Political Economy of Democratic Transition and Optimal Cooperative

Political Economy of Democratic Transition and Optimal Cooperative Design The Case Study of Gravity model-FTA Attakrit Patchimnan, Ph. D.

Democratization and Interstate Cooperation The Effects of Regime Type on the Establishment of Trade Agreements, Trade Policies, and the links between Democracy and Foreign Policy. The Type of Political Regimes and The Presence of Competitive Elections Interstate Cooperation under AFTA Agreement Economic Growth through Trade Liberalization

EMPIRICAL EVIDENCES Groups of Countries Democratic Transmission OECD countries, and NAFTA Intra-Industry Trade>Inter. Industry ASEAN ? ? ? ? ?

Average AFTA/CEPT Rates Source: ASEAN Secretariat

Current State of Play with the CEPT (Common Effective Preferential Tariff) • Temporary exclusion list (TEL) All items on the TEL would progressively be moved to the inclusion list in five annual installments from 1 January 1996 to 1 January 2000. CEPT tariff rates would be reduced at least every three years once products were put in the inclusion list. • Unprocessed agricultural products (UAPs) (SL) Three categories, treated as follows. a) Transferred immediately to normal or fast track inclusion lists by 1 January 1996 and tariffs reduced to 0– 5 per cent by 1 January 2003. b) Placed in TEL, then transferred to the inclusion list in equal installments from 1 January 1997 to 1 January 2003, with a tariff of 0 – 5 per cent. c) Placed in a sensitive list and then phased into the CEPT inclusion list by 2010. The precise phasing arrangements, start dates and final tariff rates are still to be agreed. Inclusion List • Normal track items (IL) -T > 20 %to be reduced to 0– 5 % by 1 January 2003 (2006 for Vietnam). -T <20 % to be reduced to 0– 5 % (by 1 January 2000). -Members are encouraged to aim for zero tariffs rather than the 0– 5 per cent range, and to achieve this by 2000 rather than 2003. • Fast track items T> 20 % to be reduced to 0– 5 % by 1 January 2000 (2003 for Vietnam). -T< 20 % to be reduced to 0– 5 % by 1 January 1998. Exclusion List , Sources : CENTER FOR INTERNATIONAL ECONOMICS • Nontariff barrier The initial focus was on quantitative restrictions (QRs), customs surcharges and technical standards. a) QRs on products in the inclusion list were to be removed at the outset of AFTA. As products , UAPs, are added to the inclusion list, QRs are to be removed. b) Customs surcharges (for revenue or protective purposes) were to be removed by 1 January 1997. c) Technical measures (for example, standards) and product quality, safety, packaging and labeling regulations to be eliminated by 1 January 2004. CEPT 2000

ASEAN free trade agreement (AFTA) APEC Russian federation SAPA AFTA 10 Nepal Bhutan Maldives Pakistan Sri Lanka AFTA 6 Taiwan Province of China The Increasing Problems of Cooperation in ASEAN 10 NAFTA Canada Asymmetric levels of economic development. United States Japan Brunei Darussalam Indonesia Malaysia The divergence of trade liberalization, macroeconomic policies, and policy choices caused by internal and external shocks. Mexico Philippines Singapore Korea Divergence of mixed political regime types Peru India Bangladesh Thailand China Hong Kong SAR TPSEPA Vietnam Australia New Zealand CER Cambodia Lao PDR Myanmar Note: : Bilateral trade agreement : Regional trade agreement Sources : IMF Papua New Guinea Chile The problems of collective actions caused by ineffective collaboration and coordination.

