New Economist

Are emerging Asia’s reserves really too high?

Aside from China, no, according to a new IMF working paper by Marta Ruiz-Arranz and Milan Zavadjil. This is in large part an attempt to insure against a repeat of the 1997 Asian currency crisis:

The paper has presented evidence that to a large extent explains Asia’s large reserve accumulation since the 1997–98 crisis through the precautionary motive. Current reserve holdings in most of Asia (excluding China) are not seen excessive when compared with levels predicted by a simple model of optimal reserves applied to specific country and regional characteristics. By mitigating the potentially large welfare costs of crises, reserves provide benefits in terms of insurance that more than compensates economies for the
opportunity cost of holding liquid assets.

Large currency reserves have the added benefit of lowering borrowing costs:

Furthermore, the benefits of reserves in terms of reduced spreads on privately held external debt, and thus borrowing costs, further justifies most of the observed growth in reserves. The paper finds that a majority of economies in Asia continue to benefit from reduced spreads, as evidenced by the high estimated threshold levels beyond which no further gains are realized.

Nonethless, the authors consider that current reserves "are close to or have recently reached optimal
reserves levels", and "a slowdown in the pace of accumulation in Asia is now desirable."

China, meanwhile, remains an anomaly. These models "cannot fully explain the large stock of reserves in China" - a subject to be explored in future research.

Vietnam: the world's next factory?

Bloomberg's Andy Mukherjee has been to Ho Chi Minh City - and he likes what he sees: After China, Vietnam Will Be World's Factory

After China, Vietnam is emerging as the world's next factory of choice for labor-intensive goods.

One can see that in the changing composition of the country's exports. Rice and coffee -- two of Vietnam's biggest agricultural exports -- are now becoming less significant to the $61 billion economy than textiles. Footwear shipments are gaining prominence over seafood.

The other fast-growing export industry is furniture. Exports of wood-based products have grown 24 percent from last year to more than $2 billion.

James Koh, a Singapore businessman, makes dining tables and chairs in Vietnam for customers around the world, including Williams-Sonoma Inc.'s Pottery Barn stores in the U.S. Koda Ltd., of which Koh is the managing director, also has factories in Malaysia and China. Yet, it's Vietnam's lower costs that are prompting the company to expand capacity here by 25 percent. "The labor cost in Vietnam is half that of China, while worker productivity is about the same,'' says Koh.

Starting next year, the government will increase the mandated minimum wage for foreign-funded companies in Ho Chi Minh City and Hanoi, the national capital, by 13 percent to 1 million Vietnamese dong ($62), a level that is still affordable, Koh says.

Chinese-made goods have become increasingly expensive in the U.S. for the past six months. That gives Vietnamese manufacturers an opportunity to win a bigger share in their largest export market.

Vietnam's accession to the World Trade Organization in January has provided its textile industry with quota-free access to the U.S. Joining the WTO regime has also caused a 37 percent surge this year in overseas investment commitments to $13 billion.

The biggest draw of the country is clearly its labor. The median age in Vietnam is 25 years. The workforce isn't just young, but also literate and healthy: The proportion of people who are undernourished has been cut in half over the past three decades.

But there are also challenges ahead:

Has China displaced other Asian countries' exports?

The short answer: Yes.   The long answer:

This paper uses gravity modelling to explore whether and how the growth of China 's exports is displacing exports of other Asian countries to third markets over the period 1990-2003. Chinese exports are defined both narrowly and more broadly to include exports from Hong Kong . We investigate whether the displacement effect on Asian exports differs when exports from Hong Kong and China are combined compared to the narrow case of Chinese exports only.

Aggregate and disaggregated analyses are undertaken. In the latter, we explore whether the displacement effect varies across Asian countries and in trade with different types of countries. We find evidence of a displacement effect which is more pronounced in developed markets and stronger for Hong Kong and China combined. Further it is the high income Asian exporters that experienced a greater displacement effect. We also investigate whether China's development has generated any offsetting effects on its neighbours' exports to China itself and find that Chinese growth has indeed increased China's imports from the Asian countries in the sample and in particular Japan and Korea.

