Economics of The Organization ASEAN - Research Paper Example

 The organization ASEAN (Association of South East Asian Nations) is a geo political and economic body comprised of ten countries situated in the South East Asia. The organization was established on 8th August in Bangkok and the initial members were Indonesia, Malaysia, Philippines, Singapore and Thailand. Later on the other five member nations Brunei Darussalam, Vietnam, Lao PDR, Myanmar and Cambodia joined the association. By the nature of the association it can be described as a regional trading block. In 2006 the Gross Domestic Product of the region accounted for US $ 1100 billion and the value of trade of the region was US$ 1400 billion. According to ASEAN declaration the main objective of the association is to accelerate economic growth, cultural progress and social development within the region and to secure regional peace and stability through abiding by the rules for justice and the laws regarding the relationship among the countries. (ASSOCIATION OF SOUTHEAST ASIAN NATIONS) If we want to judge the success story of this association we have to find out how this regional integration has been successful in promoting trade and economic growth in the region we have to judge the performance of its member nations. However, it will take much space and time to throw light on the individual performance of each of the member nations. That's why for the sake of saving time we can randomly choose two countries of the ASEAN and we can examine the economic performance of these two for last 10 years.  Here we represent two countries Indonesia and Malaysia. Indonesia: Trade Performance in Last 10 Years: The statistics of the external trade of the last 10 years can be expressed by the help of the following table Year Export  (in $ million) Export Growth rate (%) Import(million $) Import growth rate Trade balance Growth rate of trade balance 1999 52143 - 33321 - 17922 - 2000 65403 28 43595 31 21808 22 2001 57361 -12 37534 -14 19827 -9 2002 59166 3 38340 2 20826 5 2003 64108 8 42196 10 21912 5 2004 70767 10 54877 30 15890 -27 2005 86996 23 75533 38 11463 -28 2006 103527 19 80346 6 23181 102 2007 118014 14 92381 15 25633 11 2008 128123 9 121454 31 6699 -74 Source of data: World merchandise exports by region and selected economy, 1997-2007;  Statistics Indonesia From the above table we can say that Indonesia’s performance in export has grown for the last 10 years. In the year 2000 Indonesia experienced the highest rate of growth. That export growth was mainly attributable to manufacturing good sector. The huge drive in manufacturing goods by the companies and the perfect synchronization of the public and the private sector encouraged the growth of the export earnings. The government adopted the policies for export promotion. The research and development contributed significantly to maintain the growth rate. (Juswanto and Mulyanti). On the other hand there was a substantial rise in the import expenditure of Indonesia. The main cause was the increasing in purchasing power in the hand of the people with higher level of income. The trade balance of the country improved by 22 percent. In the calendar year 2001 the Indonesian export faced a debacle. The import earning fell by 12 percent. The main fact responsible for that was the recession in American economy. As America has always provided a major demand for the Indonesian exports recession in American economy causes a global decline in the exportable products of Indonesia (“US Economic Slowdown Threatens Indonesian Export”). On the other hand due to imposition of some import duties the import also declined substantially.  However, that could not prevent the balance of trade from declining. There was a 9 percent decline in the trade balance in this period. After that Indonesia faced a sharp increase in the import expenditures in the year 2004, one of the major importable products of Indonesia is the fuel. Another important importable is the chemical goods. In the year 2004 the world economy faced a rise in the oil price. The oil price soared to its historical level US $ 50 per barrel. (Al Muhanna) That oil price hike means an inflationary spiral in the economy. As oil is the major requirement of industry, energy and transportation a rise in oil price implies a rise in the general price level (or we can say it a cost push type of inflation i.e. stagflation). As Indonesia has to import sufficient amount of petroleum for the sake of its industries the oil price hike caused a substantial rise in the import expenditure. As a consequence of oil price hike and the related inflationary pressure, Indonesia faced a 30 percent rise in the export expenditure. However, there was not a significant growth in the earnings from export products. That's why Indonesia’s balance of payment declined by 27 percent. In the year 2005 Indonesia secured a 23 percent growth in export earnings. The main factor to be credited behind that is the export promotion policies adopted