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East Asia Forum

Vietnam: the beginning of another economic transformation?

Author: Doan Hong Quang, World Bank Consensus-based policy making is a salient feature of Vietnam, where important decisions are collectively made.   Consensus is needed not only for the formulation of a reform vision but also for the elaboration and implementation of this vision. Doi Moi , the most successful economic reform to date, would certainly not have occurred in 1986 if no consensus were reached at the VI Party Congress. A series of events in 2011 indicate that a vital consensus for the acceleration of economic reforms has been attained. Vietnam’s first major economic event for 2011 was the Communist Party Congress held in January, which set out Vietnam’s development strategy for the next 10 years. Like its predecessor, the 2011–2020 Strategy adopted at the Congress places great emphasis on rapid economic growth, with a target of 7–8 per cent average annual GDP growth over the next decade. The strategy puts increased attention on the quality of growth, including targets on macroeconomic stability and requirements for clarifying the role of the state in a market economy. Nevertheless, the ambitious quantitative growth target suggests a continuation rather than a fundamental break with previous strategies. But events took a significant turn just a few weeks after the Congress. In late February the government issued Resolution 11, aiming to restore Vietnam’s macroeconomic stability and cool down an overheated economy. Specifically, the resolution sought to address high levels of inflation, tension in the foreign exchange market, high nominal interest rates and declining foreign exchange reserves. The implementation of Resolution 11 remained a top priority in the government’s agenda throughout 2011, and reviews of its implementation continue to take place regularly. Resolution 11 represents a decisive switch from growth to stability. For the first time, there is an official government policy document that completely neglects the term ‘growth’ in its targets. Its longevity signals a significant change in the mindset of Vietnam’s policy makers. Signs of a radical shift in economic strategy became more evident when the new administration came into power in July. Several workshops and focus group discussions were held to facilitate policy dialogues regarding the restructuring of Vietnam’s economy to improve efficiency and competitiveness. From this process, consensus was reached on Vietnam’s strategic development priorities, identifying major areas for reform in the coming years. This consensus argues for radical transformation in three areas: state-owned enterprises (SOEs), the financial sector and public investment. The need for reform was also officially documented in the Socio-Economic Development Plan (SEDP) for the period 2011–2015, which was approved by the National Assembly in November. Following these events, Vietnam recorded good economic growth in 2011, with an estimated rate of GDP growth at 5.8 per cent. Exports performed very well, increasing by 33 per cent despite a significant decline in global demand. This robust GDP and export growth prevailed over a significant contraction in fiscal and monetary policy, and Vietnam’s strong export performance contributed notably to the reduction of trade deficits and the foreign exchange market’s stabilisation. The rate of inflation also slowed in the last four months, largely due to the implementation of Resolution 11. The adoption of Resolution 11 and the SEDP in particular indicate that Vietnam has achieved consensus on accelerating market-based reforms in ‘difficult’ reform areas, namely SOEs, the financial sector and public investment. The recent release of an ambitious proposal for SOE reform through to 2020, developed by the National Steering Committee for Enterprise Reform and Development, provides further evidence of this consensus. According to the proposal, about 44 per cent of the remaining 1300 full SOEs will be equitised in the next four years. In this context, 2012 will be a very challenging year for Vietnam. The country still has to deal with an overheating economy, and inflationary pressures remain a genuine threat to the country’s economic stability. The banking sector is vulnerable, with a rising share of non-performing loans resulting from a long period of extraordinary credit growth. Challenges also lie in transforming the SEDP’s vision into specific actions. The plan calls for a fundamental restructuring of the economy, and while many agree on the vision of the reform, the formulation of a feasible action plan will take time, owing to the likelihood of resistance from economically strong interest groups. The Vietnamese government is developing a detailed action plan for its ambitious restructuring strategy. It is expected that this plan will be approved by the end of the first quarter of 2012. The timeframe looks very ambitious as consensus for detailed actions still needs to be built. But there is a significant factor which may speed up the implementation process: while the market economy was an unfamiliar concept in previous times, it now receives strong support from the vast majority of Vietnamese people. Dr Doan Hong Quang is a Senior Economist at the Poverty Reduction and Economic Management Unit , World Bank, Vietnam.  This is part of a special feature:  2011 in review and the year ahead . 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Thailand in 2011: a year of surprises

