SMEInclusiveFreeTradePolicyShandreMThangavelu

JeffreyCheahInstituteforSoutheastAsiaSunwayUniversity

UniversityofAdelaide

StructureofPresentation

• Overview• ChallengesandOpportunitiesforASEANSMEs• SMEs,InclusiveandTrade• SMEsandGlobalValueChain• PolicyDiscussions

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Designated TTRs on AHN Non Designated TTRs on AHN

Designated TTRs on AHN Non Designated TTRs on AHN

ASEAN: Production Power House of AsiaConnectivity and opportunities for SMEs

Introduction:ASEANSuccessfulStorybutalsoRebalancing– GrowthPotentialisslowingdown(doesnotincludeUS-ChinaTradeWar– 0.5to1%ofGlobalGrowthtofall)

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PotentialGrowthofGDPperCapitalforSelectedASIANCountriesto2015-2050 2008-2014 2015-2020Cambodia 5.8 4.3China 8.3 7.7HongKong 2.3 1.2India 5.6 5.5Indonesia 4.5 4.4Korea 2.9 2.3Philippines 5.5 5.0Singapore 2.5 1.9Taiwan 3.0 1.9Thailand 2.9 2.4Vietnam 4.9 4.0 Source:ADBEconomicOutlook2016

Opportunities• ASEANisalargemarketwithgrowingmiddle-income:Populationof625million(EU507million)• GDP(currentprices)aroundUS$2.4trillion(averagepast5 years)• FDIisaroundUS$122.4billion(averagepast5years)• MerchandiseTradeisaroundUS$2.5trillion(averagepast5years)• Growthrateisaround5.1%(averagepast5years)(CLMVisaround7.0%)• Largeuntappedresourcesintheregion:GreaterMekongRegion• EmergingASEANcountries:Vietnam,Philippines,Indonesia• EmergingASEANLDCs:CambodiaandLaoPDR– releasinglargeresourcesfortrade

• LargeMovementoflaborintheregion:Unskilledlabor

Opportunities

• RegionallyintegratedthroughGVCactivities:GVCactivitiesarestrong• Largetradingblock– AEC,RCEP,CPTPP,APEC,FTAPP• Pro-Business• ASEANConnectivitywithhardandsoftinfrastructure• Stableinstitutionsandhumancapitaldevelopment(??)

• SeveralChallengesareemerginginAsia:Questionsoneconomicandtradeliberalization• Risinginequality• RisingWagegapbetweentheskilledandunskilled• Middleskillsaredisappearing– Polarizationofskills• Neweconomicsterms:“workingpoor”,“middle-incometrap”,outsourcing,GlobalProductionValue-Chain,“demographicdividend”• Inclusivegrowth:PPP,socialenterpriseandentrepreneurs• MovingfromSkillsdevelopmenttoTask– importanceoftraining• Agingpopulationanddemographicdividend

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NewPolicyChallengesforMicro-foundationsinAsia

SMEsinASEAN(SelectedYears):(a)Importantforemploymentbutweakintradeandinvestments;(b)SMEsaremostlyinServiceSectors

Policychallenge1:InnovationandRegionalIntegration

• Impactofagglomerationandfragmentationareoccurringatthesametimeduetoinformationandtelecommunicationtechnologies• Agglomeration– clusteringofkeyactivitiesthatcreateexternalities;closedistanceandtechnologycreatesagglomerationandexternalities(informationtechnologies– spacetechnologies)• Fragmentation– breakingdownofkeyactivitiesandlong-distanceandtechnologycreatesfragmentation(telecommunicationtechnologies)• Technologyaffectingagglomerationandfragmentationcouldbethesameordifferent• Thisaffectspolicydesignandimplementation

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GlobalProductionValueChain:“Unbundling”

• Since1980s,EastAsiaandASEANareinvolvedinthesecond-stageunbundling• SomeASEANcountriesarestillatthesecondstageunbundling• The“third”stageunbundlingiscomingandASEANhastodevelopkeypolicyframework

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ThetierstructureofutilizingglobalvaluechainsinASEANanddevelopingEastAsia

Under-developedeconomybeforeindustrialization

Hookupwithglobalvaluechains(the1stunbundling):resource-based/labor-intensiveindustries

Participateinproductionnetworks(the2nd unbundling:Jump-startindustrializationwithmachineryindustries

Formindustrialagglomeration:Acceleratetechnologytransfer/spillover

Createinnovationhub:UrbanamenitiesAttract/nurturehumanresources

Source: ERIA(2015).

