nep-sea New Economics Papers
on South East Asia
Issue of 2011‒02‒19
twelve papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Key Principles Underlying the New Modes of Aid Governance in Asia By Caroline Brassard
  2. Educational attainment and selection into the labour market: The determinants of employment and earnings in Indonesia By Margherita Comola; Luiz De Mello
  3. Who Pays for Health Care in Asia? By Owen O’ Donnell; Aparnaa Somanathan; Eddy van Doorslaer; Ravi P. Rannan-Eliya; Shiva Raj Adhikari
  4. Deepening China-Taiwan Relations through the Economic Cooperation Framework Agreement By Daniel H. Rosen; Zhi Wang
  5. Estimates of Fundamental Equilibrium Exchange Rates, May 2010 By William R. Cline; John Williamson
  7. Prospects for Implementing the Korea-US Free Trade Agreement By Jeffrey J. Schott
  8. Performance of islamic banks across the world: an empirical analysis over the period 2001-2008 By KABLAN, Sandrine; YOUSFI, Ouidad
  9. Currency Wars? By William R. Cline; John Williamson
  10. Dealing with Volatile Capital Flows By Olivier Jeanne
  11. Will India become a world economy power? By Incaltarau, Cristian
  12. Market Failures and Regulatory Failures: Lessons from Past and Present Financial Crises By Acharya, Viral V.; Cooley, Thomas; Richardson, Matthew; Walter, Ingo

  1. By: Caroline Brassard
    Abstract: Aid governance refers to the good governance of aid processes by all stakeholders, from the design and implementation to the monitoring and evaluation of aid projects and programmes,to reach national and local development objectives. In these various processes, aid governance emphasizes the need for transparency and accountability to ensure that results are achieved in the best possible manner. Hence, good aid governance contributes directly to aid effectiveness. Based on the recent experience of several Asian developing countries and interviews in Vietnam, Indonesia and Laos with aid practitioners from donor institutions and Non Government Organizations (NGOs), this paper investigates ways to improve aid governance with all types of donors, both from public and private sources. It develops a framework for donors and recipients to ensure good governance in the management, administration and evaluation of aid at the national and sub-national levels, based on the key principles underlying the new modes of aid governance in Asia. The framework is anchored on three broad principles: disaggregation, inclusiveness and incentivization. Specifically, these principles suggest that aid governance can best be achieved: First, when efforts are put to design disaggregated accountability and transparency mechanisms at the sectoral and sub-country levels; Second, when these mechanisms are inclusive of all stakeholders--- private and public donors, direct recipients, national and local civil servants, NGOs and other affected parties; and Third,when there are proper incentives structures for these stakeholders to participate in good aid governance.
    Keywords: aid, aid governance, Asia, Asian Countries, Veitnam, Cambodia, national and sub-national NGOs, international financial relations
    Date: 2011
  2. By: Margherita Comola (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Luiz De Mello (OECD - Economics Department - Paris - OECD)
    Abstract: This paper uses household survey (Sakernas) data from 2004 to estimate the determinants of earnings in Indonesia, a country where non-salaried work is widespread and where earnings data are available for salaried employees only. We deal with the selection bias by estimating a full-information maximum likelihood system of equations, where earnings are observed for salaried employees, and selection into the labour market is modelled in a multinomial setting. We also deal with reverse causality between educational attainment and earnings by instrumenting years of schooling in both the multinomial selection and the earnings equations. Our identification strategy, following Duflo (2001), uses information on exposure to a large-scale school construction programme implemented in the 1970s. Duflo recognizes that schooling may affect an individual's probability of working as a salaried employee, which creates a simultaneity bias, but does not directly deal with this issue. We find that the parameters of the earnings equation estimated under multinomial selection differ from standard OLS estimates, which ignore the selection bias, and from a binomial selection procedure "à la Heckman" (1979). In particular, the estimated parameters that vary the most are those related to the variables with the strongest impact on individual selection into the different labour-market statuses. We also find that workers with higher educational attainment are most likely to find a job as salaried employees, and that non-salaried work is as an alternative to inactivity.