Author: Pisit Leeahtam, Chiang Mai University After facing two violent street protests in the last two years, Prime Minister Abhisit Vejjajiva’s coalition government started 2011 in relative calm. The then-opposition Pheu Thai Party was without a visible leader, and many saw the red shirts as still suffering from the May 2010 violence and thus unlikely to stage another street protest. In contrast, Abhisit maintained strong royalist and military support, and was accepted by the middle class and elites. The business environment was favourable as activity picked up strongly after Thailand’s political turmoil and the global financial slow-down. Agricultural output and tourism had improved, and consequently labour demand surged to the point of engendering a widespread shortage in both skilled and unskilled labour. The global food crisis and demand for commodities helped boost prices, and thus farmers’ incomes. Much of the government’s extra-budgetary spending from the 2009 stimulus package was also ready for cash disbursement. Conditions seemed favourable to call the general election, which was due to take place by the end of 2011. But the government had failed to address a basic economic problem with widespread social impacts — price hikes in food and commodities, and a shortage of key supplies for households. To win grassroots support, the Abhisit government resorted to populist measures such as price controls, subsidies and wage increases. The opposition seized this opportunity to accuse the government of mishandling supplies, and highlighted Abhisit’s inability to prevent corruption within his government. As inflation surged, the central bank increased the policy rate in every Monetary Policy Committee meeting from mid-2010. Abhisit kept his word and declared an early house dissolution in May. He believed the general election could move the country forward and provide him with a strong governing mandate. The Democrats had underestimated Thaksin’s grassroots popularity. Under the unofficial leadership of Thaksin Shinawatra — abroad since 2008 due to his self-imposed exile — the Pheu Thai Party won a landslide victory at the 3 July general election. Despite the divisive outcome, most Thais have embraced the election result in order to move the country forward . Yingluck Shinawatra, Thaksin’s younger sister and a political novice lacking in public administration experience, became the country’s first female prime minister.  Thaksin and his ex-wife rewarded his loyal supporters with ministerial and other political positions. The cabinet thus consists of many inexperienced ministers. Many red shirt leaders also came to occupy government office. Reshuffles and appointment of Thaksin’s close ties have been made to strengthen Thaksin’s grip on the bureaucracy. The government has made immediate move to allow Thaksin’s return — without threat of imprisonment. The attempt to obtain Thaksin a royal pardon failed, although certain ministers have suggested there will be further attempts to grant him amnesty under the general reconciliation agenda. The new foreign minister has also returned Thaksin’s passport.  The first 100 days under Yingluck have left some unconvinced of her ability to lead, despite an initial honeymoon period. Populist campaign promises were put into action, including temporary exemptions from contributions to the oil fund; salary increases for state officers; an increase in the minimum wage to 300 baht (US$9.60) per day; a minimum salary for bachelor’s degree holders of 15,000 baht (US$480) per month; a reduction of corporate income tax; 0 per cent interest on car and housing loans for first-time buyers; and the rice pledging scheme’s re-introduction. Skeptics, business entrepreneurs and intellectuals voiced strong concerns that, if implemented, these populist policies could abruptly erode the country’s competitiveness and weaken long-term fiscal health. But their dissent has had little impact on the government’s actions. Sadly, Yingluck received an unaffectionate welcome from nature, as the country faced its worst floods in decades , covering one-third of the country. Agricultural and industrial estates in many provinces were severely damaged by the prolonged flood. Over one million households were inundated. Production chains in non-flooded areas were also disrupted. Output and export are adversely affected. Growth was revised to slightly over 1 per cent for 2011; and the Bank of Thailand, in its latest meeting on 30 November, decided to cut policy interest rates for the first time. The inefficiency of flood relief operations has been severely criticized, and some have also alleged that corruption threatens the government’s flood-relief measures. This discontent could shorten Yingluck’s tenure. The flooding’s impact on the economy is still unclear, but could be as significant as the damage experienced during the financial crisis in 1997. The floods will certainly weaken the country’s ability to export during the next few quarters, and investors may review their investments in the flooded region. The euro crisis could further soften export demands and lessen the flow of European tourists, reducing Thailand’s ability to generate income and thus tax revenue. The government undoubtedly needs huge budget expenditure to cope with the country’s flood victims and to bolster capital investment in the flooded region. The government’s challenge is now to chart the expenditure programs for 2012, while also preserving fiscal integrity. Pisit Leeahtam is Dean at the Faculty of Economics, Chiang Mai University, and was formerly Deputy Minister of Finance in Thailand. This piece is part of a special feature series: ’2011 in review and the year ahead’. Where is Thailand heading? Uncertainties in Thailand Thailand: the end of a year of political troubles

