Academic journal article Journal of Southeast Asian Economies

International Trade and Regional Income Convergence: The ASEAN-5 Evidence

Academic journal article Journal of Southeast Asian Economies

International Trade and Regional Income Convergence: The ASEAN-5 Evidence

Article excerpt

I. Introduction

This paper proposes the hypothesis that multilateralism (non-discriminatory) and regionalism (regional trade agreements, or RTAs) are complementary and that regional income convergence is likely to occur with like-minded and committed RTAs that often have links geographically and culturally. The inter-linked and complementarity nature of RTAs and multilateralism is complex, but extensively discussed in the literature (Ethier 1998; Ornelas 2005; Koopmann 2003; Freund 2000; Lee and Shin 2006). The core argument is that RTAs and multilateral agreements are interdependent and that both positively promote trade creation and economic growth. In this sense, we view RTAs in a positive light in terms of promoting trade (both world and intra-regional) and growth. The above alternatives are two sides of the same coin and are quite often adopted in the process of reducing tariff levels. When regions successfully forge trade agreements, then the region gains the confidence to adopt multilateralism and vice versa (assumption is that tariffs and non-tariff barriers were still higher than zero). Neither traditional trade theory nor empirical evidence provides an adequate explanation for the complementary and mutually enforcing nature of RTAs and multilateral agreements on trade liberalization and convergence/divergence of income.

It was our view that this issue could be resolved empirically by analysing an appropriate regional integration, such as the Association of Southeast Asian Nations (ASEAN). The globally oriented commitments of ASEAN countries can be viewed as a strengthening rather than a detrimental force for the region. Jayanthakumaran and Sanidas (2007) study the complementary nature of RTAs and multilateralism using the experiences of intra-ASEAN-5 (founder members of ASEAN) and conclude that intra-ASEAN-5 exports and national gross domestic products (GDP) increased with the implementation of both RTAs and multilateralism at different stages. It was found that the ASEAN-5 countries' experience in enhancing positive aspects of regionalism without ignoring the potential benefits that arise from globally oriented commitments is likely to trigger regional economic activities and mobility by creating links between regional firms and industries. Regional participation in trade and investment can be an essential ingredient for inducing regional income convergence. The expectation is that regionally oriented trade and investment reforms (motivated by both RTAs and multilateralism) tend to allocate resources within the region in response to the removal of quotas and tariffs in traditionally protected sectors, and to motivate regional income convergence in light of comparative advantage and a trickle down effect (income flowing to the poor over time).

Previous time-series studies of convergence are based on "stochastic" convergence, which implies that shocks to the income of a given country relative to the average income across a set of countries will be temporary. The evidence of stochastic convergence is a necessary but not a sufficient condition for the notion of convergence and the concept of "[beta]-convergence" to be essential (Carlino and Mills 1993). Criticism arises from four aspects. First, distributional dynamics of per capita incomes may rule out "stochastic" convergence even though "[beta]-convergence" results are obtained (Friedman 1992). Second, cross-sectional estimates for initial levels of per capita income relative to the average income across a set of countries are biased if corrections are not made for endogeneity, country-specific factors and unit root dynamics. Third, cross-sectional tests are problematic in their ability to identify groups of countries that are converging (Linden 2000). Finally, estimates lack clear-cut explanations for the link between international trade and convergence.

This paper first examines the association between trade per person (proxy for government intervention on trade and foreign direct investment), income per capita (proxy for efficiency) and Theil's index (proxy for regional income convergence/divergence) in ASEAN-5 nations, in order to present an analysis of trade policy interventions in regional income convergence by exploiting comparative advantage and allowing income to flow from a rich to a poor nation through trickle down effects. …

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