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ADBI News
2013 Volume 7 Number 1

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Rethinking Global Trade

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Left to right, Professor Richard Baldwin, WTO Director-General Pascal Lamy, ADBI Dean Masahiro Kawai, and ADBI Research Director Ganeshan Wignaraja discuss the outlook for Asian and global trade at the Future of the World Trading System conference held in Geneva on 11–12 March.

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world trading system is undergoing fundamental changes because of the rise of emerging economies, which are expanding trade and investment globally. To examine how Asia can help facilitate an orderly transition and sustain trade-led growth for all economies involved, ADBI and the Centre for Trade and Economic Integration at the Graduate Institute of International and Development Studies, Geneva, in collaboration with the World Trade Organization (WTO), jointly held the conference, The Future of the World Trading System: Asian Perspectives, in Geneva, Switzerland, on 11–12 March. ADBI Dean Masahiro Kawai and WTO Director-General Pascal Lamy delivered the opening remarks and keynote address, respectively, and spoke on the role of production networks, free trade agreements (FTAs), and new trade rules in shaping global and Asian trade. More than 150 participants attended the event, including WTO ambassadors and trade experts. Several key lessons emerged from the conference. First, regional economic integration has been the backbone of Asia’s growing links into the global supply chains. The development of supply chains and production networks in Asia owes much of its success to improvements in physical infrastructure and logistics services, rapid development of

information and communication technology and falls in trade barriers and trade costs. Second, the WTO needs to be reformed in order for it to recognize the new reality of the development of global production networks and with it to include new disciplines that can help the growth of these drivers of global economic integration.

In this issue
Rethinking Global Trade APEC—the Way Forward Reinforcing Asia’s Financial System Managing Disaster Risks ADBI in the News Recent Books The Path to Fiscal Soundness Critique of IMF Advice on International Reserves Selected Upcoming Events Recent Working Papers Sowing the Seeds of Agricultural Development 1 2 3 3 4 5 6 6 7 7 8
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Third, Asia needs to consider practical measures that will overcome the “noodle bowl” problem, such as encouraging rationalization and flexibility of rules of origin, upgrading origin administration, improving business participation in FTA consultations, and strengthening
Rapid Spread of FTAs in Asia
Number of concluded FTAs by country
25 20 15 10 5 0 Japan Korea, Rep. of Taipei,China PRC Hong Kong Cambodia Brunei Darussalam Philippines Indonesia Viet Nam Lao PDR Malaysia Singapore Myanmar Thailand India

2000 Concluded FTAs

2012 Concluded FTAs

Note: Concluded FTAs include those that are in effect as well as those that have been signed but are not yet in effect. Source: ADB’s Asia Regional Integration Center (ARIC) FTA Database (www.aric.adb.org), data as of December 2012.

institutional support systems for small and medium-sized enterprises. Furthermore, the time has come for Asia to consider consolidating the multiple FTAs negotiated by the region into a single, Asia-wide FTA like the Regional Comprehensive Economic Partnership. Finally, policymakers should resist temptations for protectionism and unwind discriminatory measures that were put in place during the height of the global financial crisis. In the medium to long term, policymakers may wish to initiate negotiations on new rules on public procurement, export taxes, and other less-transparent forms of protection. A summary of the papers presented in the conference will be published as an e-book, and the final drafts of the papers will be published as an edited volume by an international commercial publisher. I
For more information about this conference, please visit: www.adbi.org/event/5518.world.trading.system.asian. perspectives.