    Keywords: Indonesia ; employment ; earnings ; multinomial selection
    Date: 2010–02
  3. By: Owen O’ Donnell; Aparnaa Somanathan; Eddy van Doorslaer; Ravi P. Rannan-Eliya; Shiva Raj Adhikari
    Abstract: This paper describes the structure and the distribution of health care financing in 13 territories that account for 55% of the Asian population. Survey data on household payments are combined with Health Accounts data on aggregate expenditures by source to estimate distributions of total health financing. In all territories, high-income households contribute more than low-income households to the financing of health care. In general, the better off contribute more as a proportion of ability to pay in low and lower-middle income territories. The disproportionality is in the opposite direction in three high/middle income territories operating. [EQUITAP Project: Working Paper 1] [ /EquitapWP1.pdf]
    Keywords: health care financing, progressivity, equity, Asia
    Date: 2011
  4. By: Daniel H. Rosen (Peterson Institute for International Economics); Zhi Wang (US International Trade Commission)
    Abstract: On June 13, 2010, representatives from China and Taiwan held a third round of talks in Beijing on an Economic Cooperation Framework Agreement (ECFA) that would liberalize important aspects of cross-Strait economic relations. It is clear from available details that ECFA will be an ambitious accord that fundamentally changes the game between Taiwan and China and hence affects the regional economy and even the transpacific tempo for the United States. Rosen and Wang's economic projections of the effects of a China-Taiwan ECFA point to significant benefits of cross-Strait economic reform, especially for Taiwan, which would increase its 2020 GDP by about 4.5 percent, or $21 billion, from the current trend line. The authors, however, also conclude that the regional economy around China and Taiwan is not standing still but is extraordinarily dynamic. Other agreements in the region will be negotiated (e.g., ASEAN+3), which will impose costs on Taiwan, if it does not do an ECFA, to the tune of almost -0.8 percent of GDP. So the net effect of ECFA for Taiwan would be some 5.3 percent improvement in GDP by 2020. For China, the net results of ECFA are positive, though far less so than for Taiwan in value terms and of course as a share of GDP. For the United States, the authors project a very modest positive result from ECFA (though statistically marginal) but a more negative impact as the scenarios incorporating further Asian integration (ASEAN + 3) unfold. If the US objective is to maximize Taiwan's economic prospects and hence its freedom of independent action, then ECFA is highly desirable, and Taiwan's involvement in further Asian deepening is to be supported. However, US economic interests per se erode as Asia draws tighter together without US inclusion. That is an econometric reality. More significant still is the geoeconomic, qualitative implication of even long-standing nemeses China and Taiwan drawing together in a free trade pact while the United States watches, unable to ratify already negotiated Asian trade agreements like the US-Korea free trade agreement. While modest in global economic effects, the geoeconomic implications of a China-Taiwan economic pact are significant enough to demand strategic attention from the United States and underscore the importance of securing US economic engagement of the first order in Asia.
    Date: 2010–06
  5. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: This policy brief updates Cline and Williamson's estimates of fundamental equilibrium exchange rates (FEERs) to May 2010 using the data to March contained in the April issue of the International Monetary Fund's World Economic Outlook. The IMF's data are updated to May by subsequent exchange rate changes and Cline's estimates of the impact of exchange rate changes on trade flows. In addition, the assumptions about current account targets have been somewhat modified from previous years: All countries are now assumed to aim to keep current account balances within 3 percent of equilibrium, whereas formerly some countries with large net foreign assets to GDP ratios (NFA/GDP) were allowed larger targeted imbalances. The fundamental question explored is what pattern of exchange rates is consistent with satisfactory medium-term evolution of the world economy, interpreted as achieving those objectives while maintaining internal balance in each country. The big disequilibrium in the pattern of exchange rates remains the undervaluation of the renminbi and the overvaluation of the dollar. The size of this disequilibrium is, however, less than previously estimated (now 15 percent on an effective basis and 24 percent bilaterally with respect to the dollar), due to the decline in the IMF's estimate of China's prospective current account surplus. The recent depreciation of the euro, while increasing the size of Euroland's prospective surplus, does not threaten to lead to an internationally unacceptable imbalance (i.e., greater than 3 percent of GDP) and therefore does not create a case for international action to reverse the rise. The yen is no longer found to be overvalued on an effective basis, although if China revalued that would create a case for a stronger yen/dollar rate. Several of the other East Asian currencies would also need to appreciate bilaterally to avoid effective undervaluation. Of the 28 other economies covered, Hong Kong, Malaysia, Singapore, Sweden, Switzerland, and Taiwan are judged to need an effective appreciation and Australia, Brazil, New Zealand, South Africa, and Turkey to need an effective depreciation.