Source: Has China Displaced Other Asian Countries' Exports?, by David Greenaway, Aruneema Mahabir, Chris Milner (GEP Research Paper 06/21, Leverhulme Centre for Research on Globalisation and Economic Policy)

Can Japan protect quality?

The rest of Asia is catching up to Japanese-standard product - and the Japanesw are worried. Martin Feckler writes in today's New York Times that Japanese Fret That Quality Is in Decline

TOKYO, Sept. 20 — Perhaps only in Japan could a television series like “Project X” have become one of the most popular TV shows. No, it isn’t a science fiction thriller. It’s about product quality. More specifically, it’s about a bunch of corporate engineers who invented the hand-held calculators and ink-jet printers that helped turn this nation into an industrial powerhouse.

So it is little wonder that a recent surge in recalls of defective products has set off national hand-wringing and soul-searching here, in radio talk shows, on the front pages of newspapers and in the hushed corridors of government ministries. Even in local noodle shops, the conversation turns to the bruised pride and fears that Japan may be losing its edge at a time when South Korea and China are breathing down its neck.

“Craftsmanship was the best face that Japan had to show the world,” said Hideo Ishino, a 44-year-old lathe operator at an auto parts factory in Kawasaki, an industrial city next to Tokyo. “Aren’t the Koreans making fun of us now?” “It took us years to build up this reputation,” Kazumasa Mitani, 32, a co-worker, chimed in. “Now we see how fast we can lose it.”

This, after all, is a country that has been obsessed with perfection. Tokyo’s sprawling subway and train networks run like clockwork, accurate to the minute. Television factories assign workers with rags to wipe down every new set, lest a Japanese consumer find a single fingerprint and return it. In supermarkets, many apples and melons are individually wrapped in protective plastic foam.

In the last two months, the national angst increased after large-scale recalls of defective products made by Toyota and Sony, the country’s two proudest corporate names. In the United States, product recalls occur so frequently that most are barely noticed. But here, they have created something of a crisis in a country where manufacturing quality is part of the national identity.

The fingers have no main culprit to point to. Some say young Japanese are too lazy. Others say American-style management is to blame. The spate of bad news has not stopped. Just this week, Sony suffered another blow when Toshiba announced that it was recalling 340,000 Sony-made laptop batteries, after last month’s recalls of 5.9 million batteries. And Toyota, which has experienced a soaring number of recalls in recent years, said Wednesday that it would hire 8,000 more engineers to strengthen quality.

Some here admit that Americans may find the fuss perplexing. But Japan is the country that elevated the American quality guru W. Edwards Deming to virtual sainthood and conquered global markets with its eminently reliable cars, cameras and computers. For a time, American and European executives even flocked here to learn Japanese quality-control concepts like “kaizen,” meaning “improvement.” World-leading craftsmanship became so central to the nation’s self-image that many Japanese seem to have trouble imagining their country without it.

The recalls are discussed here in the same breath as Japan’s rising rates of crime and juvenile delinquency and other signs that the country’s tightly woven social fabric may be starting to fray. In the news media, Sony’s and Toyota’s quality problems have frequently topped coverage of wars in Iraq and Lebanon. And Nihon Keizai Shimbun, the leading economic daily, began a front-page investigative series this month called “Can Japan Protect Quality?”

“Toyota and Sony have been a wake-up call that something is amiss in Japan,” said Takamitsu Sawa, an economics professor at Ritsumeikan University in Kyoto. “Japan seems to have lost something important on the way to becoming a developed country, and many Japanese want to get that back.”

One of those is Toshihiro Nikai, Japan’s trade minister, who twice last month took unusually blunt steps in this nation that normally recoils from confrontation. He sent letters to executives from Sony ordering them to report on quality-control improvements after back-to-back recalls by Apple and Dell of faulty Sony-made laptop batteries. Sony promised to comply and diligently sent employees to receive the letters by hand. It was the first time such orders had ever been issued to Sony.

