Dear Readers,

The Asian Development Bank (ADB) recently released the Asian Economic Integration Report and this could be important for your exams.

The report titled “Asian Economic Integration Report 2015: How Can Special Economic Zones Catalyse Economic Development?” was released on December 8, 2015. It covers trends in trade, finance, migration, remittances and other economic activities in the region. In this article, we will look at the key findings of the report and its special chapter on Special Economic Zones (SEZs).

Key Findings in Trade Integration

· Trans-Pacific Partnership: The report highlighted that the TPP could be a stepping stone for global trade liberalisation. Intraregional trade between member states has hovered at 55% of the total Asian trade since 2011. This is below the European Union’s 65% but above North America’s 42%. Regional trade organisations like the TPP and the proposed Regional Comprehensive Economic Partnership (RECP) could facilitate freer global trade. The RECP will include the ten ASEAN members and Australia, China, India, Japan, the Republic of Korea and New Zealand.

· Impact of China’s growing consumption: As China moves toward a growth strategy driven by consumption and services, it presents both challenges and opportunities to other economies. Many economies in East Asia, South-East Asia and Oceania that supply raw materials or export parts to China could face challenges in adjusting to these. Rising consumption in China could also widen market opportunities for consumption goods exports and investments.

· Impact of GVC on Asia’s trade: Growth of trade in Asia has slowed due to sluggish global value chain (GVC) expansion and growth moderation in China. Consequently, Asia’s income elasticity of trade declined from 2.69 before the global financial crisis to 1.30 afterwards. In Asia, intermediate goods trade – almost 60% of the region’s total – decreased 2.6 % in 2014 in value.

Key Findings in Financial Integration

· Capital flow and financial stability: Inward FDI grew 26.3 % (to $495 billion) during 2010 to 2014 – from outside and within the region. However, equity and debt inflows declined 20.1 % and 59.4 % respectively. Using the standard deviation of inflows into Asia as a percentage of GDP, inflow volatility was 0.6 for FDI during 2005 to 2014, 1.4 for equity and 1.5 for debt.

· Asia as an outward FDI source: Asia has become a crucial source of outward FDI. Outward debt investment fell 178% and outward equity investment increased 91.6 %. External and intraregional Asian FDI outflows increased quicker than the FDI outflows, and grew by 45.3 % in 2014, when compared with 2010.

· Rising Asian investments: Emerging Asian investors like China, India, Malaysia and Thailand are increasing investments into developed economies Europe, the USA and Latin America. India has, thus, become the third largest source of inward FDI for the UK after the USA and France. Similarly, China has increased investments in utilities and logistics in countries like Italy, Portugal and Spain.

Key Findings in People Movement

· Asia is the largest source of international migrants: In 2013, 79.5 million people from Asia migrated to other countries, accounting for 34% of the global total of 231.5 million. The largest source was South Asia, which made up 44% of the total Asian migrants. From a general view, economies with low income and large numbers of young and working age (20-34) populations (such as Afghanistan, Bangladesh and India) are the primary sources of migrants. Thus, economies with high income and ageing populations (such as Australia, Japan and New Zealand) are the net recipients.

· Remittances and tourism are important sources of income: Asia was the source of nearly 50 % of global remittances ($583.4 billion) in 2014. Out of this, China, India and Philippines received the most – $163 billion or 61 % of the Asian total. Economies highly dependent on remittances for income are more likely to experience high volatility in remittance inflows, and should keep on pursuing industrialisation and economic diversification to make their economies more resilient.

Role of SEZs in Asian economies

What is an SEZ?

Special Economic Zone refers to designated areas in the country where trade laws are different from the rest of the country. These modified norms are conducive to Foreign Direct Investment (FDI) and firms operating in SEZs usually get tax incentives and have to pay lower tariffs. SEZs are primarily created to increase trade and investment, boost employment and effective administration.

Key Points on SEZs

· SEZs are on the rise. There were around 500 SEZs in 1995, and now there are close to 4,300 in over 130 countries, employing over 68 million workers.

· Though some are unsuccessful, they attract ample attention as many developing Asian economies use SEZs as a tool to boost economic growth and industrialisation.

· SEZs were initially designed to circumvent trade barriers and earn revenues generated by foreign exchange.

· The aim was to widen the manufacturing base and establish a base in the global market. Over time, SEZs have become sources of increased FDI, better exports and job creation in many countries.

· Different SEZs stages coexist in Asia:

– First stage SEZs aid in creating employment and foreign exchange revenues. In Cambodia, for instance, SEZs remain relatively small and employ low-skilled workers in the sectors of garments, electronics and household furnishings.

– Second stage SEZs help in diversifying the production base of an economy by bolstering links with the domestic economy. Malaysia and Thailand, for instance, began to increase sales of their own branded merchandise in domestic as well as global markets after assembling imported units.

– Third stage SEZs are capable of bringing nationwide developmental impact through reforms in labour and service. This improves productivity, innovation and promotes stronger skill development. Examples include China and the Republic of Korea.

Impact and Possible Future Directions

· Successful SEZs have helped boost exports and investments. On an average, a 10 % increase in the number of SEZs causes a 1.1 % rise in manufacturing exports. This shows that SEZs have had more impact than mere reallocation of exports and inward FDI.

· Though SEZ performances vary across economies, raw data show that political instability, unsatisfactory business environment, limited access to infrastructure, resources and finance, and unwarranted rules are major obstacles in doing business in SEZs.

· SEZ are not free of cost, and governance issues have often triggered their failure. Costs for providing infrastructure, land and subsidised utilities should be taken into account.

· Features that make an SEZ successful are (i) Fiscal incentives for initial investments and institutional factors; (ii) Institutional efficiency, reliable judicial systems, proper security and transparency; (iii) cheap factory sites, ample labour supply and strategic location; and (iv) strong state and local government commitments.

· To enhance their nationwide effect, SEZs should be made an integral part of the national development planning. They can become catalysts for national development through backward and forward linkages with the domestic economy.

· SEZs can support services, innovation and a knowledge-driven economy. Manufacturing remains the major contributor for Asia’s low- and lower middle-income economies. However, both developing and developed economies should study the potential of services like logistics, finance and IT for better growth.

These are the main points to be remembered about ADB’s Asian Economic Integration Report 2015. If you can understand these well, you can easily attempt questions pertaining to it.

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