APEC—the Way Forward
Established in 1989, APEC has become the preeminent economic forum in the Asia and Pacific region, the world’s fastest growing and most economically dynamic area. APEC’s 21 member economies account for 54% of world economic output and 44% of global trade. In the seminar chaired by Dean Masahiro Kawai, The Next Steps for APEC: An Assessment and Way Forward, held at ADBI on 28 January, three distinguished speakers, Professor Ippei Yamazawa, Dr. Julius Parrenas, and Professor Shujiro Urata, led the discussion on APEC’s

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economic integration efforts; the role of the APEC Business Advisory Council (ABAC) in providing business a voice on economic integration; and the outlook for Japan’s participation in the Trans-Pacific Partnership (TPP) agreement. Professor Yamazawa underscored APEC’s considerable success in achieving the Bogor Goals, which aim to achieve free and open trade and investment in the Asia and Pacific region by 2020. Dr. Parrenas highlighted ABAC’s role in providing the private sector a voice in the APEC agenda. Professor Urata argued that the longer Japan waits on the TPP sidelines, the greater the risk of being left behind in contributing toward the fine print of the negotiated text. The event concluded that APEC has made progress on regional trade liberalization, while strengthened peer pressure and closer private sector engagement can enhance APEC’s role in the future. I
For more information about this event, please visit: www.adbi.org/event/5403.next.steps.apec.assessment. way.forward/. Also recommended: Have APEC Five been penalized for not achieving the Bogor Goals? www.asiapathways-adbi.org/2013/03/have-apec-fivebeen-penalized-for-not-achieving-the-bogor-goals/.

Dean Masahiro Kawai (far left) joins a panel of experts to assess APEC’s regional trade liberalization efforts.

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Reinforcing Asia’s Financial System
The 2008 global financial crisis and its aftermath, most notably the ongoing eurozone sovereign debt and banking crisis, have brought into even sharper relief the centrality of having sound financial systems for emerging markets. Sound financial systems are necessary for long-term and balanced development in these countries as well as to absorb various types of shocks. To examine the issues related to the effective design of regulatory and policy frameworks that will promote financial system development and stability, ADBI and the Japan Financial Services Agency (JFSA) jointly held a conference on Strengthening the Asian Financial Sector toward Sustainable and Inclusive Growth in Tokyo on 8 March. Ryutaro Hatanaka, commissioner of the JFSA, delivered the keynote address that highlighted the need for a comprehensive review of the various types of financial regulations in Asia, and examine how these regulations can balance the dual objectives of achieving financial stability, while, at

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the same time, raising economic efficiency in the region. Dean Masahiro Kawai delivered the opening remarks and spoke on the role of improving macroprudential supervision and regulation, strengthening capital adequacy, liquidity standards and leverage limits, reducing pro-cyclicality in the financial system, and setting-up adequate resolution regimes to address systemic risk in the financial system. Furthermore, a number of key lessons emerged from the conference. First, progress in financial regulatory reforms has been impressive but the agenda remains formidable in our search for a durable stability in the global financial system. Second, the importance of managing systemic financial risk at the national level highlights the need for close cooperation and consistent policies among the central bank, the finance ministry, the financial supervisory and regulatory agency, and the deposit insurance corporation in each country. Third, steps need to be taken to promote the development of local-currency bond markets as an alternative source of funding so that Asian corporations can enjoy wider access to long-term local currency funding and also avoid currency and maturity mismatches that played an important role in the Asian financial crisis. Finally, the crisis has also taught us that systemic financial risk needs to be monitored and controlled not just at the national level but also at the regional level. I
For more information about this conference, please visit: www.adbi.org/event/5511.strengthening.asian.financial. sector/.

ADBI and the Japan Financial Services Agency conference examined ways to promote financial system development and stability in Asia.

Managing Disaster Risks
Developing countries in Asia and the Pacific are vulnerable to natural disasters. Of the ten major natural disasters with the highest death tolls worldwide since 1980, seven have occurred in developing countries in Asia. The losses in life and property from these disasters have been vast. In view of the severe economic and human impact of disasters, it is vital to formulate and implement country-based and region-wide strategies to address and reduce such risks and their consequences.

WORKSHOP

DRM experts discuss ways to reduce disaster risks.