by the government. In this period Indonesia experienced a massive increase in the export of non oil and gas. There was an increase in the non oil and gas export by 23.88 percent. On the other hand the import of non-oil and gas increased by 20.65 percent. That success in increasing the export earnings is attributable to the liberal policies adopted by the state to promote trade of goods and services. The policies included reduction in port charges, reducing the barriers of trade by allowing more imported machineries and providing other benefits to exporters. That removal of restriction on many imports and the oil price hike caused a rise in import expenditure by 38 percent in the year 2005. Finally there had been a decline in balance of trade by 28 percent. (Ministry of Trade) The calendar year 2006 was a record year for the trading pattern of Indonesia. The import expenditure grew by only 6 percent while the export earnings grew by 19 percent. The consequent rise in the balance of trade was 102 percent which is an astonishing fact. The import substitution policy in Indonesia was creditable for the rise in the balance of trade in the calendar year 2006. The oil price crisis in the world again shook Indonesia. The import expenditure in the year 2008 showed a huge jump. Oil price in the world reached $ 100 per barrel. Consequence was a 31 percent rise in import expenditure. Finally Indonesia ended up with a 74 percent decline in the balance of trade. Trade Policy Review After the financial crisis in 1997-98 Indonesia has been trying to recover its condition. The matter of fact is that for the last 35 years Indonesia has been gradually transforming itself from a protected regime to a free one by gradually opening it up. Earlier, it was following the trade model of import substitution based on the ‘Infant Industry Argument’ by Fredrich List. During the periods of oil crisis of 1970s and mid 1980s the Indonesian history was a transfer from the policy of inward looking industrialization to an export oriented growth. After 1998 Indonesia started to move in a path of liberalization. The transformation of a protected economy to the one of the most liberalized regime of East Asia was not an easy and short process. Along with trade liberalization there had been increased protection also especially in the case of oil. The government always maintained a high rate of tariff in the periods while the oil price hike took place. After the 1997 crisis the government tried to seek out the solution of the problem by ensuring a higher degree of integration with the rest of the world. The country integrated with the ASEAN and it started the process of free trade. The non tariff barriers were removed and it started to follow the neoclassical model of trade. The ultimate target was to adopt the reform policies. The IMF/WB prescribed structural adjustment policy was the desirable policy prescription. Though the country continued protection in some fields the ultimate goal was to liberalize the economy. The reform policies of the country has been proved to be fruitful (only except the year 2008 in which the global crisis of the crude oil price has soared the import expenditure up and they had to face a major decline in the balance of trade. However, it should be kept into mind that if we look at the statistics within the time period 1998-2008 there is no single year in which Indonesia has faced the balance of trade deficit. There is the fable of Indonesia in the process of reform. (Vanzetti, McGuire, and Prabowo) The Exchange Rate Policy: Exchange rate is the expression of foreign currency in terms of domestic currency (direct quotation) or in other words it measures the amount of domestic currency that one unit of foreign currency can command. Exchange rate is an important concept in the context of international trade. The balance of trade and the balance of payment are dependent upon the exchange rate. We know a depreciation or devaluation of domestic currency can improve the trade balance by expenditure switching in favor of domestic goods (granted the Marshall-Lerner Condition) and on the other hand a depreciation and devaluation causes an outflow of foreign capital as the economy loses its credibility in the global market. So the exchange rate policy should be adopted after thorough analysis. The East Asian crisis in the year 1997-98 made the exchange rate policies a highly debated topic. Indonesia was one of the highly affected countries by the crisis. In 1999, by enacting a central bank law Indonesia announced its decision to maintain a stable exchange rate either in terms of US $ or any other of the most significant countries in the global market. The new law granted the Central Bank the right to take the ultimate decision for the exchange rate. Moreover it was argued that a stable exchange rate would ensure a control over inflation. However, it was found that as the US $ became the indicator of the value of Indonesian Rupiah there had been found a volatility