7: 21st century globalization

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Discussion: winners and losers from the Asian boom and bust

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Evolution of trade shares with china – compare ‘close’ and ‘far’ (TAF talk)

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The setting: (re)globalization

During 1990s, SE Asia reintegrates with global economy through more than just commodity tradeCapital and labor marketsInternational agreements (regional: AFTA, APEC; global:

WTO)At same time, global integration by others – esp. China

1978: China’s “open door” policy initiated1980s: mainly domestic reforms1990s: China joins global marketplace (1994 devaluation)

Global impacts on product and factor marketsDevelopment impacts of SE Asian and global integration?

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The setting: (re)globalization

China effect: changes in global markets and factor supplies

Increased demand for some goods and services; intensified competition in mkts for others (which ones?)

Successful development requires flexibility Moving up the value ladder requires increasingly

sophisticated technologies and inputs; dynamic firmsPremium on capacity for innovation, & on inputs

complementary with more advanced technologiesWhat are these? How do they assist growth? “prying open the Solow model”: 3 modifications

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Globalization and productivity growth

Solow growth model emphasizes importance of productivity growth – in a hypothetical closed economy

Open-economy Solow: (i) intermediate inputs

Original aggregate production function:

Y = A•ƒ(K, L)

With intermediate inputs (N): assume

Y = A•ƒ(K,L)•N

==> More N more output and more productive K & L==> If intermediates are dominated by imports, then lowering

costs of importing N has positive effects on economic growth

Example: demand for N = ND = PN-1, so Y = A•ƒ(K,L)/PN

Then –∂Y/∂PN has an effect proportional to ∂Y/∂A; lowering the domestic cost of N raises TFP.

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Globalization and int’l capital transfer

Open-economy Solow: (ii) imported capital

Original capital growth equation:

Δk = s•ƒ(k) – (d + n)•k

Savings in closed econ: S = I; s = I/Y.

In open econ: S = I + FDI, s = (I + FDI)/Y

==> Imported capital (FDI/ investment goods) also adds to capital stock

==> Lowering the cost of importing capital/investment goods is equivalent to raising the domestic savings rate, which increases economic growth

Cheaper FDI and investment goods imports may also interact with other factors (human capital, productivity) as discussed in growth/trade class.

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Source: Estevadeordal & Taylor 2008

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10Source: Gill & Kharas 2007

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Source: Gill & Kharas 2007: 130

Innovation in product mixOpen-economy Solow (iii): climbing the product ladder

In closed economy aggregate model, diminishing returns to capital due to movement around a (single) production function This leads to convergence to steady state (zero per capita

growth) In closed-econ 2 (or more) sector model, size of domestic

market also dim returns (supply up -> price down -> lower cap returns)

In open economy, size of market is not a constraint As capital per worker accumulates, can switch production to

more capital-intensive products, sold at (constant) world prices

==> Diminishing returns do not apply, or are delayed==> High per capita growth rate can be sustained for longer, if

other conditions are favorable

“What you export matters” – Dani Rodrik

Like China, SE Asia’s most successful economies have diversified manufacturing production into increasingly capital- and skill-intensive production 12

Summary: openness, productivity, growth

In inward-oriented economies, capital is costly and factor productivity is reduced by high cost of imported intermediate goods and investment goodsGlobalization reduces investment costs and raises factor

productivityIn inward-oriented economies, the size of the market

constrains output growth, induces diminishing returnsGlobalization increases the size of the potential market,

and product innovations (i.e., climbing the product quality and sophistication ladder) can prevent diminishing returns

Globalization and innovation are complementaryWhat else is needed to realize gains?

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New Asian regionalism: China

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SE Asia in the new Asian economy

Growth of China impacts world markets, especially after 1994

South-South trade impacts: competition and complementarityCompetition - which products?Complementarity – which products?Competition - which countries?Complementarity – which countries?

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Enter the dragon

China’s growth and globalization are changing the composition and direction of SE Asian trade

Competition with China in third-country markets is intensifyingMultifiber arrangement (which penalized Chinese

garment exports to rich countries) abolished (Jan. 2005)Yet SE Asian trade with China is growing faster than

total trade – how? What products? What is SE Asia’s comparative advantage with

respect to China?

