Global Trends and Regional Economic Interdependence

To sustain its rapid economic growth and development into the decade of the 1990s, the Association of Southeast Asian Nations (ASEAN) has to respond to the external challenges of maintaining strong economic relations with its major trading partners, thereby ensuring its market access to the United States, Japan, and Europe. ASEAN, as a whole and for its constituent member countries, also has to sustain international competitiveness in terms of attracting the flows of foreign direct investment and to maintain production costs and other advantages. The ASEAN Free Trade Area (AFTA) is such a collective strategic response to pursue ASEAN's goals of stimulating intra- and extra- regional trade, improving the investment climate and enhancing the competitiveness of industrial performance of its member countries. This introductory overview attempts to provide a substantive background on the global and regional trends and issues concerning the rapidly changing international economic environment as well as highlight the increasing international economic interdependence, particularly in the Asia-Pacific region. Then, recent developments pertaining to AFTA are discussed from the perspective of policy concerns with regard to regional trade co-operation in the broader context of economic co-operation beyond tariff issues to cover non-tariff issues and trade- related concerns. After these, the summaries of the various chapters will be presented.

AFTA as an international entity was formulated in January 1992 at the Fourth ASEAN Summit in Singapore. ASEAN declared then that it would establish a free trade area in fifteen years (by the year 2008), beginning on 1 January 1993, by means of the Common Effective Preferential Tariff (CEPT) scheme. In the years prior to 1992, there were a number of fundamental changes in the global and regional economic environment which stimulated the formation of AFTA.

This chapter provides an overview of ASEAN trade patterns and the CEPT. This is done in order to set the stage for the ensuing empirical analysis. Intra and extra ASEAN trade patterns of the five (original) ASEAN countries for the years 1981, 1986 and 1991 are then examined. These years are chosen to coincide with the data used in the empirical analysis. Both total trade and trade in manufactures are considered. A brief overview of the CEPT follows. The CEPT is the backbone of AFTA. It is the main mechanism through which ASEAN will achieve its goal of free trade within the region by the year 2005. We also consider some of the more ambitious and wide-ranging reforms being mooted as part of a program commonly referred to as “AFTA-Plus”.

The Pattern of Intra-ASEAN Trade: An Overview

Tables 2.1, 2.2 and 2.3 present information on the share of intra- ASEAN imports, exports and total trade (imports plus exports) in total multilateral imports, exports and total trade, respectively, for each of the five ASEAN countries (and as a group) for the years 1981, 1986 and 1991. It is clear from all three tables that the share of intra-ASEAN trade in total multilateral trade is low. The share of intra-ASEAN imports in total imports in 1991 was 17.5 per cent, while the share of exports was just under 20 per cent. There is, however, a mild increase in the share of intra-ASEAN trade between 1981 and 1991. The countries with the highest share of intra-ASEAN trade are Singapore and Malaysia. For instance, Malaysia's intra- ASEAN imports increased from 18 to 21 per cent between 1981 and 1991, while its exports increased from 26.5 to 29 per cent over this period. Indonesia and the Philippines have very low shares of intra-ASEAN trade. The Philippines’ share of intra- ASEAN imports in 1991 was 9 per cent, while its share of exports was only 7 per cent.

For a system that is so used to central control in so many areas of life, it begs the question of policy makers' attitude towards this highly visible migration phenomenon. While the need for doi moi was based on broad consensus within the Vietnam Communist Party, the leadership engaged in intense internal debate on several ideological issues (such as the right to own land or privatization of state-owned enterprises, just to name two examples) over its implementation. There has been no indication that rural-urban migration had been the subject of such ideological contention but, at the same time, a debate between those who want to be stern and those urging a liberal approach are becoming evident. For a start, the problem has been deemed serious enough to engage policy makers at the highest level of government (7 January 1988 Resolution No. 4 of the Council of Ministers discussed in Chapter One) as well as the attention of the Party Central Committee (Fifth Plenum of its Seventh Congress).

At that meeting, Party General Secretary Do Muoi made the following resolute statement in his report:

This view can certainly find its supporters among cadres in Hanoi. The Director of the Hanoi Police Bureau took the view that “Along with the development of the country … quite a number of people took the chance to ask for ‘freedom of residence’, and ‘freedom of travel’, without considering about the reality of the country, nor the necessary laws of managing the society and the country.”