of exchange rate due to international fluctuation of US $. Moreover the Indonesian government, to recover from the crisis started the process of accumulation of international reserve. Actually the exchange rate policy of the country is towards the attainment of a rigid exchange rate. That was due to regain the faith of the investors. (Siregar and Rajan) International Factor Movement: International factor movement refers to the movement of labor and capital. This part is not included directly into the balance of trade but that is a significant part of the balance of payments. The factor movement includes both capital and labor. The capital mainly moves internationally mainly in the form of foreign direct investment. By signing the TRIMs agreement Indonesia becomes able to invest in other countries and the investor from any other can invest in Indonesia. Indonesia has experienced sufficiently high flow of FDI since 2000. The FDI flow has shown an increasing trend since 2005 and then it has declined in2006. On the other hand if we consider the labor migration Indonesia has experienced a migration of workers from its own boundary to Malaysia. The confrontation between Indonesia and Malaysia caused a decline in the flow of labor. However, after the peace process the migration gained its own momentum again. After 1990s a good migration network has been created between Indonesia and Malaysia. The migration of Indonesian workers to Malaysia provides some relief to Indonesia as still now there is some lack of job opportunities. (Mantra)     Malaysia: Trade Performance The trading statistics of Malaysia within the duration 1999-2007 can be given as Year Export  (million $) Import (Million $) Trade Balance Export Growth rate Import Growth Rate Balance of trade Growth rate 1999 84455 64996 19459 - - - 2000 98229 81963 16266 16 26 -16 2001 88005 73886 14139 -10 -10 13 2002 94058 79869 14189 7 8 0 2003 107405 83300 21405 11 4 51 2004 126511 105283 21228 21 26 -1 2005 140980 114625 26355 11 9 24 2006 160676 131152 29524 14 14 12 2007 176211 146982 29229 10 12 -1 2008 195700 156200 39500 11 6 35 Table source: same as the prior table From the above table we get the external performance of Malaysia for the last 10 years. In the year 2000, both import and export growth was found in Malaysia. Export growth accounted for 16 percent while the import growth surpassed the export growth and it accounted for 26 percent. The main cause was the high degree of private consumption in this period and a high level of investment depending on foreign capital and intermediary goods. (WTO) In the year 2001 the export and import growth rate remained the same (actually both were negative due to a world recession) and there had been an increase in trade balance by 13 percent. In the year 2002 Malaysia experienced a growth of 11% in the export earnings and a 4% growth of import expenditure that caused a rise in the balance of trade by 51%. This was the outcome of the government policy. This rise in trade balance is mainly attributable to some fiscal stimulus package for encouraging the domestic industry on the other hand the government did not allow the public debt for the public expenditure to grow much. In the year 2004 there was a jump in both import and export of Malaysia. The import rose by 26 percent and the export rose by 21 percent. The rise in export earning was the fruit of better research and development and the government policies to encourage export on the other hand the rise in import earning is nothing but the outcome of the global rise in the price of crude oils.  For the industries oil is a necessary thing and the oil price hike caused a massive rise in the import expenditure and hence Malaysia faced 1 percent decline in the trade balance. In 2005 the economy again recovered from the shock of the oil price hike and that caused only 9% rise in the import expenditure and the export earnings rose by 11 percent causing a major rise in the balance of trade by the extent of 26 percent. In 2006 the export and import increased at the same rate and hence there is no significant change in the economy, quite normally the balance of trade rose by 12%.  In the year the trade balance have shown a sufficient rise even in the situation in which a global recession was found. This 6 percent rise in the import expenditure was mainly attributable to the global oil price shock also in which the price of petroleum showed a rising trend. Trade Policy in Malaysia: Like Indonesia and the other members of ASEAN, Malaysia has also shown a path of economic reform especially after the economic crisis in 1997-1998. The government of Malaysia has adopted different policies of reform and economic liberalization by allowing the private sectors to precede more in the path of growth. Moreover, Malaysia has joined the regional cooperation in which the country joined the East Asia and Pacific. In this organization of economic cooperation Malaysia has liberalized many commodities extremely. The