Degree of Export Dependence in ASEAN free trade area (1993 -1996) Malaysia Indonesia Singapore Thailand Indonesia 1 Malaysia (1993) 0. 000 0. 116 0. 440 0. 248 0. 218 2 Indonesia(1993) 0. 070 0. 000 0. 051 0. 197 0. 131 3 Singapore(1993) 0. 595 0. 000 0. 197 0. 191 4 Thailand (1993) 0. 037 0. 103 0. 152 0. 000 0. 079 5 Philippines (1993) 0. 002 0. 020 0. 018 0. 007 0. 000 6 Malaysia (1994) 0. 000 0. 178 0. 514 0. 163 0. 300 7 Indonesia (1994) 0. 085 0. 000 0. 311 0. 169 0. 179 8 Singapore(1994) 0. 849 0. 000 0. 511 0. 250 9 Thailand (1994) 0. 052 0. 189 0. 186 0. 000 0. 143 10 Philippines(1994) 0. 002 0. 029 0. 020 0. 033 0. 000 11 Malaysia(1995) 0. 000 0. 413 0. 543 0. 303 0. 348 12 Indonesia(1995) 0. 106 0. 000 0. 333 0. 220 0. 268 13 Singapore(1995) 1. 005 0. 000 0. 701 0. 356 14 Thailand(1995) 0. 073 0. 226 0. 236 0. 000 0. 206 15 Philippines(1995) 0. 005 0. 026 0. 025 0. 063 0. 000 16 Malaysia(1996) 0. 000 0. 433 0. 604 0. 273 0. 393 17 Indonesia(1996) 0. 113 0. 000 0. 350 0. 199 0. 320 18 Singapore(1996) 0. 919 1. 918 0. 000 0. 664 0. 347 19 Thailand(1996) 0. 082 0. 303 0. 181 0. 000 0. 272 20 Philippines(1996) 0. 005 0. 046 0. 036 0. 051 0. 000 Social Networks

Trend of Political Regime Type (1962 -2002) Source: Polity IV Data Set- point measure of democracy and autocracy, if REG ≥ 6 , democracy and REG ≤-6 autocracy, and -5 to +5 are considered "incoherent polities" that are highly associated with regime instability and volatility

Empirical Perspectives of Democratic Transition and interstate Cooperation v Remmer (1998) asserts, The process of democratization that began in the late 1970 s was followed by a dramatic resurgence of cooperative endeavors, including the revitalization of the Central American Common Market, as well as the creation of new vehicles for interstate cooperation, notably NAFTA. (p. 26) Source: Remmer, K. L. (1998). The politics of neo-liberal economic reform in South America, 1980 -1994, Studies in Comparative International Development, 33(2), 3 -29. v Mansfield, Milner, and Rosendorff (2002) assert, The regime type of states can strongly affect their propensity to cooperate on economic issues and more democratic countries have displayed a greater likelihood of concluding trade agreement than other countries, even when holding constant various political and economic influences. (p. 505) Democratic countries are about twice as likely to form a PTA as autocratic countries, and that pairs of democracies are roughly four times as likely to do so as autocratic pairs. These results provide strong evidence that democracies are more commercially cooperative than other countries. (p. 481) Source: Mansfield D. E, Milner V. H, Rosendorff B. P. (Summer, 2002). Why democracies cooperate more: electoral control and international trade agreements. International Organization, 56(3), 477 -513. The regime type serves as an international economic cooperation

Literature Review Edward D. Mansfield; Helen V. Milner; B. Peter Rosendorff (2000) test the hypothesis on bilateral trade flows with gravity model from 1960 -1985/ 1990, N=30480 observations. (in-outside, Second Image Theory) The Result of Study 1) The results of an empirical analysis based on the period 1960 -1985/1990 are consistent with these predictions. 2) Holding constant various economic and political factors, democratic dyads tend to trade more freely than dyad composed of a democracy and an autocracy. q Demo+Auto 15 -20% less commerce than a dyad composed of two Demo. from 1960 -1985. q Demo+Auto 40% less commerce than a dyad composed of two Demo by 1990. Source: Edward D. Mansfield; Helen V. Milner; B. Peter Rosendorff (2000). Free to Trade: Democracies, Autocracies, and International Trade. The American Political Science Review, 94(2), 305 -321. Xinyuan Dai (2002) highlights some problematic aspects of MMR’s analysis. The Result of Study 1) He recalculates the aggregate trade barriers and concludes that no clear comparison can be drawn without considering the preference of decision makers that go into the institutions. Source: Dai X. (2002)Political Regime and International Trade: Democratic difference Revisited. the American Political Science Review, 96(1), 159 -165).

The MMR Model Three main Assumptions for MMR Model The shocks on the world prices and the establishment of protection level represents an imperfect information. Domestic shocks have no impacts on world prices since the model assumes countries are small opening economies. The voters might become aware of the domestic prices affected by both the shocks to world prices and poor economic performance. (the interstate conflicts or violations of trade agreements on commercial issues) The four factors that determines the MMR model Functions of the economy The polity Conditions of political regime type The executive’s optimal level of trade protection in order to explain the trade preference of voters and government. The Function of Government’s Maximized Level of Import Tariff Settings

Figure 1. The best response functions t Leviathan strategy t* 1 tm =t 0 Nash Equilibrium _ (Ideal voters) t t’(Chosen by incumbents) ~ U ^ U Um _ Sources: Mansfield D. E. ; Milner V. H. ; Rosendorff B. P. (Summer, 2002). Why democracies cooperate more: electoral control and international trade agreements. International Organization, 56(3), p. 486.

