ASEAN Integration: Economic

and Employment Effects

Ramon Clarete
BSP UP Centennial Professor of Foreign Trade
School of Economics
University of the Philippines
 The ASEAN Economic
Community
The AEC will establish ASEAN as a single market and production base making ASEAN
more dynamic and competitive. It envisages the following inter-related and mutually
reinforcing key characteristics:

Free flow of Competition Small and Coherent

Competitive Economic Region

Integration to the Global

Economy
Base
Single Market and Production

goods

Development
Equitable Economic
policy medium approach
Free flow of Consumer enterprise towards
services development external
protection
Free flow of economic
investment Intellectual Initiatives for
property ASEAN relations
Freer flow of
capital rights integration Enhanced
Free flow of Infrastructure participation
skilled labor development in global
Priority supply
Taxation
integration networks
sectors e-Commerce
Food,
agriculture and
forestry
 Creeping AEC Vision
ASEAN Summit 2015
formalization of the AEC
Creeping vision
Started with AFTA in the 1990s
99.6% of all tariff lines were already brought down to
zero since 2010
Of 400+ AEC obligations, 84-89% is
accomplished (PH: 87+%)
 ASEAN Profile
ASEAN China India Japan EU
Nominal GDP (US$ billions) 5 2,351 8,358 1,875 5,960 16,604
GDP per capita (US$) 5 3,851 6,070 1,516 46,838 32,795
Real GDP growth5 5.40% 7.70% 3.20% 2.00% -0.40%
5-year CAGR on GDP growth 6 8.70% 13% 7.70% 4.20% -1.90%
Total population (millions) 5 610 1,377 1,237 127 506
Median age (years)7 28 36 27 45 41
Inward FDI flows ( US$ billions)5 117.5 121.1 24.2 1.7 216
Outward FDI flows ( US$ billions)5 53.83 87.8 8.5 122.6 237.9

5 UNCTAD Statistics Database, 2012 http://unctad.org/en/pages/Statistics.aspx

6 UNCTAD Statistics Database, 2008 - 2012 http://unctad.org/en/pages/Statistics.aspx

7 NationMaster Statistics Database, 2012 http://www.nationmaster.com/country-info/stats/People/Median-age/Total
 Challenges
Remaining 15 or so % are more difficult to
accomplish
e.g. Philippines FDI liberalization, competition
policy, etc.
Unimplemented measures are region-wide
commitments, e.g. ASEAN Single Window
 Views from Private
Stakeholders
Some private stakeholders
The government
in A&F are concerned, but needs to provide
others are hopeful. effective and
intense support to
Areas for improvement: local producers in
Lower cost of power, order to be better
transportation, production prepared for the
inputs, marketing, and integration and
reap the
market information
corresponding
Reduce cost of doing business benefits.
 AEC Tariff Reforms
Establish a free trade area
in ASEAN. 12
As of now 99% of ASEAN Brunei D

6 countries tariffs are 0. 10 Cambodia

Indonesia

Only 68 % of CLMV tariffs 8

Lao PDR

are zero, but most o these 6 Malaysia

Myanmar

will be zero in 2018. 4 Philippines

Singapore
Philippines by next year 2
Thailand

will have all its ASEAN 0

Vietnam

preferential tariffs at no 2001 2003 2005 2008

more than 5%, except rice

which remains at 35%.
How Has AFTA Affected Ph?
Assessment tool: GTAP Model,
comprises 23 countries/regions and 40 industries,
ASEAN member states as separate countries, except Lao
PDR and Cambodia
GTAP database comprises 137 countries and
57 industries
Solution technique: GEMPACK
 23 Regions