With an area of 920.5 square kilometres and a population of 2.16 million, with 1.2 million living in Hanoi proper, the population density of Hanoi is the highest in the country: 2,161 people per square kilometres in Hanoi, and 24,558 people in the inner city area (noi thanh). Average housing space per person decreased from 5.1 square metres in 1954 to 2.3 metres in 1982, and 1.2 metres in 1992. Incomplete statistics for unemployment in Hanoi put it at 140,000 in 1991, and 181,000 in 1992. Theoretically the policy on migration to Hanoi still states that “Only migrants with selected skills or abilities are allowed into the city”.

One of Hanoi's characteristics is its semi-rural nature, developed within the framework of a larger agricultural society. Although established as the capital since ad 1010 it retains some semblance of this characteristic today. For a long time villages existed within the city, the so called thap tam trai (13 stockaded villages) is a case in point. Some place names in Hanoi such as Giang Vo, where the largest labour market is, and Ngoc Ha and Kim Ma, are actually names of villages. Andre Masson, a French scholar, commented early this century, “Strictly speaking, Hanoi in 1873 was not a city but a composite agglomeration where an administrative capital, a commercial town and numerous villages were juxtaposed within the same enclosure”.

Ke Cho, the most ancient name for Hanoi, literately means “the place where markets are”, which was situated opposite to Ke Que — (countryside). It was said that in mid-1954, one family in every two made its living from trade and the trade was linked closely to the surrounding countryside stretching into the provinces around the city. For instance, the well known 36 streets (36 pho phuong) in the heart of Hanoi each specialized in a certain trade or a kind of product, as Samuel Baron described in 1685: “All of the diverse objects sold in this town have a specially assigned street, quite like the different companies and corporations in European cities”.

Introduction

In 1992 ASEAN signed the Agreement on the Common Effective Preferential Tariff (CEPT) Scheme to form AFTA. Upon implementation of the agreement by 2008, ASEAN should become a free trade area (FTA) with tariffs on all commodities covered ranging between zero and 5 per cent and with all nontariff barriers (NTBs) and quantitative restrictions eliminated. Capital goods are also included.

According to member countries, the raison d’être of AFTA is twofold: first, to sustain ASEAN's competitiveness, fostering greater efficiency as an export promotion location; and second, to respond to increased regionalism in international trade using the FTA to ensure continued market access. As with most regional integration arrangements (RIAs), the ultimate goal is to promote economic growth.

The experience with RIAs among developing countries is characterized, with few exceptions, by large doses of enthusiasm injected at the beginning of the market integration process, followed normally by implementation failures and meagre results in terms of increased intra-regional trade. From this viewpoint, ASEAN's experience with its preferential trading arrangement (PTA) has not been any different. Will ASEAN's experience with AFTA make a distinct difference?

This chapter views AFTA from a comparative perspective. It poses two questions: (1) Is AFTA in its current form likely to fulfil its objectives?; and (2) What should ASEAN countries do to attain the objectives proclaimed?

Section II reviews the regional integration experience of a number of FTAs and customs unions (CLJs) among developing and developed nations. Section III develops a model that contains the major stylized factors that the experience with RIAs has shown to matter for a successful integration process. The model is used in section IV to analyse whether AFTA, in its current form, is sufficient for attaining its objectives. Section V discusses whether AFTA is necessary while section VI contains the conclusions and policy implications.

Introduction

ASEAN has become well known today in the world. The ASEAN region as a whole is now experiencing one of the most exciting periods of our time. The strong growth in the region has lead the ASEAN countries individually towards newly industrializing economy (NIE) status. This momentum of a catching-up process of economic growth is accompanied by rapid social changes, together with profound political transformation in each country. The pace of economic and political development in each ASEAN country can no longer be looked at individually, but needs to taken into perspective from the increasing interdependence of ASEAN within its own region and with the world driven by the dynamics of trade and investment linkages.

