Understanding Our Saving Capacity, Competitive Positions of Exports in Dynamic Asia, Welfare Impacts

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Understanding Our Saving Capacity,
Competitive Positions of Exports in Dynamic Asia,
Welfare Impacts of Asias FTAs FDIs, and
Shifts in Development Paradigm (for
Informal ODA Discussion Meetings in Jakarta,
Indonesia)
Prof. Shigeru T. OTSUBO Advisor
ExtraordinaryTokyo Task-Force for Japans
ODA Strategy toward IndonesiaThe Government
of Japan
ProfessorGraduate School of International
DevelopmentNagoya University
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Is the Doomsday Imminent ?
Determinants of the (private) saving
ratio Income (level), rates of return,
uncertainty, domestic/foreign borrowing
constraints, financial depth,fiscal policy,
pension system, income/wealth distribution, and
demographics
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Is the Doomsday Imminent for Indonesia?
The pattern of Indonesias age dependency ratio
lags behind that of East Asia (average) by as
much as 10 years, but it will bottom out in 2015
and the rising trend will be visible by 2025 .
If Indonesia can mobilize her own savings
..Targeting the year 2025 for major development
outcomes will be a right strategy.
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Indonesias Demographic Trends
So far, Indonesias population share of ages 65
has been only gradually rising, while that of
young generation ages 0-14 has been declining
rapidly..
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Japans Current Account
BalanceJapans CAB movements are still cyclical,
but if 1) TB surplus is on a shrinking trend,
and 2) Income Balance surplus continues to expand
..
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Japans Trade
Partners In early 1990s, Asia replaced the US as
Japans top export destination and as her top
import origin .. Exports
Imports

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• Re-Importation by Japanese Firms Operating
  Overseas
• The share of re-imports by Japanese firms in
  total imports has reached 15 mark at the end of
  1990s and it continues to increase.
• More than 80 of those re-imports are from Asia.

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Development Stages Theory of BOP (cf. Crowther,
1957)
Indonesia Malaysia Korea
Singapore Japan Thailand
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Export Product Share in 2000
Pulp
Coal Vegetable oil Data processing mac.
Furniture
Petro Gas Wood Textile
Radio Telecom Footwear
Export Potential Tables are provided at SITC
3-digit level in an Appendix.
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Indonesias Shifting Comparative Advantage in Asia

• Revealed Comparative Advantage RCAij ( Xij
  / Xi ) / ( Xj / X )
• RCAgt1 or RCAlt1
• 1) RCA indices are computed for East Asian
  economies using UN/COMTRADE (WB Version) SITC
  3-digit level (269 lines) data,for 1985, 1990,
  1995, and 2000.
• 2) Then correlations among RCAs for Asian
  economies are computed.

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Looking at the competitive structure in Asia from
Indonesias point of view1) Indonesias export
structure continues to be complementary to those
of Japan, Korea, and Taiwan.2) Indonesia faces
stiff competition with Malaysia in exports, and
this competition has become stiffer.3)
Competition with Thailand and Philippines has
been also keen, and that with Thailand has become
keener.4) Competition with Singapore has been
decreasing due to (forming a growth
triangle?)5) China (w/ or w/o Hong Kong) emerges
as a competitor for Indonesia.
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Looking at the competitive positions of economies
in Asia vis-à-vis. China1) Korea started to
position herself vs. China in early 1990s..2)
Hong Kong, Singapore, Taiwan, Malaysia, Thailand
started to position themselves vs. China in the
latter half of 1990s.3) Indonesia and
Philippines are lagging behind in this game of
coexisting with China in her emergence in the
global market.
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• The GTAP Model
• GTAP Web Site www.agecon.purdue.edu.gtap
•  
• u      The GTAP model is a multi-region
  multi-industry computable general equilibrium
  (CGE) model constructed over a database
  consisting of bilateral trade, transport, and
  protection data for economic linkages among
  countries/regions, and of input-output tables
  that represent intersectoral interactions within
  each country/region. Each industry is
  represented by a single homogeneous commodity.
  The model includes three factors of production
  labor, capital, and land. Labor and capital are
  mobile across domestic sectors, while land is
  assumed to be used only in agricultural sectors.
  Capital is traded internationally like
  intermediate inputs, while labor and land are not
  mobile across borders.
• u   Microeconomics-oriented model with incentive
  structures of economic agents explicitly modeled.
• u   Global saving-investment identity is
  preserved.
• u      WTO, WB, USDA, and EPA are among the
  active users.
• u      For further details, refer to the papers,
  ??????156?, and the GTAP web site.