    Date: 2010–06
  6. By: Partha Sen (Department of Economics, Delhi School of Economics, Delhi, India)
    Date: 2010–12
  7. By: Jeffrey J. Schott (Peterson Institute for International Economics)
    Abstract: The KORUS FTA was signed on June 30, 2007, but has not yet been sent to Congress for ratification. US concerns about auto and beef trade are the main stumbling blocks. At the Toronto G-20 Summit in June 2010, Presidents Obama and Lee Myung Bak tasked their officials to find solutions by the November Seoul G-20 Summit. If a deal is struck, implementing legislation could be submitted to Congress in early 2011. This paper assesses the problems and potential solutions to these problems and options for legislative action. The author concludes that, once submitted, the KORUS FTA will be approved for three reasons--all related to actions taken by other countries that could adversely affect US commercial and security interests in the Asia-Pacific region. The first reason is to demonstrate support for a strong ally facing North Korean aggression. Neither country wants to let a few provisions in a major trade agreement create friction in a strategically important bilateral alliance. The second reason is to secure a level playing field for US exporters in the Korean market. The imminent signing of the Korea-EU FTA, an agreement modeled on and largely comparable to the KORUS FTA, increases the urgency of Congressional action on the KORUS FTA since US and EU exports compete for sales in the Korean market. The third reason relates to the ability of US officials to advance US economic interests through an effective trade policy. Implementing KORUS is important to help maintain the credibility of US trade initiatives that seek to boost US exports, constrain Chinese economic influence in the Asia-Pacific region, and advance overall US foreign policy and security interests.
    Date: 2010–10
  8. By: KABLAN, Sandrine; YOUSFI, Ouidad
    Abstract: Our study aims at analyzing Islamic bank efficiency over the period 2001-2008. We found that they were efficient at 92%. The level of efficiency could however vary according to the region where they operate. Asia displays the highest score with 96%. Indeed, country like Malaysia made reforms in order to allow these banks to better cope with the existing financial system, display the highest scores. On the contrary countries with Islamic banking system do not necessarily display efficiency scores superior to the average. The subprime crisis seems to have impacted those banks indirectly. And market power and profitability have a positive impact on Islamic banks efficiency, while it is the contrary for their size. The latter implies that they do not benefit from scale economy, may be because of the specificity of Islamic financial products.
    Keywords: Islamic Finance; Islamic Banks; performance; efficiency; stochastic frontier analysis.