The Results of MMR Model THE NUMBERS OF PROPOSITION RESULTS OF EACH FUNCTION PROPOSITION 1: Comparing Political Regime: Imperfect Control and Gains for the Executive. • • The agreement is preferred by governments, which are sufficiently democratic and patient. The more democratic the polity is, the greater the gains from cooperation. PROPOSITION 2: Comparing Political Regime: Perfect Control and Gains for the Executive. • The more democratic the polity is, the greater the gains from cooperation. PROPOSITION 3: International Games. • The probability that two countries form a RTA and WTO rises with the level of democracy in each country. Sources: Mansfield D. E. ; Milner V. H. ; Rosendorff B. P. (Summer, 2002). Why democracies cooperate more: electoral control and international trade agreements. International Organization, 56(3), 477 -513.

Methodology The data for our test are drawn from a wide range of World Bank, UN COMTRADE, International Monetary Fund (IMF), Polity IV, International Financial Statistics (IFS), and Industry Trade Data. The data of bilateral trade in SITC REV. 3 (manufactured goods-labor intensive sectors) from ASEAN-5’s major trade partners, such as, Malaysia, Philippines, Indonesia Singapore, and Thailand, from 1993 -2005. The panel data analysis (cross section and time-series method) because the advantages of this method are that panels can capture all relevant relationships among independent and dependent variables over time, and monitor unobservable bilateral-trade-pairs’ individual effects. Disputes ij is not included in this inquiry because there is no relationship of disputes in terms of military conflicts The objective of Analysis Hypothesis: the increased probability of interstate cooperation under either RTAij or WTOij is caused by the rising democratic levels. The Concept of Neoliberal Intuitionalists (International Institutions).

Model I: A Regression model of RTAij (Regional Trade Agreement) RTAij = 0 + 1 GDP i+ 2 GDP j + 3 CHECK &BALANCE i + 4 CHECK &BALANCE j + 5 REG i + 6 REG j + 7 POLARIZATION i + 8 POLARIZATION j + 9 DISTANCE ij+ 10 POPULATION i+ 11 POPULATION j + ij Model II: A Regression model of WTOij (World Trade Organization) WTO ij = 0 + 1 GDP i+ 2 GDP j + 3 GDP i+ 4 GDP j+ 5 REG i + 6 REG j + 7 DISTANCE ij+ 8 LANGUAGEij+ 9 CONTIGUITY ij+ 10 PAR_COM i + 11 PAR_COM j + 12 CHECK &BALANCE i + 13 CHECK &BALANCE j+ 14 DISTANCE ij+ 15 POPULATION i+ 16 POPULATION j + ij Data Descriptions RTAij = the variable equals 1 if country i and j participate in interstate cooperation or trade liberalization of RTA in year t, and 0 otherwise. GDPi (GDPj) = Gross Domestic Product of country i (j) in year t, (Size of State) GDP i ( GDPj) = the changes in the GDP of i and j from year t - 1 to t, (Downturns in the business cycle) REG i (REGj) = DEMOC – AUTOC in year t, * LANGUAGE ij = this variable equals 1 if country i and country j use the same language in year t, and 0 otherwise, POLARIZATION i (POLARIZATION j) = this variable equals 1 if i or j consists of polarization in year t and 0 otherwise, DISTANCEij = distance between country i and country j in year t, CONTIGUITYij = this variable equal 1 if country i and country j share the same border in year t, and 0 otherwise, PARCOM i (PARCOM j) = point measure of level of competitiveness of participation (0 -10) in year t, POLCOM i (POLCOM j) = point measure of level of political competition (0 -5) in year t, CHECK &BALANCE i (CHECK &BALANCE j) = the point measure of level of stability and check& balance (0 -5) in year t, WTO ij = the variable equals 1 if country i and j participate in interstate cooperation of WTO, (country i) and country j in year t, and 0 otherwise. ij = error term