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Static Impact Only
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Static Impact Only
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In the APEC region, FDI inflows had already
started to create exports (more than imports) in
early 1990s.
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Results for APEC Trade Gravity Models with FDI
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Analyzing Welfare Implications of Japans FDI
Activities in Asia
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Simulation 1 Transfer of Capital Stock under
the Assumption of Perfect Competition (CRTS) A
transfer of capital stock from Japan to nine
developing Asian economies/regions (Indonesia,
Malaysia, Philippines, Thailand, China, Hong
Kong, Taiwan, South Korea, and Singapore) is
emulated in order to assess the stock effects.
Capital stock endowments of recipient Asian
economies are augmented by 1 percent while
Japans capital stock is reduced by the amount
equivalent to a total increase in the recipients
capital stock. Without an accompanied technology
transfer, there is no distinction between
indirect investments and direct investments.
International capital mobility is assumed. The
savings rate is fixed. Simulation 2 Transfer of
Capital Stock and Technology under the Assumption
of Perfect Competition Production and managerial
technologies accompany the transfer of capital
stock. Assuming FDI flows to manufacturing
sectors and there is resultant intra- and
inter-industry technology spillover, the rate of
technology growth is augmented in all seven
manufacturing sectors (food beverages,
textiles, chemicals, metals, transport equipment,
machinery, and other manufacturing) by 1 percent.
Simulation 3 A Matching Increase in Capital
Stock by Domestic Investment-Savings
(Cofinance) Perceived higher rates of return in
industrial activities with FDI inflows prompt
domestic investors to mobilize domestic resources
(savings) to cofinance the industrial projects.
Recipient countries capital stock is further
increased by an increment in domestic investment
equivalent to the amount of the initial inflow of
FDI. This simulation is conducted on top of
Simulation 2 using the output file produced in
Simulation 2. International capital flows are
suppressed and the trade balance is fixed in
order to force domestic savings to finance new
domestic investment. The savings rate is thus
endogenized on the marginal base. Simulation 4
Transfer of Capital Stock under the Assumption of
Monopolistic Competition (IRTS) Transfer of
capital stock (Simulation 1) is repeated, but
this time, under an assumption of monopolistic
competition with scale economies in all of the
seven manufacturing sectors (food beverages,
textiles, chemicals, metals, transport equipment,
machinery, and other manufacturing).
International capital mobility is assumed. The
savings rate is fixed. Simulation 5 Transfer of
Capital Stock and Technology under the Assumption
of Monopolistic Competition Transfer of capital
stock and technology (Simulation 4) is repeated,
except that monopolistic competition is assumed
for the manufacturing sectors. Simulation 6 A
Matching Increase in Capital Stock by Domestic
Investment-Savings (Cofinance) Same as Simulation
3 except that the simulation is conducted under
the assumption of scale economies and that the
output file of Simulation 5 is used.
International capital mobility is suppressed. The
savings rate is endogenized.
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FDI is a positive-sum game, not a zero-sum game!
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Major strategic implications of the study for
Japan (FDI-supplier) are   (1) In order to
benefit from the positive-sum game of FDI, Japan
(or any FDI-supplier) should also provide a
conducive environment to attract inward FDIs.
Outward FDI alone is not likely to improve
domestic welfare (just like the case in
international trade) unless it is driven by
welfare-improving domestic causes. Also, two-way
flows in a large number of countries should
enlarge the positive sum of FDI. (2) In order
for Japan (FDI-supplier) to avoid the possible
secondary burden of a transfer of productive
resources, it should also mobilize local savings
by looking for local partners and/or raising
local funds when executing FDIs. (3) It may be
important to retain RD facilities in the
domestic market and preserve technology terms of
trade if one supplies technology abroad along
with capital.

• Looking at the results from Indonesias (or any
  other FDI-recipient) point of view
• Indonesia should promote (call back?)
  inward-FDIs.
• Intra-APEC FDIs should promote Indonesias
  exports and mitigate BOP problems.
• Technology (productivity) enhancement is the
  key.
• (3) Cofinancing (mobilizing domestic
  savings/investment together with inward-FDIs)
  will increase Indonesias welfare, even though it
  turns TOT slightly against Indonesia.

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Revolutions and the Evolution of Economic Systems
Private ownership of the means of production
Primitive Market Economy
Capitalism
Industrial Revolution
IT-driven Market Economy
Imperialism
The US economy after the IT revolution
IT Revolution
Monopoly Capitalism
Colonialism
Primitive Economy
Socialist Revolution
Informal Sector
Market-oriented
Industrialized China
Larger-scale-organization oriented
Smaller-scale-organization oriented
Transitional
State SocialismDevelopment Planning
China under Mao Zedong(Maoist China)
Linux
USSR
Socialism
Utopian Socialism
State ownership ofthe means of production
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Spending per Capita on Information
Infrastructurein 1998 (US)
Source John Gage, From Digital Divide to
Digital Opportunity Business Leaders Report for
Davos, Development Outreach, World Bank
Institute (Spring 2000).
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Structural Reform for Sustainable Growth Changing
Roles of Government, Corporate, and Household
Sectors
Self-reliance of Individuals
Expansion of Corporate Activity and Investment
Job choice society
Employment practices
Human capital investment
Corporate governance
Corporate accounts disclosure
Corporate pension (401k type)
Portfolio investment diversification
Corporate restructuring
FDI into Indonesia
IT revolution
Entrepreneurship promotion
Regulatory reform
Personal income taxation
Corporate taxation
Social security
Financial system reform
Education reform
SME policy
Labor market liberalization
Public investment reform
Information network
Budget consolidation
Administrative reform
Compact and Efficient Government
SOE reform
Local govt autonomy
Electronic government
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