“This is very rare,” said Atsuo Hirai, assistant chief at the trade ministry’s information product safety section. Rarer still was the fact that a few weeks earlier, the transport ministry issued similar orders to Toyota.

Hiroshi Okuda, the retired chairman of Toyota and elder statesman of Japan’s business world, called on his countrymen to do more about what he saw as the declining competitiveness of Japanese manufacturing. “Japan lacks a sufficient sense of crisis,” he warned last month.

A single Asean market?

A few week's ago I posted some critical remarks about the Asean paper tiger. But maybe I was premature. Today the Association of South-East Asian Nations agreed in principle to speed efforts to create a single market by 2015, five years ahead of schedule, according to its secretary-general Ong Keng Yong. If that goal is achieved, it won't have proved as useless a body as many had thought. But the FT report suggests the goal will not easily be achieved:

The agreement came at the start of an annual conference of the region’s economic ministers, who will focus on achieving closer integration in response to competition from China and India.

But doubts remain over whether the goal can be achieved given the wide economic disparity and conflicting national interests among the 10 Asean members.

Even as the ministers were pledging support for a broader economic union, a dispute erupted between Malaysia and Thailand over the terms of the existing Asean Free Trade Agreement, which reduces import barriers for most manufactured goods.

Thailand said it would not cut tariffs on Malaysian cars until Malaysia ended a car import licensing system, which it has promised to phase out by 2010. Malaysia and Thailand are competing to become the region’s main car manfacturing centre.

The dispute underscored the difficulties that Asean will confront in achieving the ambitious goal of creating a common market allowing the free flow of goods, services and investment.

Does governance matter for growth?

Does better governance help economic growth? The World Bank certainly believes that countries can derive a very large "development dividend" from better governance. But a recent Kyklos article, currently free to download, suggests otherwise. Here is the abstract for Does Governance Matter? Yes, No or Maybe: Some Evidence from Developing Asia by M.G. Quibria of the Asian Development Bank:

This paper seeks to explore the relationship between economic growth and governance performance in Asian developing economies. This exploration yields some interesting conclusions. First, notwithstanding its tremendous economic achievements, the state of governance in Asia is not stellar by international comparison. Indeed, the majority of these countries seem to suffer from a governance deficit. Second, contrary to our expectations, data do not suggest any strong positive link between governance and growth: paradoxically, countries that exhibit surpluses in governance on average grew much slower than those with deficits. The paper ends with some conjecture about this apparent paradox.

The Asean paper tiger

The glory days of the 'Asian tigers' are well and truly over. Western investors and politicans are in a rush to embrace the BRIC economies (Brazil, Russia, India and China), as the asian tigers lose their appeal. Victor Mallet explains in today's Financial Times that Asia's former tigers are moving towards irrelevance how weak values and slow progress in economic liberalisation have made Asean less than the sum of its parts. The European Community of the East this is not:

An organisation of 10 countries, with a population of 500m and the economic weight to match, is in danger of becoming a diplomatic irrelevance as it approaches the 40th anniversary of its founding next year.

...Yet Asean remains less than the sum of its disparate parts - its members include democratic, Muslim Indonesia; the fast-growing economy of Vietnam; and the wealthy city-state of Singapore; as well as Burma, the Brunei sultanate, Cambodia, Malaysia, the Philippines and Thailand.

Among this year's failures, Asean made no headway in persuading Burma to end the junta's egregious human rights abuses. Nor did the ARF, known from its acronym and its inactivity as "the dog that doesn't bark", seriously rebuke North Korea for its recent missile launches orits nuclear weapons programmes.

Even in seeking to liberalise regional trade and investment in goods and services, Asean seems to have run out of steam. The once tigerish economies of Malaysia and Thailand are growing at less than 6 per cent a year - slower than those of Ghana and Botswana.