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CompetingandComplementaryTechnologies:Informationtechnologies(IT)andCommunicationTechnologies(CT)

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Productivity (Multi-Factor ProductivityGrowth)inASEAN:Declining and lackinnovation –smallerfirmslessproductivity; important fortradeandcompetitiveness

1.Example:LowRateofReturnstoEducationinLaosandCambodia:“MissingCentre– Hollowingout”effectsinEducationsystem,LaoPDRhigher– evenwitheconomicgrowth

Figure5A:RatetoInvestmentinEducationforCambodia(%):1997-2008

Source:MontenegroandPatrinos,2014

Figure5B:RateofReturnstoInvestmentinEducationinSelectedASEANCountries(%):2000-2008

Source:MontenegroandPatrinos,2014

“MissingCentre”Problem

• Thelowrateofreturnsoninvestmentinsecondaryleveleducationandlargeshareoflaborforcewithprimaryschooleducation(laborsupplydecisions)clearlyreflectsindustrialstructuralproblemsandlabormarketmismatch.• “MissingCentre”problemisalsoduetolackofMediumsizedlocalenterprisestolinklargeandsmallindustriesinLaosandCambodia–lackofentrepreneurship• Thisiscriticalissuethegovernmentneedstoaddress

Figure 2: Share of Agriculture, Industry, and Services Sectors to GDP for Selected Asian Countries, 2000–2013

Agriculture Industry Services 2000 2013 2000 2013 2000 2013

China 15.1 10.0 45.9 43.9 39.0 46.1 Hong Kong 0.1 0.1 12.6 7.0 87.3 93.0 Korea 4.4 2.3 38.1 38.6 57.5 59.1 India 23.4 18.4 26.2 24.7 50.5 57.0 Brunei 1.0 0.7 63.7 68.2 35.3 31.0 Cambodia 37.9 33.8 23.0 25.7 39.1 40.5 Indonesia 15.6 14.4 45.9 45.7 38.5 39.9 Laos 48.5 30.0 19.1 30.0 32.4 40.0 Malaysia 8.3 9.4 46.8 41.0 44.9 49.6 Myanmar 57.2 36.9 9.7 26.5 33.1 36.7 The Philippines 14.0 11.2 34.5 31.1 51.6 57.7 Singapore 0.1 0.0 34.8 25.1 65.1 74.9 Thailand 8.5 10.6 36.8 40.1 54.7 49.3 Viet Nam 24.5 18.4 36.7 38.3 38.7 43.3

Source: Asian Development Bank Statistics Database.

Observation 2: Rising Share of Services Sector in Asia

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export Import

Figure4:ASEANExportandImportofServices:2005-2011(US$Billion)

2005 2011

RisingServicesTradeinASEAN:Servicesarebecomingtradable

Services liberalizationwillimprove productivity throughcompetition

3.!Industrial!agglomera2ons!and!services�

•  Agglomera2on!for!arm’s*length!transac2ons!

•  Local!firms!have!opportuni2es!to!have!business!rela2onships!with!mul2na2onals;!technology!transfer!and!process!innova2on.!

•  Contribu2on!of!services!–  Urban/suburban!transport,!large*scale!port/airport!

–  Reduc2on!in!transac2on!costs!–  Harmoniza2on/convergence!of!economic!ins2tu2ons�

Technology!transfer!and!process!innova2on�

Evolu2on!of!produc2on!networks�

Source:!ERIA!(2015,!forthcoming).�

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4.!Urban!ameni2es!and!services

High*Skilled!Employment!Share

Source:!World!Economic!Forum!(2015).!Originally!ILOSTAT!data!from!2014!or!latest!available!as!of!March!2015.!

•  To!be!fully!advanced!economies,!urban!ameni2es!are!needed.!(i)!the!presence!of!a!rich!variety!of!services!and!consumer!goods!(ii)!aesthe2cs!and!physical!sehng!(iii)!good!public!services!(iv)!speed!Glaeser,!Kolko,!and!Saiz!(2001)!

•  By!a\rac2ng/nurturing!intellectuals,!step!up!to!product!innova2on.!

•  Contribu2on!of!services!–  Everywhere.!–  Possibly!engine!of!growth.!

Product!innova2on

Source:!ERIA!(2015,!forthcoming).

Source:!ERIA!(2015,!forthcoming).