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Disaster Risk Management in Asia and Pacific: Cooperation Workshop was held at ADBI on 20–21 February to discuss and coordinate the chapter drafts for a major study on disaster risk management (DRM) to reflect on the lessons and challenges the region has experienced in recent decades, and to make appropriate policy recommendations for the countries in the region. The study will be carried

out by ADBI and the Regional and Sustainable Development Department at ADB headquarters. Dean Masahiro Kawai underscored the importance of the study’s focal points of supply chain issues, governance, DRM financing, and regional cooperation. Project consultants, scholars, policymakers, and senior ADB staff participated, including Edgar Cua, deputy director general, East Asian Department; and Ayumi Konishi, deputy director general, Pacific Department. Following the workshop, several chapter authors and ADBI staff visited Sendai, Japan, which suffered extensive damage from the 11 March 2011 earthquake and tsunami, and met with experts from Tohoku University Disaster Science Institute and Sendai city government officials to exchange ideas after their visit to the disaster-affected area. An interim report will be presented at the 46th Annual Meeting of the Board of Governors of ADB in New Delhi in 2–5 May, and the final volume will be published by the end of 2013. I
For more information about this workshop, please visit: www.adbi.org/event/5519.disaster.risk.mngt.asia.pacific. workshop/.

DRM workshop attendees visit Sendai, Japan, to survey recovery efforts two years after the 11 March 2011 earthquake and tsunami devastated the region.

ADBI in the News
Dean Masahiro Kawai was quoted in the Business Times article, “S’pore may be a better model for Asia than Wall St: ADBI.” Research Director Ganeshan Wignaraja was cited in the Times of India article, “Regional Comprehensive Economic Partnership is huge for Indian businesses” and in the Live Mint article, “India stands to gain in the Asian integration process.” He was also cited in the Business Times Singapore articles, “Falling yen won’t bring business back to Japan” and “Fukushima blows away supply chains.” CBT Director Yuqing Xing’s paper, “How the iPhone Widens the United States Trade Deficit with the People’s Republic of China,” was cited in the Financial Times article, “Research reshapes debates on global trade policy”; and the Xinhua News Agency article, “New measurement may reshape China-US trade ties.” He was also interviewed by Xinhua News on “Abenomics” and its implication for the PRC, and by Danish Broadcasting Corp. on whether the PRC is now the world’s No.1 trading nation. Senior Consultant for Research Peter Morgan was cited in the Business Times Singapore article, “Is Abenomics a cover for Tokyo’s real agenda?” And the Financial Times published his letter titled, “Japan’s economy not about ‘belief.’” Research Fellow Victor Pontines was cited in the Business Mirror article, “ADB airs new tack on money issues.” The Mainichi Newspaper featured ADBI in the article, “Fiscal Rule or Fiscal Crisis? Challenges to Fiscal Consolidation from a Global Perspective.” NHK World interviewed Dean Masahiro Kawai on Japan’s participation in the Trans-Pacific Partnership agreement. NHK World interviewed CBT Director Yuqing Xing on pollution control efforts in the PRC. NHK World interviewed Research Director Ganeshan Wignaraja on the outlook for the Indonesian economy.

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Recent Books
Patterns of Free Trade Areas in Asia
In this new policy study, Dean Masahiro Kawai and Research Director Ganeshan Wignaraja address Asia’s rise in global free trade agreement (FTA) activity, which has sparked concerns about the erosion of the World Trade Organization (WTO) trading system and the Asian “noodle bowl” (multiple and possibly conflicting FTAs). The study identifies for policymakers how best to minimize the costs of FTAs while maximizing their benefits. It reexamines key trends and challenges in Asian FTAs and offers new information from analysis of FTAs, economic models, and firm surveys. This analysis supports strengthening business support for FTAs; rationalizing rules of origin and upgrading their administration; expanded coverage of agricultural and services trade; forging comprehensive “WTO-plus” agreements; and encouraging a region-wide FTA. The analysis suggests a bot tom-up approach to global t r a de liberali zat ion as a complement to W TO processes. I

To download a free copy, please visit: www.eastwestcenter.org/publications/patterns-free-tradeareas-in-asia.