The success of the ASEAN economies can be attributed to the primarily outward-oriented and market-driven economic development policies over the past decades (see Table 2.1). The appropriate mix of economic policies with sound macroeconomic stability and the relatively effective reform and restructuring of the individual ASEAN economies over time have led to ASEAN becoming an attractive region for the promotion and expansion of trade and investment. As the process of ASEAN market integration continues more and more rapidly, ASEAN needs to sustain the region's international competitiveness on a world scale. This competitive pressure stimulated ASEAN policy makers to think more seriously on how to embark upon an institutionalized integration in order to facilitate ASEAN economic integration with the world.

Looking from outside as well as from within the region, there is no need to recount the numerous changes within the global economy which had occurred right after the end of the Cold War. Economic regionalism has become increasingly important in different parts of the world while multilateral trade liberalization is still actively sought after the conclusion of the Uruguay Round and now pursued under the new World Trade Organization (WTO). The developments within and outside the region have caused ASEAN to focus again on intra-ASEAN economic co-operation.

Migration is by no means new and alien to Vietnamese, since three-fifths of the territory of present-day Vietnam was obtained mainly by migration of the Vietnamese people over the centuries, a movement well known as nam tien (southward expansion). Migration is one of the most significant features of Vietnamese history, and the natural increase or decrease of the population was remarkably influenced by it from time to time.

Migration became a more frequent phenomenon during the French colonial period. Basically there were three categories, rural-urban migration, periodic movement between small-scale subsistence cultivation and the plantation and mining areas that were owned and operated by the French, and seasonal migration between various agricultural areas during the planting and harvest seasons in search of temporary employment. The last category seems to be of the largest volume. The principal centre of demand for seasonal migration of wage labourers was the rice-cultivation zone, which stretched over the provinces of Ha Dong. Ha Nam, Nam Dinh and Ninh Binh. The local labour force was insufficient to ensure that harvesting would be accomplished quickly enough before crops were lost to heavy storms and considerable flooding. Another centre of demand for seasonal migrant labour was in the highlands that extended along the rim of the Red River delta. Seasonal migrations were able to take place because harvests occurred at different times and places in the delta. Thompson estimated that by the mid-1930s at least two-thirds of Tonkinese had moved around to be employed as temporary informal workers for part of the year, for “[s]easonal migrations are the rule in over-populated districts”

Rural–urban migration at the time might have a more permanent nature. By 1905, Tonkin alone had at least 85 separate industrial enterprises, concentrated in the Hanoi and Haiphong regions, which employed more than 12,000 workers, miners not included.

Changes in Vietnam since the late 1980s have by now been well-documented. Four institutional changes, however, are basic elements relevant to the current labour force movement in Vietnam.

Relevant Factors

The first is the policy of decollectivizing the land — the khoan muoi (Contract 10) or khoan ho (household contract) which finally accepted that the family was the basic unit in the rural economy in 1988, and land was distributed to individual families.

As discussed in Chapter 3, perhaps the most controversial issue in the measurement of IIT relates to the definition of “industry” employed in compiling the data base. Sceptics such as Finger (1975), Lipsey (1976) and Rayment (1976) have argued that almost all measured IIT is purely a statistical artefact brought about by “categorical aggregation”. In this appendix, we provide a systematic analysis of this potential problem by identifying its sources and quantifying its effect on the measurement of IIT.

Categorical aggregation has two conceptually distinct components, which we will call “product misclassification” and “aggregation bias”. Finger (1975), Lipsey (1976) and Rayment (1976) emphasise the product misclassification aspect, arguing that the problem lies with trade data classification systems which group data within heterogeneous categories. To rectify this problem, they suggest regrouping the basic data such that the resulting categories conform more closely to the theoretical construct of an industry.

The definition of an “industry” with respect to product homogeneity is still under dispute, however (Lloyd 1989). For instance, Finger (1975) defines an industry as one where the products produced are similar with respect to their factor intensities. Falvey (1981), on the other hand, concentrates on the specificity of factors and defines an industry by the range of products that a certain type of capital equipment can produce. While these definitions concentrate on the production side, Lancaster's (1980) definition focuses on consumption: “a product class in which all products, actual and potential, possess the same characteristics, different products within the group being defined as products having these characteristics in different proportions” (p. 153).

It is clear from the discussion above that there is no unique criteria for regrouping the data. Furthermore, none of these definitions deal adequately with the problem of how to allocate trade in parts and components in any reclassified scheme. All in all, it is unclear if the arduous task of regrouping would yield any improvement upon established trade classification systems.