5.DigitalTransformation:ImportantforSMEsandGVC– Onlylargefirmsabletoparticipate

ByNazareth College - Flickr,CCBY2.0,https://commons.wikimedia.o rg/w/index.php?curid =25843794

Observation7.ParticipationandPositionaredrivenbyMajorCitiesinaGVC– ASEANLDCs

Theredareasaccountfor80%ofGDPandonly0.2%oflandmass.

PolicyDiscussion1:ImportanceofServicesectorandServicification

• ServicestradeandGlobalProductionValueChain:MappingofservicestoGVC(toppriority),servicesGVC(tourism,financialservices,professionalservices,educationalservices,logistics,etc.)• Trade,StructuralAdjustmentsintheEconomyandProductivitygrowth– Shiftingtoservicessector• Servicestrade,Employment,incomesandupgrading– ImportanceofregionalandglobalGVC:servicesandmanufacturinglinkages• Distributionofvalueaddedandinclusivegrowthwithemphasisontradeliberalization– (a)importanceofhumancapital,(b)institutions,(c)SMEs,(d)hardandsoftinfrastructure• Adjustmenttoglobalisation

Policydiscussion 2:HumanCapitalDevelopment istheKeyandcomplements SMEdevelopment• HumanCapitaldevelopmentisimportantandhavetogenderneutral• Twocomponents:(1)Educationand(2)TrainingandRe-tooling• Educationistheflowofhumancapitalanditaddstothestock• Trainingandre-toolingareimportanttomaintainthestock• However,infragmentedgrowthwewillexperiencegreaterdestructionthencreationsinjobs– greatercreationofnewtypesofjobsleadingtogreaterdepreciationofhumancapital• Needtodevelopamodelfor“LearningforAll”(seethewebsiteforhttp://www.skillsfuture.sg/)• Portfolioofhumancapitalwillallowworkerstoundertakevalue-addedtasks,whichisincreasinglybecomingimportantforGlobalValue-ChainActivities• Thisallowsthemtodiversitytheirskillsandridethefragmentedgrowthbetter

Universityeducationisnotattechnicalandengineering forCambodia,Laos,Myanmar,VietnamandalsoIndonesia(ADBStatisticalDatabase)

Figure 16: Majors of University Graduates

PolicyDiscussion: Skills,GVCandAidforTrade

• Skillsandvocationaltrainingisimportantandshouldstartearlytoemphasizelife-longlearning• Skillsandvocationtrainingasalternativetoformaleducation• Investintheinfrastructureforskillsandvocationaltraining• PublicPrivatePartnershipisveryimportantineducationandtraining–thereturnsaremoretothebusiness• Improvingtheskillsoffemalesarecriticalforhighersocialandeconomicreturns

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PolicyDiscussion3:DevelopingSMEsforTrade

• TherearegreatopportunitiestodeveloplocalSMEsbypushingthemintoregionalactivities– integrationandbuildingintotheregionalsupplychainmapping• OriginalEquipmentManufacturer(OEM)• Tier1Supplier– SupplyingcomponentsdirectlytotheOEM• Tier2Supplier– SupplyingtoTier1supplier• Tier3Supplier– SupplyingtoTier2supplier–machinescomponents,etc.• Tier4Supplier– basicrawmaterialssuchassteel,glass,etc.tohighertiersuppliers

• Example:OEMordersAlternator– Tier1Supplier:SupplierofAlternatorwillordercopperwire– Tier2Supplier:CopperWiresupplierneedcopper– Tier3Supplier:Supplyofcopper

• FinancialInclusion• SMESEZsandIncubatorstosupportVentureCapitalFunds

DevelopmentofSMEsintheAgriculturalSector:GVC• DevelopmentofAgriculturalsectorandproductivity:• DevelopmentofhumancapitalinAgriculture– AgricultureUniversity,diffusionoftechnologyinagriculture

• DevelopmentofservicelinkagesandagriculturalservicesinGVC• Developmentofsoftandhardinfrastructurelinkingagriculturetourbanactivities:(a)dryports,(b)warehousingandcoldstorage,(c)marketinformationtofarmers,(d)marketstructure:agriculturalcooperatives

PolicyDiscussion4:InstitutionalReforms– Policiestoimprovebusinessinvestmentbehaviour• Alignmentofindustrialpolicywitheducationpolicyisimportant• tosustainandincreasethereturnstoeducation• Toreduceanymismatchinthelabourmarketandreducetheskillsgap• CoordinatebetweenMinistries• Coordinatewithbusiness,unionsandgovernment– TripartismandPPP