New Paradigms for Financial Regulation: Emerging Market Perspectives
A new book, edited by Dean Masahiro Kawai and Professor Eswar Prasad, examines the global financial crisis and how it led to a sweeping reevaluation of frameworks and paradigms for financial market regulation and macroeconomic policies. Progress has been made in strengthening these frameworks, but numerous challenges lie ahead in developing an analytical framework to guide these changes in a manner that promotes financial stability. Copublished with the Brookings Institution Press, this book provides new perspectives on these issues and evaluates recent developments from an emerging markets perspective. The objective of New Paradigms for Financial Regulation is to develop analytical frameworks and policy prescriptions for emerging markets for balancing the goals of financial development and broader financial inclusion, with the imperative of strengthening macroeconomic and financial stability in these economies. The first two chapters provide an overview of the global regulatory landscape from the perspective of Asian emerging markets. The book then discusses how to promote financial development and inclusion in these emerging markets and to take account of regulatory concerns and constraints. Different approaches to strengthening macroeconomic frameworks that promote financial stability are evaluated. Finally, the book examines cross-border regulatory coordination, which is becoming increasingly important as financial institutions operate freely across national borders and as capital flows serve as a channel for the rapid international transmission of financial shocks. This is the third in a series of books edited by Kawai and Prasad on international financial regulation and reform in the wake of the global financial crisis, focusing on emerging markets. The first two books in the series are Asian Perspectives on Financial Sector Reforms and Regulation and Financial Market Regulation and Reforms in Emerging Markets. I
To order a copy, please visit: www.brookings.edu/research/books/2012/ newparadigmsforfinancialregulation.

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The Path to Fiscal Soundness
One side effect of the global financial crisis was massive increases in government debt in many advanced economies as a result of shortfalls in tax revenues, expenditures related to economic stimulus packages and the huge costs of financial-sector bailouts. This increase put a huge strain on government finances in a number of countries, and was one of the direct causes of the eurozone financial crisis. As a result, understanding the path to fiscal soundness has become a critical policy issue. ADBI, together with the Japan Ministry of Finance Policy Research Institute, held the conference, Fiscal Rule or Fiscal Crisis? Challenges to Fiscal Consolidation from a Global Perspective, in Tokyo, 17 January. The event was co-sponsored by the Mainichi Shimbun. The purpose of the conference was to analyze the determinants of successful fiscal policy consolidation and the basis for fiscal rules to assure fiscal sustainability over the economic cycle, with particular reference to the situation of Asian emerging economies.

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The conference covered the following thematic areas: (i) fiscal policy soundness: conditions and issues; (ii) desirable rules for sound fiscal policy; and (iii) long-term public finance issues and fiscal monitoring in Asia. One of the highlights was a presentation on fiscal consolidation lessons by Alan Auerbach, professor of economics, UC Berkeley. Nobumitsu Hayashi, president of the Ministry of Finance Policy Research Institute, gave the opening remarks, while ADBI Dean Masahiro Senior Consultant Kawai and Senior Consultant ADBI for Research Peter for Research Peter Morgan Morgan ( pictured) and gave a presentation on Dean Masahiro Kawai long-term fiscal policy issues gave a presentation on long-term fiscal policy for emerging Asian issues for Asia’s emerging economies. economies. I
For more information on this event, please visit: www.adbi.org/event/5399.fiscal.rule.fiscal.crisis/.