China: will 2012 be a replay of 2009?

Author: Yiping Huang, Peking University China’s economic developments in 2011 closely resembled those of 2008: over-heating at the beginning of the year; moderating due to policy tightening around mid-year; and decelerating as a result of external recession before year’s end. But 2012 will probably not be a replay of 2009, as neither a hard landing nor a sharp rebound look likely this year. GDP growth may slow from 9.1 per cent in 2011 to 8.1 per cent in 2012 — with softer external demand and weaker residential investment — and inflation could ease from 5.5 per cent to 3.2 per cent. Consumption will probably play a greater role in the coming year, and both monetary and fiscal policy should be modestly expansionary. Key risks for China include deeper recession of the world economy and a disorderly correction of the housing market. Currently, China is suffering from a range of economic difficulties, which have fuelled fears of a hard landing. For instance, the number of small and medium enterprises (SMEs) declaring bankruptcy is growing rapidly, with several high-profile cases widely reported in the media. The flow of funds into private lending has been disrupted in certain areas. House prices declined for a third month in November, with potentially significant implications for investment growth and asset quality. Local government investment vehicles, with total liabilities of at least 10.7 trillion yuan (US$1.7 trillion), find it difficult to repay loans when they are due. And the recent expansion of shadow banking transactions may also cause risks for the financial system. But these factors are unlikely lead to a hard landing of the Chinese economy for at least three reasons. First, the changes have mainly been caused by policy adjustments, such as macro-policy tightening and housing restrictions. Some changes, such as the correction of property prices, may be necessary in order to facilitate healthy development in the future. If the situation deteriorates sharply, the government should be able to reverse the policies quickly. Second, these problems have not yet developed into systemic macro risks. Despite an increasing incidence of bankruptcy, for instance, the SME sector as a whole is still growing steadily. Also, the widely reported collapse of private lending activities remain isolated, concentrated largely in Wenzhou city of Zhejiang and Eerduosi city of Inner Mongolia. And third, balance sheets are still quite healthy for households, banks and the government — which should underwrite resilience even if the economic situation deteriorates. Total household borrowing is below 18 per cent of GDP, less than the value of households’ annual savings. If property prices decline modestly, households will not be forced to deleverage. And given the banks’ average non-performing loan ratio is at 2 per cent and the reserve requirement ratio (RRR) is at 21 per cent, some deterioration of credit quality is unlikely to make the banks dysfunctional in the near future. Finally, public debts are only 17 per cent of GDP in China. If all contingent liabilities are included, they could amount to nearly 70 per cent of GDP. But the government still has room to use fiscal resources to contain domestic risks and support economic growth. So based on current trends, 2012 should see a soft landing in China. Affected by a sluggish external economic environment, export and import growth will likely halve to 9.8 per cent and 12.8 per cent, respectively. Reduction in net exports could reduce GDP by 0.4 percentage points. Of the three key components of fixed-asset investment, manufacturing investment is relatively more resilient and infrastructure is more or less a function of government policy. Uncertainty surrounds residential investment, which is likely to slow significantly in the coming year, following sharp adjustment in both property prices and transaction volumes. Despite this, residential investment should continue to grow in 2012 — albeit at a slower pace — due to large development projects, ongoing construction and the expansion of public housing. Domestic consumption will be key to maintaining the economy, although the pace of its expansion should also moderate. In recent years, retail sales have consistently outperformed GDP. But the GDP-by-expenditure data continuously show declining consumption, due to reporting errors in household survey data, such as the under-reporting of income and household spending. Estimates combining information from both GDP by expenditure and retail sales suggest a turning point in 2007, after which consumption’s share of GDP actually picked up steadily. This is consistent with improvements in the social welfare system and a rapid growth of wage income in recent years. The authorities have become vigilant against downside risks, evidenced by the recent adjustment of the reserve requirement ratio. But policy makers are concerned about a premature and aggressive easing of policies, given what might be considered ‘overstimulation’ three years ago. Four more cuts to the RRR and a slight increase in fiscal deficit can also be expected throughout 2012. The purpose of RRR adjustment is to stabilise liquidity conditions, instead of stimulating growth, given the steady slowing of China’s money supply. Although a cut to the policy interest rate is not predicted, the chance of rate cuts could rise significantly if the global economy falls into deeper recession or the correction of the housing market becomes disorderly. Yiping Huang is Professor of Economics at Peking University and Professor at the China Economy Program , the Australian National University. He is also Chief Economist for Asia at Barclays Bank, Hong Kong. Russia and APEC 2012: imaginary engagement? Chinese leadership: The challenge in 2012 India faces an ugly environment in 2009