reform measure adopted by Malaysia generated huge scope of trade and it has to face very minimum level of protection in various markets i.e. the process of reform has enabled Malaysia to gain more global access. In 2006 Malaysia launched a free trade agreement (FTA) with the United States. In that treaty Malaysia has made the promise to proceed with US to promote additional bilateral trade and investment. The reform measures have enabled Malaysia to have greater access in the US market. This trade would include the agricultural and manufactured product, telecommunication and financial services, supply chain among the Malaysian and American companies etc. (“2008 Policy Agenda and 2007 Annual Report of the President of the United States on the Trade Agreements Program”) Exchange Rate Policy: Malaysia, before the East Asian economic crisis, was subject to floating exchange rate regime. The exchange rate was determined by the free market operation and the demand supply factors. However, after the crisis the economists realized the need to make a suitable exchange rate policy. The exchange rate volatility due to the unexpected fluctuation in the global trade and business cycle facts may harm the functioning of the economy. The major problem of the floating exchange rate regime lies in the foreign institutional and portfolio investment. In the period of financial liberalization an unanticipated float would always cause a capital outflow and consequently a balance of payments crisis. That's why while the Malaysian government was thinking a way out from the currency crisis they thought of stabilizing the exchange rate by which they would be able to protect the economy from unanticipated fluctuation in the global market through avoiding volatility. In that ground the post crisis period Malaysia has adopted a pegged exchange rate system along with product market liberalization. Malaysia: International Factor Movement: Malaysia, also after the adaptation of economic reform process has became a lucrative destination for the foreign investors. The Malaysian economy has started to receive high amount of foreign direct investment in the recent days and there is a consequence rise in the stock of capital. Still, there is some fluctuating trend in the Malaysian economy regarding the flow of foreign direct investment since the year 2000. From 2001 to 2002 there had been a sharp rise in the flow of FDI in Malaysia. In the next year the level of FDI declined. Again we can find a huge rise in the flow of FDI in the financial year 2004. The 2005 shows a declining trend and again in the year 2006 the FDI flow rose to a high. (Malaysia) The Story of Malaysia and Indonesia: A theoretical Background: Now we consider the stories of Malaysia and Indonesia and their success. The countries can be analyzed with the help of a general equilibrium framework. The basic feature of these policies is based on the structural adjustment policies prescribed by the IMF/WB. To be more precise we can consider the basic theoretical framework of the SAP (structural adjustment policy) was given in the Mundell Fleming model of open economy macroeconomics. The main policy prescription of the famous Mundell Fleming model is based on the long run analysis. If an economy is consider which has been facing the problem of balance of trade deficit and unemployment it could take a hands off policy (i.e. the policy of deregulation by the state). In that situation by the non intervention the unemployment situation would be aggravated and hence the workers would go for new contract with the employers with some lower level of real wage. That would be reflected by decline in the price. There would be two consequences. The fall in price level would cause a rise in the aggregate demand of the economy and hence that would generate employment and the fall in the price of domestic good would be reflected through the greater competitiveness of the domestic product in the global market and hence the balance of trade would start to improve and the economy would reach the full employment equilibrium by increased aggregate demand through improved trade balance. After the economic crisis in South East Asia the countries like Indonesia and Malaysia solved their crisis in similar way. The Possible Problems and/or Constraints ASEAN Might Face in Adopting the Common Currency Optimum currency is popularly perceived as an energizer to free trade and economic prosperity. The optimum currency area theory is a branch or an extension of the fixed versus flexible exchange rate debate. A currency area is defined either as a common currency area or an area in which rigidly fixed exchange rates operate. The theories of common currency attempt to create an economic environment, in which monetary and fiscal policies can be totally relied upon, to create internal and external balance in the absence of exchange rate changes. These theories would recognize and rely upon government intervention to produce internal and external