Critique of IMF Advice on International Reserves
Hans Gensberg, assistant director of the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF), presented the results of the IEO’s recent study of the IMF’s advice on international reserves titled, International Reserves: IMF Concerns and Country Perspectives, at a seminar at ADBI on 7 March. Against the background of the rapid growth of international reserves since 2000 and concerns expressed by the IMF about the potential implications for the stability of the international monetary system, this evaluation focused on two aspects of the IMF’s concerns and advice: the origin, Hans Gensberg of the rationale, and robustness of IMF’s Independent Evaluation Office the IMF’s analysis of the presented the results effects of excessive reserve of a recent study of accumulation on the stability the IMF’s advice on of the international monetary international reserves.
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system; and the conceptual underpinnings and quality of the advice on reserve adequacy in the context of bilateral surveillance. The conclusions were rather critical of the IMF’s approach, arguing that the focus on reserve accumulation as a risk for the international monetary system was not helpful in that it stressed the symptoms of problems rather than the underlying causes. If the underlying cause is currency misalignment, then the IMF should focus on that directly. In particular, there seems to be little justification for the IMF to focus on the size of reserves as a measure of risk to international stability. The evaluation also identified cases of bilateral surveillance where the IMF’s analysis and advice could have been improved, notably by embedding the assessment of reserve adequacy in a broader analysis of countries’ specific situation regarding internal and external stability. I
For more information on this event, please visit: www.adbi.org/event/5520.intl.reserves.imf.concerns. country/.

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Selected Upcoming Events

5 May

Flagship Study: Connectivity in South and Southeast Asia (New Delhi) This project will conduct an inception workshop, consultation meetings, and a seminar to present the Interim Report at the ADB Annual Meeting. Regional “Think 20” Seminar (Sydney) This conference aims to take stock and assess the performance of the G20 and identify what has worked and what has not. Asian Think Tank Summit (Tokyo) This summit will bring together senior figures from Asia and the Pacific think tanks to address pressing medium-term policy issues in the region.

22–24 May 12-14 June

Recent Working Papers
Understanding Innovation in Production Networks in East Asia
Author: Ganeshan Wignaraja
This paper explores the “black box” of innovation in the electronics production network in East Asia through a mapping exercise of technological capabilities and an econometric analysis of exporting in the People’s Republic of China (PRC), Thailand, and the Philippines. Technology-based approaches to trade offer a plausible explanation for firm-level exporting behavior and complement the literature on production networks.
Read Working Paper 410 at www.adbi.org/files/2013.03.01. wp410.understanding.innovation.prod.networks.east.asia.pdf.

Financing Development Cooperation in Northeast Asia
Author: Masahiro Kawai
Infrastructure connectivity in Northeast Asia—comprising the northeastern People’s Republic of China, Japan, the Democratic People’s Republic of Korea, the Republic of Korea, Mongolia, and the Russian Far East—has been hindered by limited intergovernmental cooperation. This paper finds that total infrastructure investment needs for Northeast Asia excluding Japan and the Republic of Korea could be $63 billion per year over the next 10 years.
Read Working Paper 407 at www.adbi.org/files/2013.02.15. wp407.financing.dev.cooperation.northeast.asia.pdf.

Navigating a Changing World Economy: ASEAN, the People’s Republic of China, and India
Authors: Peter A. Petri and Fan Zhai
Most projections envision continued rapid growth in the members of ASEAN, the People’s Republic of China, and India over the next two decades. By 2030, they could quadruple their output, virtually eliminate extreme poverty, and dramatically transform the lives of their more than three billion people. This study used a Computable General Equilibrium model to examine the likely effects of the region’s growth on trade, resources and the environment.
Read Working Paper 404 at www.adbi.org/files/2013.01.22. wp404.navigating.changing.world.economy.pdf.

Impact of the ASEAN Economic Community on ASEAN Production Networks
Authors: Kornkarun Cheewatrakoolpong, Chayodom Sabhasri, and Nath Bunditwattanawong
Empirical evidence suggests that the emergence of international production networks in East Asia results from market-driven forces such as vertical specialization and higher production costs in the home countries and institutional-led reasons such as free trade agreements. This paper examines two industries—autos, auto parts, and hard disk drives—to understand international production networks.
Read Working Paper 409 at www.adbi.org/files/2013.02.21. wp409.impact.asean.production.networks.pdf.