Country Period China trade share %

Total trade growth %

Growth of trade w China %

Indonesia 85-95 4.3 143 153

95-01 6.2 32 44

Malaysia 85-95 2.4 381 118

95-01 5.6 29 133

Thailand 85-95 2.9 598 -15

95-01 6.5 34 124

China’s trade share (percent) and rank among trading partners Country 1990 1995 2000 2001 2002 2003 Malaysia Exports 2.10 2.56 3.09 4.33 5.63 10.78

Rank 10 9 9 6 5 3 Imports 1.92 2.20 3.94 5.19 7.74 6.82 7 7 5 4 4 4

Indonesia Exports 3.25 3.83 4.46 3.91 5.08 7.43 5 5 5 5 5 4 Imports 2.97 3.68 6.03 5.95 7.76 11.72 7 8 5 5 4 2

Philippines Exports 0.75 1.20 1.74 2.47 3.85 12.00 10 10 10 10 8 3 Imports 1.40 2.34 2.28 2.95 3.54 6.99 9 8 9 7 7 4

Thailand Exports 1.16 2.87 4.07 4.40 5.16 7.09 10 6 6 5 5 4 Imports 3.31 2.84 5.45 5.98 7.61 8.00 6 7 4 3 3 3

Vietnam Exports 0.31 6.44 10.61 9.44 6.45 6.40 6 3 2 2 4 4 Imports 0.16 3.94 8.96 9.91 11.82 14.06 8 6 4 4 2 1

Source: ADB back

A measure of comparative advantage

Revealed comparative advantage as captured by trade intensity:

RCAij = (Xij/XTj) / (XiWXTW) Where Xij = exports of good i from country j;

XTj = total exports from country j;XiW = world exports of good i;XTW = total world exports

RCAij > 1 ==> comparative advantage < 1 ==> comparative disadvantage

Trade data: commodity groups

Group SITC section SITC division

A.Primary products

1. Agricultural products:

- Food

- Raw materials

2. Mining products

0,1,2,3,4

0,1,4

3

22

21,23,24,25,26,29

27,28,69

B. Manufactures 5,6,7,8 Not including 68 and group 891

C. Other products 9 Group 891

SITC Revision 3 WTO International Trade Statistics 2004

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23

24

25

26

27

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

World China World China World China World China World China

Indonesia Malaysia Philippines Thailand Vietnam

1. Agriculture 2. Raw & semi-processed nat. res.

3. Heavy industry 4. Capital-intensive mfg

5. Labor-intensive mfg 6. Other

Figure 9: Sectoral composition of SE Asian exports to the world and to China

Competition and complementarity

CompetitionInvestment?Labor-intensive manufactures – ‘bottom rung’

industries

ComplementarityNatural resources – could export booms resource

curse? Skill-intensive manufactures

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FDI net annual inflows, China and SE Asia

0

10,000

20,000

30,000

40,000

50,000

60,000

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Source: WDI. * Excludes Singapore.

Millions of 2000 US dollars

China

SE Asia*

Employment in textiles, garments and footwear and share of manufactures exports

Country Year Employment (% Mfg LF)

Share of Manufactured Exports (%)

Indonesia 2001 31.3 31.1

Malaysia 2000 8.3 4.6

Philippines 1999 18.2 8.8

Thailand 2000 21.0 13.6

Viet Nam 2000 41.4 60.8

Cambodia 2000 80.1 80.0 Source UNIDO. Product Categories: ISIC 171, 172, 1730, 1810, 1820, 191, 1920 UN Comtrade. Product Categories: SITC 65, 83, 84, 85

Resource exports: resource curse?

SE Asia escaped resource curse first time aroundIn fact, their ‘miracle’ growth occurred during a decade

on historically low world commodity prices Was based on hosting FDI directed at non-resource

sectors

Could they do it again?Some econs have climbed further up industrialization

ladder than others (structure of investment; human capital accumulation). Esp. late starters.

China’s growth (and India’s…) could kick away ladder

• China’s growth raises demand for NR products– E.g. demand for forest products rose 175% 1997-2003

• Among exporters, contraction of labor-intensive industries reduces growth of low-skill labor costs• Natural resource sectors benefit from this

• Future profit rises will be highest in labor-intensive, resource-intensive activities, including– Industrial plantation crops– Agricultural crops– Inland and coastal fisheries

Environmental problems: access to natural resources

Open access & unresolved externalities characterize many aspects of natural resource extraction in Southeast Asia

Some trends toward greater central control in early 1990s

How will decentralization affect NR management?

Liquidating Indonesia’s forests

New laws unclear on ownership, use rights, responsibilities and rights of local gov’ts

Fiscal incentives for local gov’ts to increase extraction rates

Result… “a free-for-all in which forest management has become the responsibility of no-one” Demand for timber and land for ag. conversionTimber removal rates now at 3 times Jakarta’s

“sustainability criterion”

Conclusions

‘Globalization’ in China and SE Asia shifts comp. adv. toward NR products, away from labor-intensive manufacturesDynamics: investment flows may reinforce trend

Divergence within region: complementarity in skill-intensive manufactures v. complementarity in natural resourcesDecentralization may cause resource depletion to

accelerate Possibility of “new” natural resource curse in

resource-intensive economiesCaveat: ‘China effect’ reduces net gains from

globalization

Next: growth of skill-intensive manufacturing

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