Beating back India’s retail Luddites

Author: Rajiv Kumar, FICCI The Luddites have won for the moment, with their recent protests following the Indian government’s decision to allow FDI in the retail sector. A mere 10 million owners of traditional and self-organised retail and wholesale trade have held a country of 1.2 billion people to ransom and thwarted progress. Their pyrrhic victory was achieved by evoking the fear of 40 million people associated with the sector, suggesting they would be thrown out of jobs and lose their livelihoods. This is a gross misrepresentation of facts. It is yet another demonstration of how untruths can triumph when repeated often and loudly enough. India’s retail sector is destined to almost double in size in the next 10 years simply by keeping pace with growth — and with such high levels of growth , there is room enough for everyone. Those who oppose the entry of FDI in India’s retail trade, thereby preventing the sector’s modernisation, are yet to explain how an expansion in business from US$450 billion to an expected US$840 billion will result in the death, demise, destitution and deprivation of this most resilient and intrepid group of traders. A greater contradiction could not have been imagined, and can come about only in India where competitive populism seems to have trumped any rational discourse. The other fear being purposely promulgated is the idea that India will go back to being a colony of foreign powers. This is done by resurrecting the ghost of the East India Company, which entered India in 1612 by asking for a trading concession from Emperor Jahangir. Those evoking such fears cannot be serious in arguing that India in 2011 is as vulnerable, divided, weak and inept as it was four centuries ago. India today is becoming a global power. It is actively striving for a permanent seat on the UN Security Council, and others are supporting it in this endeavour. A large number of developing and emerging economies look toward India as a model for their own development. In complete contrast to this positive sentiment, there are those who would have us believe that foreign retail stores — selling food, toiletries and assorted merchandise — can outwit, outthink and outgun India’s leadership and elite. This reflects a very low opinion of Indian abilities. Can a country whose own people have such a poor opinion of themselves really rise to assume global responsibility? Can the BJP, avowedly a political party with strong nationalist sentiments, not see the stark contradiction in this fear of the foreigner and their exemplary nationalism? Indians have to show the world — and more importantly prove to themselves — that they can determine their own destiny. This will not be achieved by denying the progress that can come from working with foreign investors, but by acting with sagacity, foresight and resolve when and if foreign investors diverge from national priorities. Those who have opposed the entry of FDI in multi-brand retail have done so without recognising that it is a sector dominated by a cash economy, with non-accountability and poor-to-horrible working conditions. The same class of traders, which is being pampered with all the political attention, does not bat an eyelid while cutting regulatory corners and flouting all rules and regulations — of which there is a plethora. These measures are largely meant to be ignored, and are used predominantly to generate rent for an army of government inspectors. Perhaps these features of the unorganised retail trade make it attractive to those who would rather keep India’s cash economy and the country’s young people trapped in low-productivity and insecure jobs. It is a real pity that the otherwise active civil society and consumer welfare organisations choose to ignore the poor working conditions and anti-consumer welfare aspects of the unorganised retail sector. It is also a pity that farmers’ organisations have not come out more strongly in favour of large-scale organised retail trade which will give them higher returns, better terms of trade and greater access to better farming practices. The lesson from this unfortunate episode is that it is important for those who are advocating reforms for greater liberalisation and globalisation to also better organise themselves and take the trouble to present their case to the public. The setback to introducing FDI in retail trade strongly demonstrates that reforms can never be undertaken by stealth. A public case has to be built and propagated strongly to push back the Luddites. Dr Rajiv Kumar is Secretary-General of the Federation of Indian Chambers of Commerce and Industry . An earlier version of this article was originally published here in the Hindu Business Line.  Is China or India ageing better? Can India and America up their investment game? India after the elections

