Understanding Our Saving Capacity Competitive Positions of Exports

Understanding Our Saving Capacity, Competitive Positions of Exports in Dynamic Asia, Welfare Impacts of Asia’s FTAs & FDIs, and Shifts in Development Paradigm (for Informal ODA Discussion Meetings in Jakarta, Indonesia) Prof. Shigeru T. OTSUBO Advisor Extraordinary Tokyo Task-Force for Japan’s ODA Strategy toward Indonesia The Government of Japan Professor Graduate School of International Development Nagoya University 1

Is the Doomsday Imminent ? Determinants of the (private) saving ratio: Income (level), rates of return, uncertainty, domestic/foreign borrowing constraints, financial depth, fiscal policy, pension system, income/wealth distribution, and demographics … 2

Is the Doomsday Imminent for Indonesia? The pattern of Indonesia’s age dependency ratio lags behind that of East Asia (average) by as much as 10 years, but it will bottom out in 2015 and the rising trend will be visible by 2025 …. If Indonesia can mobilize her own savings …. . Targeting the year 2025 for major development outcomes will be a right strategy. 3

Indonesia’s Demographic Trends So far, Indonesia’s population share of ages 65+ has been only gradually rising, while that of young generation ages 0 -14 has been declining rapidly…. . 4

Japan’s Current Account Balance Japan’s CAB movements are still cyclical, but if 1) TB surplus is on a shrinking trend, and 2) Income Balance surplus continues to expand …. . 5

Japan’s Trade Partners In early 1990 s, Asia replaced the US as Japan’s top export destination and as her top import origin …. . Exports Imports 6

Re-Importation by Japanese Firms Operating Overseas 1) The share of re-imports by Japanese firms in total imports has reached 15% mark at the end of 1990 s and it continues to increase. 2) More than 80% of those re-imports are from Asia. 7

Development Stages Theory of BOP (cf. Crowther, 1957) Indonesia Malaysia Korea Singapore Japan Thailand Immature Debtor Country Current Account Balance Trade Balance in Goods & Services Income Balance (returns on Investments) Net Foreign Assets Capital Account Balance Matured Debtor Country Deficit - Deficit + + + - - Deficit - - Surplus + + + - - + + - Surplus + Deficit F. Asset Take-down Country - Surplus Deficit Matured Creditor Country + Surplus Immature Creditor Country + Surplus Debt Repayment Country + - - - 8

Export Product Share in 2000 Pulp Coal Vegetable oil Data processing mac. Furniture Petro Gas Wood Textile Radio Telecom Footwear Export Potential Tables are provided at SITC 3 -digit level in an Appendix. 9

Indonesia’s Shifting Comparative Advantage in Asia u Revealed Comparative Advantage RCAij = ( Xij / Xi ) / ( Xj / X ) RCA>1 or RCA<1 1) RCA indices are computed for East Asian economies using UN/COMTRADE (WB Version) SITC 3 -digit level (269 lines) data, for 1985, 1990, 1995, and 2000. 2) Then correlations among RCAs for Asian economies are computed. 10

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Looking at the competitive structure in Asia from Indonesia’s point of view: 1) Indonesia’s export structure continues to be complementary to those of Japan, Korea, and Taiwan. 2) Indonesia faces stiff competition with Malaysia in exports, and this competition has become stiffer. 3) Competition with Thailand Philippines has been also keen, and that with Thailand has become keener. 4) Competition with Singapore has been decreasing due to … (forming a growth triangle? ) 5) China (w/ or w/o Hong Kong) emerges as a competitor for Indonesia. 12

Looking at the competitive positions of economies in Asia vis-à-vis. China: 1) Korea started to position herself vs. China in early 1990 s. . 2) Hong Kong, Singapore, Taiwan, Malaysia, Thailand started to position themselves vs. China in the latter half of 1990 s. 3) Indonesia and Philippines are lagging behind in this game of ‘coexisting with China’ in her emergence in the global market. 13

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The GTAP Model GTAP Web Site: www. agecon. purdue. edu. gtap u The GTAP model is a multi-region multi-industry computable general equilibrium (CGE) model constructed over a database consisting of bilateral trade, transport, and protection data for economic linkages among countries/regions, and of input-output tables that represent intersectoral interactions within each country/region. Each industry is represented by a single homogeneous commodity. The model includes three factors of production: labor, capital, and land. Labor and capital are mobile across domestic sectors, while land is assumed to be used only in agricultural sectors. Capital is traded internationally like intermediate inputs, while labor and land are not mobile across borders. u Microeconomics-oriented model with incentive structures of economic agents explicitly modeled. u 　Global saving-investment identity is preserved. u WTO, WB, USDA, and EPA are among the active users. u For further details, refer to the papers, ｢経済分析 ｣１５６号 , and the GTAP web site. 15

[Static Impact Only] 16

[Static Impact Only] 17

In the APEC region, FDI inflows had already started to create exports (more than imports) in early 1990 s. 18

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Results for APEC Trade Gravity Models with FDI 22

