tighten monetary policy preemptively in order to head off asset price misalignments before a sudden crash triggers financial instability. This study explores the issue of the appropriate monetary policy response to asset price swings in the small open economy of Singapore. Empirical analysis of monetary policy based on standard VAR models, unfortunately, is often hindered by the use of sparse information sets. To better reflect the extensive information monitored by Singapore’s central bank, including global economic indicators, we augment a monetary VAR model with common factors extracted from a large panel dataset spanning 122 economic time series and the period 1980q1 to 2008q2. The resulting FAVAR model is used to assess the impact of monetary policy shocks on residential property and stock prices. Impulse response functions and variance decompositions suggest that monetary policy can potentially be used to lean against asset price booms in Singapore.
    Keywords: Monetary Policy; Asset Prices; Dynamic Factors; Vector Autoregression
    JEL: C33 E52
    Date: 2009–10
  12. By: Irina Tytell; Selim Elekdag; Ravi Balakrishnan; Stephan Danninger
    Abstract: This paper studies how financial stress is transmitted from advanced to emerging economies, using a new financial stress index for emerging economies. An episode of financial stress is defined as a period when the financial system's ability to intermediate may be impaired. Previous financial crises in advanced economies passed through strongly and rapidly to emerging economies. In line with this pattern, the unprecedented spike in financial stress in advanced economies elevated financial stress across emerging economies above levels seen during the Asian crisis, but with significant cross-country variation. The extent of pass-through of financial stress is related to the depth of financial linkages between advanced and emerging economies. The paper finds that higher current account and fiscal balances do little to insulate emerging economies from the transmission of financial stress in advanced economies. However, they may help dampen the impact on the real sector of emerging economies and help reestablish financial stability and foreign capital inflows once financial stress subsides.
    Keywords: Banking crisis , Banking sector , Capital flows , Developed countries , Developing countries , Economic models , Emerging markets , Financial crisis , Financial risk , Spillovers , Transition economies ,
    Date: 2009–06–26
  13. By: Macunovich, Diane (University of Redlands)
    Abstract: There are significant effects of changing demographics on economic indicators: growth in GDP especially, but also the current account balance and gross capital formation. The 15-24 age group appears to be one of the key age groups in these effects, with increases in that age group exerting strong positive effects on GDP growth, and negative effects on the CAB and GCF. There have been major shifts in the share of the population aged 15-24 during the past half century or more, many of which correspond closely to periods of institutional turmoil. The hypothesis presented in this paper is that increases in the share of the 15-24 age group lead producers to ratchet up their production expectations and take out loans to expand production capacity; but then reductions in that share – or even declining rates of increase – confound these expectations and precipitate a downward spiral of missed loan payments and even defaults and bankruptcies, putting pressure on central banks and causing foreign investors to withdraw funds and speculators to unload the local currency. This appears to have been the pattern not only during the 1996-98 crisis with the Asian Tigers, but also during the "Tequila" crisis of the early 1990s, the crises that occurred in the early 1980s among developed as well as developing nations, and the economic problems Japan has experienced since about 1990. The effect appears to be even more pronounced for the current 2008-2009 period.
    Keywords: age structure, currency crisis, demographic change, financial crisis
    JEL: J1 E3 F3 F4
    Date: 2009–09
  14. By: Kai Guo; Papa M'B. P. N'Diaye
    Abstract: This paper assesses the sustainability of China's export-oriented growth over the medium to longer term. It shows that maintaining the current export-oriented growth would require significant gains in market share through lower prices in a range of industries. This, in turn, could be achieved through a combination of increases in productivity, lower profits, and higher implicit or explicit subsidies to industry. However, the evidence suggest that it will prove difficult to accommodate such price reductions within existing profit margins or through productivity gains. Moving up the value-added chain, shifting the composition of exports, diversifying the export base, and increasing domestic value added of exports could give room to further export expansion. However, experiences from Asian economies that had similar export-oriented growth suggest there are limits to the global market share a country can occupy. Rebalancing growth toward private consumption would provide a large impetus to output growth and reduce the need for gaining further market share.