Russia and APEC 2012: imaginary engagement?

Author: Kirill Muradov, HSE With the conclusion of the APEC meetings in Honolulu in November, another yearly cycle is about to draw to a close. Soon all eyes will turn to Russia as the next host, with the 2012 summit scheduled for early September in Vladivostok. Leading APEC will be Russia’s most significant multilateral undertaking since hosting the G8 in 2006. Observers are curious to see what a Russian agenda will entail and what goals will be set for APEC in 2012. Adding to this significance, APEC is the first — and only — major Asia Pacific forum where Russia can hold the chair. The WTO Ministerial Conference is expected to confirm Russia’s accession to the organisation before the year’s end. By securing WTO membership just prior to hosting APEC, Russia appears to be taking a big step toward fully fledged integration into the global economy. With strong support from the US and the European Union, accession to the WTO will finally enable Russia to speak the common language of trade liberalisation with its Asia Pacific partners . Yet there is evidence to suggest that Russia may be unlikely — or unable — to fully capitalise upon the benefits that chairing APEC provides the host economy, partly as a result of Russia’s weak economic engagement with the Asia Pacific region. First, Russia is not an intrinsic part of the region’s complex production networks, also known as supply chains. Unlike many other APEC economies, Russia does not add value to the variety of manufactured goods circulating throughout the region. Accordingly, its trade agenda is limited to boosting exports of raw materials and energy products directly to consumer countries, primarily China, the US, Japan and South Korea. Russia’s role in supporting sophisticated supply chains throughout the Asia Pacific in the form of services trade or investment is also negligible. In other words, Russia is not really a part of the de facto economic integration in the region. Second, Russia is excluded from de jure economic integration in the form of trade agreements in the Asia Pacific. Although Russia has never explicitly articulated its trade policy, a set of old-generation FTAs exists with all Commonwealth of Independent States (CIS) members. Outside of the CIS, FTAs are largely ignored as a trade policy tool. Only recently in 2010 did Russia begin to show interest in FTA negotiations with the European Free Trade Area, made up of Iceland, Liechtenstein, Norway and Switzerland; and in early 2011, Russia started FTA negotiations with New Zealand. The Russian government perceives both of these endeavours as ‘pilot negotiating projects’. A feasibility study of an FTA with Vietnam is also in progress but the expected outcome is unclear. APEC economies may expect announcements of Russia’s intention to negotiate more agreements in 2012, but further opening up of the Russian market to the industrialised economies of the Asia Pacific may prove difficult. Finally, throughout its 13 years of APEC membership, Russia has failed to clearly outline the economic interests it wishes to pursue with its regional APEC partners. Nor has it utilised numerous APEC opportunities to articulate its strategic trade vision. This is well indicated by its limited participation, and lack of submissions, to APEC committees and groups, including an indifference toward the agendas of important APEC fora such as the Economic Committee and the Committee on Trade and Investment. The only APEC forum with which Russia has recorded engagement is the Counter-Terrorism Task Force, further indicating that Russia’s participation seems not to be driven by economic considerations. Consequently, Russia will likely focus on a number of more narrowly defined initiatives in drafting the 2012 APEC agenda. Russian President Dmitry Medvedev’s remarks in Honolulu and a recent APEC meeting in St.Petersburg suggest the topics of interest will be energy, transport and food security. Russia apparently sees APEC as an opportunity to assert its role as a premier energy supplier, a transport ‘bridge’ between the Asia Pacific and Europe and a competitive food exporter to the region. This self-perception is not new and rests partly on domestic assumptions that the Trans-Siberian Railway and the Northern Sea Route will be feasible alternatives for commercial cargo travelling between the Asia Pacific and Europe. In order to fulfil at least some of these ambitions, huge investment in the physical infrastructure of Russia’s Far East is required. Translating these complex and mostly unilateral interests into the APEC language of concerted multilateralism will require a lot of creativity. In the absence of any real business interests to fuel the agenda for the Asia Pacific , APEC 2012 may exemplify Russia’s imaginary engagement with the region. Hence, APEC deliverables for next year are likely to draw substantially on the contributions of the previous chairs — Japan and the US. There is no strong reason to expect that Russia will seize the opportunity and reinvent itself as a contributing actor in the region. The underlying fact is that Russia remains outside the Asia Pacific’s real process of economic integration. Kirill Muradov is Research and Education Programs Coordinator at the International Institute for Education in Statistics, Higher School of Economics , National Research University, Moscow. An earlier version of this article was first published here on the East-West Center website. Russia in Asia and the Pacific Institutional architecture in Asia: Challenges for the US and Russia APEC to tackle the Doha round?