From a Centralized to a Decentralized Global Economic Architecture: An Overview
Author: Pradumna B. Rana
This paper argues that calls for a New Bretton Woods system in the aftermath of the global economic crisis—similar to the remarkable 1944 Bretton Woods conference that led to the establishment of various international economic institutions— are unlikely to be answered. The likely scenario is that the centralized architecture from before the global economic crisis will evolve toward a more decentralized and multilayered global architecture where regional institutions are linked together to a “senior” global organization in a complementary manner by rules and regulations.
Read Working Paper 401 at www.adbi.org/files/2013.01.15. wp401.decentralized.global.economic.architecture.pdf.

Inadequate Regional Financial Safety Nets Reflect Complacency
Author: Iwan J. Azis
To the extent that financial contagion from the United States and the eurozone crisis has occurred in Asia, this paper focuses on the importance of strengthening the regional financial safety nets. By conjecturing that efforts to prevent and manage a crisis are the essence of providing such safety nets, the author argues that efforts made by ASEAN+3 officials, especially in the provision of liquidity support during a crisis, are far from adequate. Making the Chiang Mai Initiative Multilateralization more effective is critical.
Read Working Paper 411 at www.adbi.org/files/2013.03.07. wp411.inadequate.regional.financial.safety.nets.pdf.

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Sowing the Seeds of Agricultural Development
Developing efficient supply chains is crucial to enable trade and expand opportunities for agricultural producers in Cambodia, Lao PDR, Myanmar, and Viet Nam (CLMV). To help CLMV countries expand their understanding of the role of supply chains within wider agricultural policy and examine potential approaches to improving national policy initiatives, ADBI, in partnership with The Mekong Institute, conducted a training course titled, Developing Agricultural Supply Chains in Cambodia, Lao PDR, Myanmar and Viet Nam, in Khon Kaen, Thailand, from 18 to 22 February. Some 30 senior government officials and private sector representatives from CLMV countries participated in the five-day course. Building on the first CLMV Project training program on developing viable seed industries, this course offered lectures by international experts, case studies, field visits, and group work to explore the role of supply chains in enhancing agricultural productivity. The training focused on policy issues, and analyzed country perspectives on opportunities and challenges related to supply

TRAINING COURSE

Trainees from Cambodia, Lao PDR, Myanmar, and Viet Nam study how supply chains enhance agricultural productivity at an ADBI training course held in Khon Kaen, Thailand, from 18 to 22 February.

chain management. Trainees learned from experts on agricultural supply chain management and developed a set of key policy issues and research questions to help guide future CLMV Project activities. I
For more information on this event, please visit: www.adbi.org/event/5522.clmv.project.training.program.2/.

ADBI Climbs Think Tank Rankings
ADBI has jumped from 10th to 6th among government-affiliated think tanks in the 2012 Global Go To Think Tanks Report. ADBI scored well in other categories—17th best international development think tank, 24th best think tank outside the United States, and 32nd best think tank in the world. “We are delighted with this performance. We will continue to strive to improve our position among the world’s best think tanks,” said Dean Masahiro Kawai. The report by the University of Pennsylvania, International Relations Program, is based on an international survey of 1,950 scholars, public and private donors, policymakers, and journalists who evaluated more than 6,500 think tanks.

Publisher: Yasuro Narita

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ADBI News reports quarterly on the activities of the Asian Development Bank Institute. The views expressed in this newsletter do not necessarily reflect the views or policies of the Asian Development Bank Institute or the Asian Development Bank. Materials may be reprinted with credit given to ADBI News. To send comments or to request a free subscription, e-mail adbinews@adbi.org; fax a message to +81-3-3593-5571; or write to ADBI News, Kasumigaseki Building 8F, 3-2-5, Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, Japan. For the web version, go to www.adbi.org/newsletter/.

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