Indonesia India
Cambodia & Lao PDR Rest of South Asia
Malaysia Australia and New zealand
Philippines Canada
Singapore United States
Thailand Brazil
Vietnam Rest of North and South Americas
Rest of Southeast Asia European Union (27)
China Middle East and North Africa
Hong Kong and Taiwan Rest of Africa
Japan Rest of the World
South Korea
 40 Sectors
1. paddy rice 21. wood products
2. cereal 22. paper and publishing
3. oil seeds 23. leather
4. sugar cane and bee 24. chemicals, rubber and plastic
5. vegetables and fruit 25. petroleum and coal
6. other crops 26. non-metal mineral products
7. other animal products 27. metal products
8. cattle 28. machinery products
9. fishery 29. electrical products
10. forestry 30. transport equipment
11. mining 31. other manufacturing
12. oil and gas 32. construction
13. meat preparations 33. fuel, electricity and water
14. dairy 34. transport services
15. vegetable oils 35. trade services
16. processed rice 36. communications
17. milled sugar 37. financial intermediary
18. other food predcuts 38. public administration, education and health
19. beverages and tobacco 39. real estate and commercial services
20. textile and garments 40. rest of services
 Base Value
Sectors %
Bln. Pesos
1 Paddy rice 142.36 -4.58
2 Cereal 56.64 -0.4
Production
3 Oil seeds 35.84 -1.02 Effects
4 Sugar cane and beet 25.48 -1.83

5 Vegetables and fruits 140.72 -0.18

6 Other crops 43.96 15.13
7 Other animal products 227.96 0.17
8 Cattle 28.12 0.35
9 Fishery 180.08 -0.03
10 Forestry 14.52 -1.15
 Base Value
Sectors %
Bln. Pesos
11 Mining 92.52 -0.92
12 Oil and gas 13 -0.91
Production
13 Meat preparations 278.56 0.06 Effects
14 Dairy 52.56 0.45

15 Vegetable oils 83.52 -1.82

16 Processed rice 141.28 -4.78

17 Milled sugar 43.8 -1.95

18 Other food preparations 430.64 -0.17

19 Beverages and tobacco 130 4.62
20 Textile and garments 278.56 -0.97
 Base Value
Sectors %
Bln. Pesos
21 Wood products 86.28 -1.63
22 Paper and publishing 96.28 0.07
Production
23 Leather 30.28 -0.94 Effects
Chemicals, rubber and
24 327.6 -0.86
plastic

25 Petroleum and coal 260.56 0.3

Non-metal mineral
26 87.28 0.28
products

27 Metal products 341.76 0.9

28 Machinery products 438.24 -1.36

29 Electrical products 1912.04 -1.56
30 Transport equipment 246.32 16.54
 Base Value
Sectors %
Bln. Pesos
31 Other manufacturing 117.32 -0.62
32 Construction 388.4 1.29
Production
33 Fuel, electricity and water 388.4 0 Effects
34 Transport services 585.64 0.08

35 Trade 1232.68 0.14

36 Communications 213.92 -0.12

37 Financial intermediary 396.48 0.11

Public administration,
38 812.72 -0.05
education and health
Real estate and commercial
39 724.72 -0.32
services
40 Rest of services 217.48 -0.16
 Exports Imports
Sectors
% %
1 Paddy rice 9.09 -6.77
2 Cereal 0.4 0.32
Trade
3 Oil seeds -0.59 0.47 Effects
Sugar cane and
4 0.5 -0.55
beet
Vegetables and
5 -0.81 1.26
fruits
6 Other crops 280.79 15.29
Other animal
7 -1.01 0.58
products
8 Cattle -3.52 1.92
9 Fishery -0.63 3.3
10 Forestry -2.39 0.15
 Exports Imports
Sectors
% %
11 Mining -0.82 1
12 Oil and gas 2.9 0.34
Trade
13 Meat preparations 9.82 2.16 Effects
14 Dairy 7.47 1.19

15 Vegetable oils -1.22 2.02

16 Processed rice 3.96 20.62

17 Milled sugar 1.58 36.97

Other food
18 0.86 2.8
preparations
Beverages and
19 76.79 1.35
tobacco
20 Textile and garments -1.11 0.97
 Exports Imports
Sectors
% %
21 Wood products -1.38 3.8 Trade
22 Paper and publishing 3.1 1.42
23 Leather -0.27 2.13 Effects
Chemicals, rubber and
24 -0.48 0.99
plastic