Pakistan–United States relations at the brink

Author: Alicia Mollaun, ANU This year will be remembered as annus horribilis for Pakistan–United States relations. CIA contractor Raymond Davis kicked off the downward slide when he gunned down two Pakistanis in Lahore, creating an enormous diplomatic immunity circus, which saw the media, politicians and even President Obama entering the fray. Next, ‘the 2 May incident’, as Pakistanis refer to it, or the CIA covert operation that killed Bin Laden , pushed relations to the brink, and many thought it couldn’t possibly get any worse. But it did. On 26 November, NATO forces accidently killed 24 Pakistani soldiers in Mohmand Agency. Pakistan’s Foreign Minister said the attack ‘demonstrated complete disregard for international law and human life and was in stark violation of Pakistani sovereignty’. Pakistan–US relations are on life support . Pakistanis don’t trust the United States and Americans don’t trust Pakistan. Recent public polling showed that 55 per cent of Americans view Pakistan as an enemy and 69 per cent of Pakistanis view the United States as an enemy. Malaise doesn’t just exist at the ‘street’ level. Adm. Mike Mullen, former Chairman of the Joint Chiefs of Staff, told a Senate inquiry that the Haqqani network was a ‘veritable arm’ of the ISI (Pakistani intelligence). In Pakistan, well-known cricketer turned political candidate, Imran Khan led a two-day sit-in to block NATO supply routes in protest against the NATO strikes that killed Pakistani soldiers. Can the downward spiral be reversed in 2012? One key thing that will drive relations (again) in 2012 is Afghanistan. Afghanistan has become too central to the relationship between Pakistan and the United States. While ideally the US and Pakistan should conduct a bilateral relationship without a continual focus on Afghanistan, the unfortunate reality is that the US desire to eliminate terrorism and get out of Afghanistan militarily means that Pakistan has become a lever of US policy in Afghanistan. The United States needs Pakistan to achieve a political settlement in Afghanistan that will earn it a modicum of respectability. One of the key things highlighted by Pakistani academics when talking about Pakistan–US relations is that both parties agree on what needs to happen to achieve a stable, secure Afghanistan, but the mechanisms on how to achieve these goals differ greatly. Pakistan’s strategic calculus is at odds with the US’. The military has hedged its bets using the Haqqani network and the Afghan Taliban to counter the future US withdrawal and India’s increasing influence in Afghanistan. At the same time, the US calls publically for Pakistan to sever all ties with the Haqqani network and conditions military and civilian aid on terrorism cooperation. Pakistanis complain loudly that the United States simply doesn’t understand Pakistan. That is probably true. Few understand how much the ‘threat’ of India colours Pakistani perceptions of the world. Pakistanis genuinely fear being encircled by India and are anxious that Afghanistan too will fall under India’s influence — hence the support for militant networks. So who will have to make more concessions to the other? In 2012, it is likely to be the United States. As 2014 draws closer, the onus falls on the US to work with Pakistan constructively because soon, the US will need Pakistan more than Pakistan needs the United States. Pakistan is too important to ignore and needs to be viewed through a new strategic lens. Moving forward, Pakistan is not only crucial to a political settlement in Afghanistan, but is a state with nuclear weapons, a strong army, weak democracy, as well as an economy that is unable to provide opportunities for an ever-increasing and youthful population. The problems facing Afghanistan have defined the last decade in the region, Pakistan will define the problems of the region over the next decade — and all policy makers need to be congnisant of this. Alicia Mollaun is a PhD candidate at the Crawford School at ANU and is based in Islamabad. Osama Bin Laden, Pakistan and the United States Pakistan: US losing hearts and minds in the battle against terrorism United States and China: Will positive relations endure?

