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The Challenge of Structural Change in APEC Economies - WP 07/06

4  Impediments to Growth and Convergence in the Asia-Pacific Region

Impediments to enhancing growth and convergence in the Asia-Pacific region lie both at and behind the border. Significant progress in tariff reduction has been achieved. Exports of goods and services now make up 18.5% of GDP for APEC economies compared with 13.8% in 1989, and average applied tariffs in APEC economies have been reduced from 16.6% in 1988 to 6.4% in 2004 (APEC Secretariat, 2005). However trade reforms remain important, because significant tariff peaks still exist in some areas (particularly in areas of economic importance to New Zealand, such as the food and primary production sectors).

A number of commentators are of the view that while benefits from trade and investment reform are far from being exhausted, a complementary focus in the APEC context should be given to behind-the-border barriers to regional economic integration. For example, Oxley (2006) maintains that the importance of trade liberalisation to growth in the APEC region is diminishing and that the core mission of APEC should be to ensure economies are structured to maintain growth. In a similar vein, a recent OECD (2007) paper highlights the interaction between trade reforms and other economic policies, including competition and investment policies.

This section looks at empirical evidence on the benefits of structural policy reform vis-à-vis trade liberalisation before looking at internationally comparable economic indicators of micro-level impediments to growth and convergence – the World Bank “East of Doing Business Indicators”, the “Index of Economic Freedom”, and the IMD Business School “World Competitiveness Yearbook”.

There has been a lot of research and discussion about the economic impacts of the “spaghetti bowl” of bilateral and plurilateral trade agreements that have emerged in the APEC region. In this context, the concept of a Free Trade Area of the Asia-Pacific (FTAAP), ie, a preferential trade agreement (PTA) covering APEC economies, is currently being discussed within APEC. Preliminary analysis suggests that an FTAAP would deliver more favourable outcomes for APEC members than PTAs among smaller groups of APEC members (Scollay, 2004).

Dee (2005) empirically examines the payoffs from structural policy reform vis-à-vis trade liberalisation in the East Asian region.[14] She examines three scenarios: a regional preferential trade agreement (including trade liberalisation and the elimination of regulations that discriminate against foreigners), the successful completion of the Doha round of World Trade Organisation (WTO) negotiations, and unilateral regulatory reform. Dee’s estimates show that preferential trade liberalisation and preferential reform of regulations would add US$16.6 billion per annum and US$2 billion per annum respectively to regional income. The successful completion of the Doha round would result in much larger gains of over US$30 billion per annum. However, by far the largest gains result from unilateral regulatory reform, which is estimated to result in gains of over US$100 billion per annum for the region. Dee’s research therefore indicates that there are large potential gains from structural reform. This is a very compelling result. However, it should be treated with some caution, given the difficulties in quantifying the extent of domestic regulatory “restrictiveness” – and hence measuring the gains from reforming.

The variation in levels of GDP per capita is closely related to labour productivity levels across the region. Figure 6 shows the close relationship between average per capita levels of GDP and the level of labour productivity in APEC economies. An implication of this is that convergence mechanisms that increase labour productivity levels (relative to those in high income economies) will be potentially important.

Figure 6: GDP per capita and labour productivity of APEC economies, 2001-2005
Figure 6: GDP per capita and labour productivity of APEC economies, 2001-2005.
Source: World Economic Outlook Database, International Monetary Fund.

Note: Excludes productivity data for some economies due to data gaps. Some recent data based on forecasts.

Economic indicators are a tool that can be used to identify specific micro-level impediments to growth and convergence, such as regulation, taxation and property rights, which may be suitable for unilateral reform, as applied for example by Dee (2005).

The World Bank’s “Ease of Doing Business” indicators data set provides internationally comparable measures of business regulation and enforcement across 175 economies. For example, it provides international comparisons of the number of days to register a business, the number of days to close a business and the ease of enforcing contracts.[15] The report currently ranks economies across 10 indicators of the ease of doing business and also comes up with an overall ranking. The partial correlation between the 10 rankings and the overall ranking ranges between 0.85 for ease of closing a business to 0.59 for ease of trading across borders.[16] The full set of correlation coefficients are provided in Appendix 3. The relatively high degree of correlation between the 10 doing business indicators suggests that they may be indicative of broader structural policy settings and reform of individual components (eg, reducing the number of days to register a business), may not be as important as more comprehensive reforms (eg, improving the regulatory system).

Another commonly referred to indicator of domestic economic policy settings is the “Index of Economic Freedom” which provides internationally comparable measures of 10 “economic freedoms” across 161 economies. For example, it provides comparisons of the freedom of movement of labour, capital and goods as well as the enforcement of property rights across economies.[17] The report ranks economies across 10 indicators of economic freedom and also comes up with an overall ranking. The partial correlation between the 10 rankings and the overall ranking ranges between 0.923 for property rights to 0.088 for fiscal freedom. The full set of correlation coefficients is provided in Appendix 3.