25 Petroleum and coal 4.23 0.88

Non-metal mineral
26 0.5 2.95
products

27 Metal products 1 2.14

28 Machinery products -1.55 1.74

29 Electrical products -1.59 -0.96
30 Transport equipment 47.87 6.76
 Exports Imports
Sectors
% %
31 Other manufacturing -2.07 2.28 Trade
32 Construction -1.46 2.05

33
Fuel, electricity and
-2.53 1.26
Effects
water

34 Transport services -0.43 0.46

35 Trade -1.83 1.08

36 Communications -1.98 1.06

37 Financial intermediary -2.26 1.28

Public administration,
38 -2.16 1.15
education and health
Real estate and
39 -2.29 0.96
commercial services
40 Rest of services -1.89 0.08
 Economic Indicators

GDP at constant
Country/Region Trade Surplus Efficiency gain
prices

1 Indonesia -274.38 80.09 64.87

2 Cambodia & Lao PDR -217.34 24.58 182.27
3 Malaysia -667.76 270.06 430.37
4 Philippines -239.22 74.92 248.97
5 Singapore 795.43 65.89 2389.27
6 Thailand -1573.16 333.36 210.79
7 Vietnam -198.21 15.02 24.31
8 Rest of Southeast Asia -54.73 49.16 76.41
9 China -19.96 -57.25 -421.73
10 Hong Kong and Taiwan -9.17 -20.06 -191.83
 Economic Indicators
Trade GDP at Efficiency
Country/Region
Surplus constant prices gain
11 Japan 684.34 -164 -827.83
12 South Korea 54.04 -116.88 -283.99
13 India 27.31 -104.5 -328.49
14 Rest of South Asia 17.94 -6.03 -32.8
15 Australia and New Zealand 66.56 -23.44 -101.61
16 Canada 52.34 -0.13 -15.45
17 United States of America 663.63 -36 -601.56
18 Brazil 46.73 -11.63 -47.33
19 Rest of North and South Americas 46.8 12.5 36.62
20 European Union 27 585.12 -106 -767.54
21 Middle East and North Africa 129.74 -22.25 183
22 Rest of Africa 22.25 -5.5 -16.45
23 Rest of the World 61.22 58 111
 Low
Sectors Skilled
Skilled
1 Paddy rice -5.01 -5.03
2 Cereal -0.47 -0.5
Employment
3 Oil seeds -1.15 -1.18 Effects
4 Sugar cane and beet
-2.03 -2.06
5 Vegetables and fruits
-0.23 -0.26
6 Other crops 16.57 16.54
7 Other animal products
0.15 0.12
8 Cattle 0.34 0.31
9 Fishery -0.05 -0.08
10 Forestry -1.17 -1.19
 Low
Sectors Skilled
Skilled
11 Mining -0.94 -0.96
12 Oil and gas -1.16 -1.19
Employment
13 Meat preparations 0.14 0.02 Effects
14 Dairy 0.53 0.40