• Informationgap:Needtocollectmoreinformationontrainingandskillseducation

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PolicyDiscussions5:Importanttoaddressbehindborderissues– AidforTrade• Expansionandstandardizationofprimaryandsecondaryschooleducationtolargerpartoftheeconomy(UrbanandRuralSectors)

• Importantofe-learningande-educationaspartofnarrowingthedigitaldivideanddigitaleducation• Networkeconomyisimportant• Curriculumreformtoemphasizebasicreading,writingandarithmeticskills (Englishlanguageisimportant)– countrieswithcommerciallanguagetendstowellintradeliberalizationsuchasMalaysiaandPhilippines• Investmentinconnectivitysuchassoftandhardinfrastructureisimportant

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PolicyDiscussion 5:AidforTradeMatters• Industrialandeducationalpoliciesmustcomplementandforwardlooking

• Industrialpoliciesdeterminedemandforskills• Deriveddemandfromgrowthofsectors• IdentifygrowthforSMEs

• Educationalpolicies(formaleducationandContinuingeducation(CET))determinesupplyofskillsandhumancapital• Laggingandaccumulatedovertime

• Skillgapandmismatch• DemandforskillsisgreaterthanSupplyofskills• Workersdonothavethenecessaryskillstomeettheindustrialdemandforskills

• Adjustmenttohighervalue-addedsectorscouldleadtoskillsmismatch

PolicyDiscussion6:TradeandTradeAgreementsareimportant• Australia-SingaporeComprehensiveStrategicPartnership(CSP)– settingthestagefornextstageofunbundling• Developmentofservicessectors:Greaterliberalizationofservicessectorsintermsofaddressingthekeyinvestmentissuesthathinderservicestradegrowthintermsofnationaltreatmentandmarketaccess.Inparticular,CSPwilladdressthedevelopmentofe-Commerceservices,educationalservices,financialservicesandtelecommunicationservices.• Educationalliberalizationhasverypositiveimpactonhumancapitaldevelopment– RMITatVietnam,MonashUniversityatMalaysia• Movementofpeople:Theabilityforbusinesspersonstomoveacrossbordersisanintegralfeatureofmodernbusiness• FrameworkforMutualRecognitionofSkillsandEducation

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• Identifyandaddressthe“behind-border-issuessuchas• institutionalalignmentsandcooperationinR&Dandtechnologies,• commercializingtechnologies,• entrepreneurialactivitiesandSMEactivitiesintermsof“businesslaunching”pads,

• institutionalalignmentsintechnologypartnership:e-commerceregulations,institutionalalignmentsintelecommunicationsservices,

• greatertransparencyforinvestments,• bestpracticesfordatamanagementsystems• Regulationandinformationanddatasharingplatforms,• nationaltreatmentofinvestments,• governmentprocurements,e-procurements,• paperlesstrading

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TradeandTradeAgreementsareimportant

Challenges:TradeandDomesticcapacityandlinkages• ImpactonMSMEs• SMEsandMSMEsutilizationrateofFTAsareverylow(TambunanandChandra,2014)• Lackofinformationandtechnicalknow-howonhowtousetheFTAs• Notabletonetworkwithforeignexporters• Highcompliancecost• OverlappingFTAstoestablishROOs• ComplexROOs

PolicyDiscussion 7:CitiesandIncreasing theEconomic Space

• AstheCitiesmatures,theconstraintsofCity-Statehinderfurthergrowthoftheeconomy• NeedtoincreasetheeconomicspaceofCity-Statebyincreasingtheurbanamenitiesandconnectednesstoregionalandglobalactivities• TheASEANandEastAsianwillbeimportantandidentifyneweconomicspaceintheregion– ASEANConnectivitywillgiveabigpushforSMEdevelopmentintheregion• Moreflexiblemovementofpeople• EfficientCitiesareimportantfornextstageofservicesdevelopment

PolicyDiscussions:Summary• Neednewindustrialpolicytounbundlenewactivitiesandtask• Needtomanagedisruptionsandcreations– howtorecognizetechnologiesasdisruptionsandcreations• Needtomanageservicelinkagesandagglomerationandfragmentation• Needtomanagehumancapitaltoundertakedifferenttask:needlaborpolicyforfutureskillsandtounderstandfutureoccupations;mismatchproblems• NeednewSMEpolicies• Informationas“oil”oftheneweconomyandalsotoregulateinformation• Needtounderstandthebehaviorofproducersandconsumersandthisisadifficultpolicyquestion• Neednewsoftandhardinfrastructureforconnectivity:needpeopletopeopleconnectivity

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