Analyzing Welfare Implications of Japan’s FDI Activities in Asia 23

Simulation 1: Transfer of Capital Stock under the Assumption of Perfect Competition (CRTS) A transfer of capital stock from Japan to nine developing Asian economies/regions (Indonesia, Malaysia, Philippines, Thailand, China, Hong Kong, Taiwan, South Korea, and Singapore) is emulated in order to assess the “stock effects”. Capital stock endowments of recipient Asian economies are augmented by 1 percent while Japan’s capital stock is reduced by the amount equivalent to a total increase in the recipients’ capital stock. Without an accompanied technology transfer, there is no distinction between indirect investments and direct investments. International capital mobility is assumed. The savings rate is fixed. Simulation 2: Transfer of Capital Stock and Technology under the Assumption of Perfect Competition Production and managerial technologies accompany the transfer of capital stock. Assuming FDI flows to manufacturing sectors and there is resultant intra- and inter-industry technology spillover, the rate of technology growth is augmented in all seven manufacturing sectors (food & beverages, textiles, chemicals, metals, transport equipment, machinery, and other manufacturing) by 1 percent. Simulation 3: A Matching Increase in Capital Stock by Domestic Investment-Savings (Cofinance) Perceived higher rates of return in industrial activities with FDI inflows prompt domestic investors to mobilize domestic resources (savings) to cofinance the industrial projects. Recipient countries’ capital stock is further increased by an increment in domestic investment equivalent to the amount of the initial inflow of FDI. This simulation is conducted on top of Simulation 2 using the output file produced in Simulation 2. International capital flows are suppressed and the trade balance is fixed in order to force domestic savings to finance new domestic investment. The savings rate is thus endogenized on the marginal base. Simulation 4: Transfer of Capital Stock under the Assumption of Monopolistic Competition (IRTS) Transfer of capital stock (Simulation 1) is repeated, but this time, under an assumption of monopolistic competition with scale economies in all of the seven manufacturing sectors (food & beverages, textiles, chemicals, metals, transport equipment, machinery, and other manufacturing). International capital mobility is assumed. The savings rate is fixed. Simulation 5: Transfer of Capital Stock and Technology under the Assumption of Monopolistic Competition Transfer of capital stock and technology (Simulation 4) is repeated, except that monopolistic competition is assumed for the manufacturing sectors. Simulation 6: A Matching Increase in Capital Stock by Domestic Investment-Savings (Cofinance) Same as Simulation 3 except that the simulation is conducted under the assumption of scale economies and that the output file of Simulation 5 is used. International capital mobility is suppressed. The savings rate is endogenized. 24

FDI is a positive-sum game, not a zero-sum game! 25

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Major strategic implications of the study for Japan (FDI-supplier) are: (1) 　 In order to benefit from the positive-sum game of FDI, Japan (or any FDI-supplier) should also provide a conducive environment to attract inward FDIs. Outward FDI alone is not likely to improve domestic welfare (just like the case in international trade) unless it is driven by welfare-improving domestic causes. Also, two-way flows in a large number of countries should enlarge the positive sum of FDI. (2) 　In order for Japan (FDI-supplier) to avoid the possible secondary burden of a transfer of productive resources, it should also mobilize local savings by looking for local partners and/or raising local funds when executing FDIs. (3) 　 It may be important to retain R&D facilities in the domestic market and preserve technology terms of trade if one supplies technology abroad along with capital. Looking at the results from Indonesia’s (or any other FDI-recipient) point of view: (1) Indonesia should promote (call back? ) inward-FDIs. (2) Intra-APEC FDIs should promote Indonesia’s exports and mitigate BOP problems. (3) Technology (productivity) enhancement is the key. (4) (3) Cofinancing (mobilizing domestic savings/investment together with inward-FDIs) will increase Indonesia’s welfare, even though it turns TOT slightly against Indonesia. 27

Revolutions and the Evolution of Economic Systems Private ownership of the means of production Capitalism Primitive Market Economy Industrial Revolution Imperialism Monopoly Capitalism IT-driven Market Economy The US economy after the IT revolution IT Revolution Colonialism Primitive Economy Socialist Revolution Informal Sector Market-oriented Industrialized China Larger-scale-organization oriented Smaller-scale-organization oriented Transitional State Socialism Development Planning China under Mao Zedong (Maoist China) Linux USSR Socialism Utopian Socialism State ownership of the means of production 28

Spending per Capita on Information Infrastructure in 1998 (US$) Source: John Gage, “From Digital Divide to Digital Opportunity: Business Leaders Report for Davos”, Development Outreach, World Bank Institute (Spring 2000). 29

Structural Reform for Sustainable Growth Changing Roles of Government, Corporate, and Household Sectors Self-reliance of Individuals Expansion of Corporate　 Activity and Investment Corporate governance Corporate accounts disclosure Job choice society Employment practices Human capital investment Corporate pension (401 k type) Portfolio investment diversification Corporate restructuring FDI into Indonesia IT revolution Regulatory reform Entrepreneurship promotion Personal income taxation Corporate taxation Financial system reform Social security SME policy Education reform Public investment reform Information network Labor market liberalization Budget consolidation Administrative reform SOE reform Local gov’t autonomy Electronic government Compact and Efficient Government 30

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