Table 2. 1: Results of Binary Probit Models with Panel Data (RTA ij) Independent Variables Constant (1) (2) (3) (4) (5) (6) 2. 07*** 2. 54*** 2. 91*** 2. 51*** 2. 14*** 2. 11*** (-4. 48) (-4. 69) (-4. 6) (-5. 56) (-3. 66) (-5. 35) 2. 53 E-09** Trade flow 1. 70 E-07 (-2. 17) -1. 88 Population i -5. 78 E-09 -2. 23 (-1. 93) (-2. 47) (-1. 7) Population j -5. 62** -9. 95 E-09** -4. 61 E-09 -5. 95 E-09 (-2. 26) (-2. 17) (-1. 87) (-5. 35) -1. 56** -1. 74** -1. 12* -7. 49 E-09** -1. 37 E-08*** -3. 55 E-09 Language ij Polalization i -1. 17** (-1. 78) (-2. 17) (-2. 19) (-1. 48) Polalization j -1. 17** -. 164** -1. 55** -1. 56* (-1. 78) (-2. 29) (-2. 10) (-2. 11) Reg i 0. 00 (-1. 49) -0. 05 0. 009** (-1. 2) Reg j 0. 0058** (-0. 21) (-2. 06) Change of GDPi -1. 42 E-12 (-0. 16) Change of GDPj -4. 08 E-14** (-1. 72) Distance ij 0. 00* 0 4. 11 E-05 (-1. 61) (-0. 48) -0. 11 Check & balance i -0. 267** (-1. 78) Check & balance i -0. 262 (-1. 89) Observations Number of country R-squared 145 145 160 259 5 5 5 0. 12 0. 22 0. 30 0. 13 0. 1 Notes Titles: Robust standard errors in parentheses *** p<0. 01, ** p<0. 05, * p<0. 1

Table 2. 2: Results of Binary Probit Models with Panel Data (WTOij) Independent Variables (1) (2) (3) (4) Constant 0. 769 (-0. 97) -4. 95 E-10 (-0. 205) -3. 57 E-09 (-1. 065) -0. 288*** (-2. 481) -0. 2109** (-1. 918) 1. 804*** (-3. 1) 6. 66 E-10 -0. 28 9. 77 E-10 (-0. 677) -0. 209*** (-2. 53) -2. 094*** (-1. 96) 0. 057 (-0. 05) -9. 37 E-09 (-1. 51) 9. 98 E-10 (-0. 4) -0. 319** (-2. 43) -2. 88** (-2. 35) 0. 603** (-1. 75) 0. 459** (-2. 35) 1. 62 E-12 (-1. 2) 1. 62 E-13 0. 905** (-2. 056) -5. 92 E-09** (-1. 82) 2. 84 E-09 (-1. 28) Population i Population j Check & balance i Check & balance j Par_com i Par_com j GDP i GDPj 0. 188 0. 291 (-1. 21) 0. 016 (-0. 76) -0. 472 (-0. 382) (-0. 54) (6) 0. 79** (-0. 04) -0. 45*** (-3. 40) -0. 32*** (-2. 68) -0. 13** (-1. 88) -0. 21** (-2. 34) (-0. 752) Contiguity ij Language ij (5) 1. 729** (-2. 2) 0. 0007 (-0. 49) GDPi 1. 76 E-13** (-2. 083) 2. 03 E-13** (-2. 48) GDPj -2. 28 E-14 (-1. 22) -4. 04 E-14* (-1. 54) 0. 178*** -3. 49 -0. 052 (-0. 78) 0074** (-1. 735) 0. 28** (-2. 34) -0. 00*** (-2. 82) 160 5 0. 08 Reg i Reg j Polcom i Polcom j 0. 057* (1. 641) -0. 0846 (-0. 944) 0. 0689* (-1. 698) 0. 2411* (-1. 668) Distance ij Observations 160 Number of country 5 5 R-squared 0. 1 0. 06 Notes Titles: Robust standard errors in parentheses *** p<0. 01, ** p<0. 05, * p<0. 1 -6. 864** (-3. 03) -0. 00 (-0. 89) 160 5 0. 25 260 5 0. 08 0. 06** (-1. 69) 0. 09** (-1. 92) 160 5 0. 06

Concluding Remarks Developing Countries’ Perspectives Perceptions Closer Analysis of ASEAN • Asymmetric issues. • The interplay between formal and informal institutions in relationship to the policy space. • Adam Smith –Unilateral trade Policy • Political-Economy Approach • Greater transparency. • Speeding-up process without threatened qualities of decision making. • Improvement compliance through expansion of range of monetary supports.

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