    JEL: C23 G32 G21
    Date: 2011–02–07
  9. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: More than a dozen countries, including Brazil, China, India, Japan, and Korea, have been intervening in the foreign exchange market to prevent their currencies from appreciating. There are fears that the second dose of quantitative easing in the United States (dubbed QE2) may worsen currency appreciation. These developments raise the prospect of a currency war, which the Group of Twenty (G-20) fears is gathering steam. Because many countries are simultaneously seeking to improve their balance of payments position, many are seeking a more competitive exchange rate. The laws of mathematics mean that some must be disappointed: A weaker exchange rate of one country implies a stronger rate of some other country or countries. Cline and Williamson argue that any agreement reached at the G-20 summit in Seoul to prevent an exchange rate war should be based on a distinction between countries with overvalued and undervalued currencies. Any accord should be designed to seek appreciation of the latter but not to debar the former from taking actions to prevent their currencies from becoming even more overvalued. Countries that are already overvalued on an effective basis--primarily floating emerging-market economies, but also Australia and New Zealand--should not be condemned for resisting further appreciation. But if a currency is substantially undervalued and the country is aggressively engaging in intervention to prevent appreciation, it is reasonable to judge that its intervention is unjustifiable. The authors show that a handful of high-surplus economies are intervening in such a fashion: China, Hong Kong, Malaysia, Singapore, Switzerland, and Taiwan. The currencies of these economies are substantially undervalued, and their current account surpluses are correspondingly excessive, pointing clearly to the desirability of currency revaluation by these countries. It would be very wrong for the G-20 to condemn all countries that are trying to prevent their exchange rates from appreciating. One needs to ask which currencies are undervalued and concentrate on preventing them from intervening and tightening capital controls.
    Date: 2010–11
  10. By: Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: The tools and mechanisms with which emerging-market countries insure themselves against volatile capital flows are in a state of flux. Most emerging-market countries had accumulated an unprecedented level of international reserves before the 2008 global financial crisis. The crisis itself led to a large increase in International Monetary Fund (IMF) resources and the introduction of a new lending facility, the Flexible Credit Line. Meanwhile, some progress was made toward transforming the Chiang Mai Initiative into an Asian Monetary Fund, and the Greek debt crisis even prompted calls for the creation of a European Monetary Fund. How have emerging-market countries dealt with capital flow volatility in the current crisis? What is the appropriate level of reserves for emerging-market countries? How can international crisis-lending and liquidity-provision arrangements be improved? What role can financial regulation and capital controls play in dealing with volatile capital flows? Olivier Jeanne discusses these and other important questions that are useful to keep in mind when thinking about the reform of international liquidity provision for emerging-market countries to deal with volatile capital flows. Jeanne concludes that the IMF and the international community should make more efforts to establish normative rules for the appropriate level of prudential reserves in emerging-market and developing countries and actively develop with its members a code of good practice for prudential capital controls.
    Date: 2010–07
  11. By: Incaltarau, Cristian
    Abstract: India's economic rise during the last decades has surprised most of the economists, including the Nobel Laureate Paul Krugman. Which are the ingredients of such an economic roadmap and why hasn’t India's economy boosted along with those of the "Asian tigers" during the 80s or later, with China’s economy? Once India became an important economic player, it can no longer be neglected in international political relations as the struggle for world supremacy became more an economic and technological competition, military rivalry going in the background. How can India maintain growth rates at such a high level? What are the prospects regarding economic and political relations between India and China?
    Keywords: India; China; economic power; world economy; knowledge economy; human capital
    JEL: O53 F59 F02
    Date: 2010–08–01
  12. By: Acharya, Viral V. (Asian Development Bank Institute); Cooley, Thomas (Asian Development Bank Institute); Richardson, Matthew (Asian Development Bank Institute); Walter, Ingo (Asian Development Bank Institute)
    Abstract: The paper analyzes the financial crisis of 2007–2009 through the lens of market failures and regulatory failures and presents a case that there were four primary failures contributing to the crisis: excessive risk-taking in the financial sector due to mispriced government guarantees; regulatory focus on individual institution risk rather than systemic risk; opacity of positions in financial derivatives that produced externalities from individual firm failures; and runs on the unregulated banking sector that eventually threatened to bring down the entire financial sector. In emphasizing the role of regulatory failures, the paper provides a description of regulatory evolution in response to the panic of 1907 and the Great Depression, why the regulation put in place then was successful in addressing market failures, but how, over time, especially around the resolutions of Continental Illinois, Savings and Loans crisis and the Long-Term Capital Management, expectations of too-big-to-fail status got anchored. The paper proposes specific reforms to address the four market and regulatory failures we identify, and we conclude with some lessons for emerging markets.
    Keywords: global financial crisis; LTCM; market failures; regulation; emerging markets
    JEL: E44 G15 G18 G21 G24
    Date: 2011–02–08

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