APEC’s challenge is no longer at the border

Author: Andrew Fragomeli, University of Western Australia Barack Obama championed high-quality growth as a key focus of this year’s APEC Summit in Hawaii. But this goal can only be realised if APEC members choose to jump the hurdle of behind-the-border barriers. Official tariff barriers within APEC have reduced dramatically; an APEC report noted the average applied tariff rate in APEC’s industrialised economies had fallen to 3.9 per cent as of 2008. But plenty of work still confronts APEC leaders — expanding trade and investment, and boosting trade flows are each a matter of urgency. APEC economies have also shown unbalanced growth and are still affected by the sluggish rate of world economic recovery . Despite this present context, decisive action — and in some cases dramatic reform — can put APEC economies on a faster path to recovery and combat some odd paradoxes, too. Some developing economies are generating excess domestic savings, which are being diverted and invested overseas in industrialised economies. This paradox arises from unseen, informal barriers, known as ‘behind-the-border’ barriers. APEC members need to address this reality if they want to expand trade and investment. Behind-the-border barriers are increasing costs, increasing risk and discouraging competition. And reducing tariffs to zero per cent serves little purpose if behind-the-border barriers prevent investment and trade, and thus restrict poverty-reduction efforts. Infrastructure reform can help remove such barriers. This includes reforming large monopolies in the electricity sector. In APEC, around 35–40 per cent of members have made little to no progress in removing barriers to competition throughout their electricity provision. But these necessary changes are too important to be ignored. Inability to reform can impede investment in critical infrastructure and the adequate provision of electricity, with the ultimate losers being consumers and businesses, while jobs and trade also suffer. In light of these hazards, leaders are restructuring, privatising and improving regulatory oversight. Structurally unbundling competitive activities from natural monopoly elements encourages competition and investment. Competition is often the catalyst for innovation and productivity increases. Conversely, monopoly situations have allowed state enterprises to neglect innovation or cost retention. Politicised operation of state enterprises has also seen electricity being purposely under-priced, leading to underinvestment in some cases. A World Bank report shows that intentionally under-priced electricity imposed a US$90 billion fiscal burden on developing nations’ budgets in the 1990s. But the high costs of provision are eventually passed onto consumers and businesses in such a scenario. APEC members that have pursued reform have seen significant benefits. For instance, labour productivity and service quality has improved in Chile, Peru and New Zealand. The performance of existing-generation plants has improved, and wholesale prices have fallen. Retail prices now better reflect the true costs of production. But widespread reform has been blocked for various reasons. First, influential unions may oppose the sale. Second, there could be a sentimental attachment or communities may fear the sale of public assets. Or third, the government may lack the technical capability or insight to successfully carry out complicated reform. Australia is an APEC member that has set a fine example in reforming electricity infrastructure provision. There are elements of partial to full reform in most of the country’s states and territories, except the Northern Territory. This includes unbundling the supply chain and the introduction of competition, which has led to greater investment in the industry. This sequencing and experience of reform should be shared with other APEC members. Short-term politics should not prevail over the long-term interests of APEC, its people and its future. Andrew Fragomeli is a student at the University of Western Australia and was a Global Voices delegate to APEC 2011.  APEC meeting: New policies for Indonesia? India’s political economy: classic strategies no longer apply Why America no longer gets Asia