The “World Competitiveness Yearbook” of the IMD Business School provides internationally comparable indicators of the economic competitiveness across four main criteria of economic performance, government efficiency, business efficiency and infrastructure, for 55 economies. APEC economies rank an average of 24th and rank similarly across the five criteria. The partial correlation between the four rankings and the overall ranking ranges from between 0.939 for business efficiency and 0.756 for economic performance. The full set of correlation coefficients is provided in Appendix 3.

Figure 7 shows the average ranking in the “Ease of Doing Business” index and the “Index of Economic Freedom” across different regional groupings. The world competitiveness rankings are not included in the graph because of their more limited regional coverage. In most cases there is a close correlation between the two indices. APEC performs quite well on average as a group, but in general the costs of doing business are higher, and economic freedoms less, than the average for Nordic and high-income OECD economies.

Figure 7: Ease of doing business and economic freedom indices, regional groupings
Ease of doing business and economic freedom indices, regional groupings.
Source: Ease of Doing Business Database, World Bank 2006; and Index of Economic Freedom Database 2007.
Note: Includes only economies surveyed in both the Index of Economic Freedom and the Ease of Doing Business reports.

According to the “Ease of Doing Business” indicators, APEC economies perform most strongly in the areas of “employing workers”, which measures the flexibility of labour regulations, and “protecting investors”, which measures the protections afforded to minority shareholders. On average, APEC economies perform least strongly in “paying taxes” which measures the level and administrative burden of taxes on businesses, and “dealing with licences” which measures the number of procedures, time and cost of building a warehouse.

According to the “Index of Economic Freedom”, on average APEC economies perform most strongly in the areas of “business freedom” and “property rights”. Business freedom refers to the ability to create, operate, and close an enterprise quickly and easily. Onerous regulatory rules are often the major barriers to business freedom. Property rights refer to the ability of individuals to accumulate private property, secured by clear laws that are well enforced by the state. APEC economies perform least strongly in the areas of “fiscal freedom” and “financial freedom”. Fiscal freedom refers primarily to government taxation (tax rates and the tax revenue as a proportion of GDP), and financial freedom measures banking security and the independence of the financial sector from government influence and control.

According to the “World Competitiveness Yearbook”, on average APEC economies perform most strongly in the area of “government efficiency”, which measures the extent to which government policies are conducive to competitiveness. APEC ranks most poorly according to the criteria of “infrastructure”, which measures the extent to which basic technological, scientific and human resources meet the needs of business.

Figure 8 shows the ranking of individual APEC economies according to the three indices. There is significant variation in rankings across APEC economies, ranging from 1st to 135th out of 175 economies in the ease of doing business, from 1st to 138th out of 161 economies in terms of economic freedom, and from 1st to 54th out of 55 economies in terms of economic competitiveness.

Figure 8: Ease of doing business, economic freedom, and world competitiveness indices, APEC economies
Ease of doing business, economic freedom, and world competitiveness indices, APEC economies.
Source: Ease of Doing Business Database, World Bank 2006; Index of Economic Freedom Database 2007; World Competitiveness Online, IMD Business School 2007.

Barriers to business tend to be highest and economic freedoms lowest, in lower-income APEC economies. This is evidenced by the strong correlation between per capita GDP levels (and labour productivity) and economies’ rankings across indicators of the business environment and economic competitiveness. The correlation coefficients of GDP per capita (or labour productivity) and the ranking of APEC economies in these indices range from 0.752 and 0.814. The full set of correlation coefficients is provided in Appendix 3.

As discussed in Section 3, the APEC region is not realising the full benefits of economic growth and income convergence due to remaining barriers at the border as well as behind-the-border barriers to economic growth and regional integration. While outward-orientation and strong growth performances have resulted in catch-up progress in some economies, progress across APEC has been patchy.

The above section examined economic indicators in order to identify specific micro-level impediments to the operation of convergence mechanisms. This analysis again highlighted that while APEC performs well on average as a group, significant variation exists in performance across APEC. The following section outlines general lessons from the literature on the challenge of bringing about structural change and the role of APEC in progressing structural reform across the APEC region.

Notes

  • [14]The study includes nine APEC economies: China, Japan, Korea, ASEAN 5 (Indonesia, Malaysia, Philippines, Singapore, Thailand), and Australia.
  • [15]Further information on the World Bank Cost of Doing Business Indicators is available from http://www.doingbusiness.org/
  • [16]A partial correlation of “0” reflects no correlation and a partial correlation of “1” reflects perfect correlation.
  • [17]Further information on the Index of Economic Freedom is available from http://www.heritage.org/index/.
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