It has been uncomfortable for nations that were the toast of bankers and investors in the 1990s to find themselves so quickly eclipsed by China and India. If they want to keep attracting performances from the Lavrovs and Rices of this world and simultaneously engage in the serious business of regional diplomacy, Asean leaders need to develop a clear idea of how they see the world and how they want to improve it.

My blogroll: Indonesian econoblogs

Indopundit kindly informs me of not one, not two but three Indonesian econoblogs:

While you're at it you may want to consider adding these Indonesian economists' blogs: the informative and concise Sarapan Ekonomi, the irreverent, micro-oriented Cafe Salemba, and the policy-oriented On Indonesia and the Economy!

I have added them to my blogroll. For those who follow Asian economies, they're worth a look.

The picture of young girls at Bali's Ubud Festival 2006 is taken from the excellent Indonesian photo weblog Java Jive.

My blogroll: A Singapore economist

A welcome addition to my Asian blogroll is a singapore economist. He/she "hopes to be the looking glass for those who are interested in an economist's view of the world,  a view guided by objective analysis, facts and figures." Not much posted yet, but I'll be watching with interest. Welcome!

China: the paramount power

Much has been written about China's growing economic power. But what about relationships in its own backyard? Dr Milton Osborne of the Lowy Institute examines how China's relations with Southeast Asia have dramatically changed for the better in the last ten years, with "free trade  agreements and strategic partnerships" replacing "decades of mistrust and uncertainty." The Paramount Power: China and the countries of Southeast Asia (PDF) argues that China is now the paramount power in Southeast Asia, "with significant soft power resources and regional goodwill, posing new challenges for Japan and the United States."

Over the past decade, China’s relations with the countries of Southeast Asia have changed substantially, even dramatically. Nowhere is this more apparent than in the fact that China now has close and productive dealings both with the Association of Southeast Asian Nations (ASEAN), an organisation founded in 1967 in large part in opposition to China, and with the individual countries making up that organisation. Allowing for the considerable diversity that exists in its relations with each individual Southeast Asian country, China has now assumed a position as the paramount regional power. This paper seeks to describe how this came about and reflects on contemporary Southeast Asian attitudes towards China, based in part on the writer’s discussions in eight ASEAN capitals in November 2005.

Economic relationships with China have improved:

China’s economic development, once seen as a threat by Southeast Asians is now generally regarded as an opportunity, a fact reflected in what is already a substantial increase in trade between the region and China and has led to the conclusion of a framework agreement on free trade between ASEAN and China in 2002, which will come into effect in 2010. One year later China agreed to sign ASEAN’s Treaty of Amity and Co-operation, a decision greeted with the greatest warmth in Southeast Asia.

As US hegemony has waned:

Seen from the perspective of Southeast Asian countries, China’s actions are both welcome and, for a number of them, a contrast with the policies of the United States. Although there is a recognition that the United States is unquestionably more powerful than any other state, in terms of its capacity to project power into the Southeast Asian region, some aspects of American policy are distinctly  unpalatable to regional populations, particularly in those countries with Muslim majorities, such as Indonesia and Malaysia. The United States preoccupation with the ‘war on terror’ is also seen as diverting American attention away from Southeast Asia, while there is a reaction against Washington’s belief ‘that democracy is the best possible form of government, anytime anywhere’, and its tendency to couch policies in terms of moral absolutes. There is little sympathy in Southeast Asia for any suggestion that the appropriate policy to follow in relation to China is that of ‘containment’, and affirmations by the United States that it does not have this policy are regarded with some scepticism.

While there are grounds for debating the degree to which Southeast Asian states are pursuing their interests through varying degrees of hedging in their dealings with China and the United States, there is no doubt that all countries of the region see their interests served through engagement with China. As expressed to me in various ways in my recent discussions in the region, China has become a power whose interests cannot be ignored. This is what is signified by the concept of paramountcy. And notably, confirming its paramount—rather than its hegemonic or dominating—position is the fact that Beijing has made clear that it accepts that other states have a right to exert influence in individual states. China’s position in relation to Cambodia is a particularly striking example of this fact.