equilibrium in the region. The theories by Magnifico, Wood and others belong to the second group of currency area theory. Fixed exchange rate greatly simplifies the economic calculations and thereby a better provider of a decision making base than that of the floating rates. In a country like USA where the whole country is divided into several states, if each state starts to follow a separate currency then each currency has to be adjusted in terms of the others and fifty different exchange rates have to be maintained. That will involve time as well as resources and create a hurdle to the smooth functioning of business process as well as consumer transaction. Fixed exchange rate system enjoys a lot more advantage over the floating exchange rate system in terms of avoiding the uncertainty, confusion and calculation as well as the transaction costs. These on a whole are termed as the monetary efficiency gain. (Krugman and Obstfeld, 2004) Now the question arises whereas the EU has shown the example of successful monetary union by establishing an optimum currency area or common currency area then why the ASEAN is indifferent in adopting a common currency? If we judge the economic conditions of the members of the ASEAN it is revealed that the level of difference of the countries is very large in terms of economic development. The richest country of the union, Singapore, is subject to more than 300 times of the per capita income of the poorest Myanmar. Such a huge differential in the economic condition is a barrier towards adopting a common currency as the success of common currency area depends upon the co-movements of the economic variables of the partners. Low degree of co-movement of these variables would create instability. Moreover, to form a monetary union the countries with large difference in economic variables should adopt a freer flow of capital and labour across national boundaries. But in ASEAN if the free flow of factors is allowed that would cause a huge immigration in the economically strongest countries. It has been historically found from the financial crises in different countries whenever a country having weak banking and financial sectors have heavy dependence on foreign capital it pegs its exchange rate. In such a situation banking problem may cause an exchange rate crisis. In 1997 the financial crisis of Asia revealed the fragility of the banking system. still now the reform in banking sectors is required for those countries that have faced the crisis. That’s why before monetary union the ASEAN countries need to reform and restructure the banking system. The inadequacy of the mechanisms of reserve pooling and the absence of the regional institutions are some major constraints to form a common currency area. Moreover, the political condition of ASEAN is not fit for adopting a common currency. More political orientation and liberal viewpoint of the member nations are required. The economic gain should be thought over the politics. The required reform measures and the equality are highly required. (Madhur, 2002) Works Cited 1. “2008 Policy Agenda and 2007 Annual Report of the President of the United States on the Trade Agreements Program”, The President’s 2008 Trade Policy Agenda, 2008, retrieved on April 23, 2009 from: http://www.ustr.gov/assets/Document_Library/Reports_Publications/2008/2008_Trade_Policy_Agenda/asset_upload_file649_14563.pdf 2. Al Muhanna, Ibrahim ibn Abdul Aziz, “Oil Price Hike: Reasons and Impacts”, Arab news, 2004, retrieved on April 23, 2009 from: http://www.arabnews.com/?page=6§ion=0&article=51086&d=6&m=9&y=2004 3. ASSOCIATION OF SOUTHEAST ASIAN NATIONS, 2009, retrieved on April 23, 2009 from: http://www.asean.org/64.htm 4. International Oil Agency, Analysis of the Impact of High Oil Prices in The Global Economy: 2004, retrieved on April 23, 2009 from: http://www.iea.org/Textbase/Papers/2004/High_Oil_Prices.pdf 5. 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Rajan, Exchange Rate Policy and Reserve Management in Indonesia in the Context of East Asian Monetary Regionalism, CIES, retrieved on April 23, 2009 from: http://www.adelaide.edu.au/cies/papers/0403.pdf. 12. Statistics Indonesia, Table Export by Month, Year 2007, retrieved on April 23, 2009 from: http://webdev.bps.go.id/tabel/ 13. “US Economic Slowdown Threatens Indonesian Export”, The Jakarta Post, 2001, retrieved on April 23, 2009 from: http://www.thejakartapost.com/news/2001/02/01/us-economic-slow-down-threatens-indonesia039s-export.html 14. Vanzetti, David, McGuire, Greg and Prabowo, TRADE POLICY AT THE CROSSROADS –THE INDONESIAN STORY, UNCTAD, 2005, retrieved on April 23, 2009 from: http://www.unctad.org/en/docs/itcdtab29_en.pdf 15. World merchandise exports by region and selected economy, 1997-2007, WTO, retrieved on April 23, 2009 from: http://www.wto.org/english/res_e/statis_e/its2008_e/appendix_e/a06.xls 16. WTO: Malaysia, December 2001, retrieved on April 23, 2009 from: http://www.wto.org/english/tratop_e/tpr_e/tp180_e.htm Read More