Academic journal article Journal of Southeast Asian Economies

Closer Trade and Financial Co-Operation in ASEAN: Issues at the Regional and National Level with Focus on the Philippines

Academic journal article Journal of Southeast Asian Economies

Closer Trade and Financial Co-Operation in ASEAN: Issues at the Regional and National Level with Focus on the Philippines

Article excerpt

I. Introduction

Over the past decade, efforts at promoting closer regionalism in East Asia have been stepped up for various reasons, including: (i) a response to the experience and lessons of the 1997 financial crisis; (ii) the gridlock in the Doha round, success of North American Free Trade Agreement (NAFTA), and expansion of the EU; (iii) the mitigation of political factors that prevented closer co-operation in the past, for example, competition between China and Japan; and (iv) the perception that ASEAN economic integration will not progress far unless other East Asian economies are involved.

One major constraint to this process is the large disparity in economic development in East Asia. Table 1 depicts the situation for fourteen countries of East Asia and the ASEAN member countries including Timor Leste. In terms of per capita income in PPP$, East Asia has the largest disparity when compared to other regional groupings: Latin America, Europe, South Asia, and North Africa. Studies have shown (for example, Venables 2003) that a large disparity in economic development will hinder efforts towards greater economic integration.

This paper examines various policies at the regional and national level that can help narrow the development gap and at the same time increase the chances for effective and meaningful economic integration. At the national level, these policies can be considered as necessary conditions for successful trade liberalization and financial co-operation. Free flow of goods and services is a minimum requirement for ASEAN to function as a single market. On the other hand financial cooperation and integration of financial markets provides a valuable window of opportunity to foment macroeconomic stability and reduce vulnerabilities.

In this context, the following questions will be considered: What are the structural constraints to growth in the Philippines? What institutional and economic reforms, thus far, have been implemented? What factors prompted these reforms? What institutional and economic reforms are needed or lacking?

II. The Economic Disparity in ASEAN

The ten ASEAN member countries significantly vary in several social and economic indicators (Tables 2 and 3). In general, they can be classified into four clusters based on HDI rankings and socio-economic indicators. Singapore and Brunei belong to the upper cluster, being in the "high human development" category along with Japan, Republic of Korea, and the United States.

The second cluster is categorized as upper "medium development countries" and includes Malaysia, Thailand, and the Philippines. Vietnam and Indonesia belong to the medium "medium human development" countries, while Cambodia, Myanmar, and Lao PDR belong to the fourth group of countries referred to as lower "medium human development" countries.

The Philippines actually straddles the second and third groups since many of its socio-economic indicators are closer to Indonesia and Vietnam rather than Thailand and Malaysia. Among the ASEAN-6, the Philippines has the highest incidence of poverty--even higher than Vietnam --as measured by the proportion of population living below $1 per day, and the highest income inequality (Table 3). Its only distinct advantage is in the education index, reflecting its tradition of having a highly qualified workforce that is proficient in the English language.

The Philippines is an enigma in this context. It has not lived up to its enormous potential, which is reflected not only in its level of education but also in the vast natural resources of the country. Despite the economic reforms that have been implemented, issues of poor governance and a weak state have hampered economic progress (Fabella 1999; Llanto and Gonzalez 2006). This issue will be further explained later.

An existing large disparity in the level of development will likely lead to divergence or greater disparity in development when an FTA among the member countries is formed. …

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