15 Vegetable oils -1.75 -1.87

16 Processed rice -4.71 -4.83

17 Milled sugar -1.88 -2.00

18 Other food preparations -0.09 -0.22

19 Beverages and tobacco 4.69 4.55
20 Textile and garments -0.88 -1.02
 Low
Sectors Skilled
Skilled
21 Wood products -1.54 -1.68
22 Paper and publishing 0.15 0.01
Employment
23 Leather -0.85 -0.99 Effects
Chemicals, rubber and
24
plastic -0.78 -0.92
25 Petroleum and coal
0.39 0.25
Non-metal mineral
26
products 0.36 0.22
27 Metal products
0.99 0.85
28 Machinery products -1.28 -1.42
29 Electrical products -1.48 -1.62
30 Transport equipment 16.63 16.44
 Low
Sectors Skilled
Skilled
31 Other manufacturing -0.53 -0.66
32 Construction 1.4 1.24
Employment
33 Fuel, electricity and water 0.07 -0.07 Effects
34 Transport services
0.2 0.01
35 Trade
0.26 0.07
36 Communications -0.05 -0.19
37 Financial intermediary
0.18 0.04
Public administration,
38
education and health 0 -0.14
Real estate and
39
commercial services -0.25 -0.39
40 Rest of services -0.09 -0.23
 Employment Effects
Effects reflect the reallocation of labor (skilled
and unskilled) across the 40 industries.
There is full employment.
Model is does not inform if AEC creates new
jobs or reduces unemployment.
 Empirical Assessment (1)
ILO studies on trade liberalization and
employment in early 2000s failed to provide a
clear picture.
Successful cases: China, India and Malaysia
the expansion of trade led to increases in
employment
driver: growth of export oriented industries
 Empirical Assessment (2)
Less successful cases: Latin America, e.g. Brazil
and Mexico
Manufacturing employment has either stagnated
or declined.
Low skilled workers tended to lose jobs.
Attributed "to unfavourable initial conditions (e.g.,
extremely unequal distribution of assets),
problems of macroeconomic management and
overdependence on external resources, but more
work is required to develop adequate insights."
Why Unemployment Stagnated
Trade costs in export markets
Importing firms are likely to respond faster to
trade liberalization than exporting firms.
Economy lose jobs faster than gain them.
Labor market transaction costs
Workers looking for jobs
Firms looking for workers
Need for jobs sensitive models
Conventional CGE models are full employment
and zero transaction costs.
Firms are homogeneous, when in reality they
differ in productivity (Melitz, 2003).
Labor markets have search costs. It is possible
to have persistent unemployment (Mortensen
and Pissarides, 1999).
 Possible Improvements
Export markets in the model are slapped with
trade costs.
Trade costs
reduce export volumes of existing firms; or
Prevent new firms to enter the markets.
When jobs are lost in the import substituting
industries, export sectors fail to absorb them
fast enough, causing unemployment.
 Message
If trade costs in the export sector are reduced,
jobs lost through import liberalization are
absorbed faster by export oriented industries.
What does it take to do that?
 Coordinated action of small
and medium investors
Information on market access opportunities is
unevenly distributed.
Business firms with access to such information
may invest to export a given product if the
tasks entailed are few and the whole
investment not lumpy.
Generally, to realize market opportunities the
coordinated investments of small and medium
business firms along the chain is required.
 Preliminary Development Follow Up

I like
it! Implementa-
Draft road Road map
map validated tion plan
Investment Obligations Monitor/anal
opportunity and benefits; yze shocks
assessments Rules of the Adjustments
(pre- chain agreed to the road
feasibility of upon map
businesses Agreements Keeping the
needed in enabled alliance
the value together
chain)
 Who can be the
sponsor/leader?
One with the greatest stake in the
organization of the value chain.
Sponsor organizes, makes a good case for the
viability of the chain in order for other chain
participants to come in, and invest.
 Policy Interventions
Public sector
may initiate the formulation of the draft road
maps
may help organize meetings in the development
state, facilitate negotiations
May invest in drafting agreement template
Act on the policy bottlenecks/public good/shared
facilities required by the chain
May assist in training participants of the chain
 CSOs
May assist in the organization of the farmers
especially in A&F industries
May assist in training the participants on the
obligations/benefits/rules of the chain
May be tapped by the chain participants in
providing management services for a fee
As third party managers may analyze the impact
of unanticipated shocks to the alliance and
identify solutions/adjustments to the agreement
 Concluding remarks
Outward not inward looking!
Losses in jobs in import competing industries can be more than
replaced with more exports.
More competition, less protection!
Our sector gets more and better ideas how to become more
competitive.
Public sector will be more pressured by constituents to deliver the
right policies and assistance.
More self-reliant, less expecting public sector assistance!
Doing business together not separately!
Farmers and SMEs need to cooperate to make the value chain happen.
Disadvantages now can become strengths in the future.
Except for products that we do not have any resources to produce,
products can be improved to become internationally competitive.
Thank you.

Ramon Clarete
BSP UP Centennial Professor of Foreign Trade
School of Economics
University of the Philippines
ramonclarete@econ.upd.edu.ph