    Keywords: China, People's Republic of , Cross country analysis , Economic growth , Export markets , Export performance , Export prices , Export sector , Exports , Fiscal reforms , Global competitiveness , Industrial sector , Private consumption , Productivity ,
    Date: 2009–08–12
  15. By: Magnus Saxegaard; Souvik Gupta
    Abstract: During the first half of 2008, Sri Lanka witnessed significantly higher inflation than most other emerging Asian countries. Inflation has since declined amid declining world commodity prices and tight monetary policy. Given the sensitivity to global commodity prices, a core inflation measure could be useful for monetary policy. The purpose of this paper is to compare the performance of Sri Lanka's existing official measure of core inflation against alternative measures. Our findings suggest that the existing measure does contain information about the future path of headline information, but may be inadequate as a communication tool for the Central Bank.
    Keywords: Central bank policy , Consumer price indexes , Economic models , Inflation , Monetary policy , Performance indicators , Price structures , Sri Lanka ,
    Date: 2009–08–10
  16. By: Lillian Cheung (Research Department, Hong Kong Monetary Authority); Chi-Sang Tam (Research Department, Hong Kong Monetary Authority); Jessica Szeto (Research Department, Hong Kong Monetary Authority)
    Abstract: The sharp rise in government debt in many major economies following the introduction of large fiscal stimulus measures during the global financial crisis of 2008-09 has triggered concerns over its impact on long-term interest rates and the potential negative consequences for future growth and inflation. This paper uses an error-correction model to assess the effect of growing government debt on long-term real interest rates by drawing on empirical evidence from the US. The results show that in the long run, a one-percentage-point increase in the federal debt-to-GDP ratio raises the equilibrium 10-year real US Treasury yield by about six basis points. We also discuss the economic consequences of a rise in the world long-term interest rates, and draw implications for longer-term growth and the conduct of monetary policy in the Asian economies.
    Keywords: Public debt, fiscal policy, monetary policy, long term interest rate, real interest rate, error-correction model
    JEL: E43 E47 E52 E62 H63
    Date: 2009–08
  17. By: Tilak Abeysinghe (Department of Economics, National University of Singapore); Jiaying Gu (Department of Economics, National University of Singapore)
    Abstract: The instrumental variable (IV) estimator in a cross-sectional or panel regression model is often taken to provide valid causal inference from contemporaneous correlations. In this exercise we point out that the IV estimator, like the OLS estimator, cannot be used effectively for causal inference without the aid of non-sample information. We present three possible cases (lack of identification, accounting identities, and temporal aggregation) where IV estimates could lead to misleading causal inference. In other words, a non-zero IV estimate does not necessarily indicate a causal effect nor does the causal direction. In this light, we re-examine the relationship between Chinese provincial birth rates and economic growth. This exercise highlights the potential pitfalls of using too much temporal averaging to compile the data for cross sectional and panel regressions and the importance of estimating both (x on y and y on x) regressions to avoid misleading causal inferences. The GMM-SYS results from dynamic panel regressions based on five-year averages show a strong negative relationship running both ways, from births to growth and growth to births. This outcome, however, changes to a more meaningful one-way relationship from births to growth if the panel analysis is carried out with the annual data. Although falling birth rates in China have enhanced the country’s growth performance, it is difficult to attribute this effect solely to the one-child policy implemented after 1978.
    Keywords: IV estimator and causality inference, identification, accounting identities, temporal aggregation, spurious causality, Chinese provincial growth and fertility relationship.
    JEL: C23 J13 O53
    Date: 2009–09
  18. By: Chatterji, Shurojit (Singapore Management University); Ghosal, Sayantan (University of Warwick); Walsh, Sean (Center for International Governance Innovation); Whalley, John (Center for International Governance Innovation, University of Western Ontario and NBER)
    Abstract: In this paper we discuss global climate change mitigation that builds on existing unilateral actions to deliver ever deepening emission cuts over time. A wide array of unilateral environmental measures have been documented. We discuss the rationale for such measures and argue that unilateral initiatives have the potential to generate positive spillover e¤ects both within and across countries. Using a simple dynamic model of learning, we show how global negotiations can accelerate convergence to a global low emissions regime by building on and strengthening the positive spillovers inherent in unilateral initiatives.
    Keywords: Unilateral initiatives ; mitigation ; technology ; cumulative ; emissions reduction ; learning ; global ; negotiations.
    JEL: Q54 F53 Q50
    Date: 2009

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