Asia Pathways http://www.bddve.live A blog of Asian Development Bank Institute (ADBI) Tue, 26 Feb 2019 05:41:28 +0000 en-US hourly 1 The impact of trade opening on developing Asia: Evidence and policy implications http://www.bddve.live/2019/02/the-impact-of-trade-opening-on-developing-asia-evidence-and-policy-implications/ http://www.bddve.live/2019/02/the-impact-of-trade-opening-on-developing-asia-evidence-and-policy-implications/#respond Tue, 26 Feb 2019 02:19:23 +0000 http://www.bddve.live/?p=3666 The impact of trade opening on developing Asia: Evidence and policy implicationsEven though in aggregate, trade leads to economic gains, it almost always creates winners and losers. To design appropriate social protection policies, it is important to know the identities of these winners and losers. These policies need to be in place for equity reasons as well as to build and sustain support for free trade.

To determine the identity of potential winners and losers, we can divide the population in several different ways. For example, for every good produced, we have two main groups, namely producers and consumers. In this context, what researchers have found for the various Asian countries they have studied is that trade liberalization improves productivity through greater competition from imported products as well as through cheaper and a greater variety of inputs. They also find the input channel to be the stronger of the two. At the same time, trade liberalization affects price-cost markups. While greater competition through trade lowers the monopoly power of domestic firms and reduces these markups, cheaper inputs give firms or producers the scope for greater profit margins and markups. The net effect of these two channels results in lower prices faced by consumers and improvement in their welfare. At the same time, due to the dominance of the input-related channel, firm profitability could also go up.

Moving to poverty and inequality, there have been huge reductions in poverty all over Asia arising from opening to trade. The two largest Asian countries, the People’s Republic of China (PRC) and India, have experienced large reductions in poverty, brought about by their impressive growth since liberalizing their trade regimes. The PRC has had a better performance than India in both growth and poverty reduction.?However, while both have witnessed an increase in inequality, the PRC’s rise in inequality has been much sharper. While the World Bank’s $1.90-a-day poverty rate for India in the 1980s was about 55%, it is about 20% now. The PRC, within the same period, has brought down its poverty rate drastically from almost 70% to 1% now. The Gini inequality index for India has increased from 32 to 34, while for the PRC it has gone up from 28 to 42. While the ratio of the top 10% to the bottom 10% within the last 3 decades increased from roughly 7 to 8 in India, it has increased from 6 to 18 in the PRC.

Many researchers have concluded that given the right kinds of complementary conditions, such as a high road density, a large number of good ports relative to the size of the country, and flexible labor market regulations, trade liberalization will have a favorable impact on poverty reduction. Standard trade theory predicts that the abundant factor (low-skilled labor in the case of developing Asia) will benefit from trade liberalization, thereby reducing both inequality and poverty, but this channel may not always work in practice due to frictions that prevent free intersectoral labor mobility. The proximate cause for the poverty reduction we see after trade reforms in many Asian countries is most likely economic growth. However, greater imports of intermediate and capital inputs, which are complements for high-skilled labor but substitutes for low-skilled labor, may have led to higher inequality.

Next, moving to the wage and employment effects of trade reforms, researchers have not found any adverse impacts so far for the few Asian countries studied, namely India, Indonesia, and the Republic of Korea. This is in sharp contrast to the non-Asian countries studied, which have seen some adverse effects. As a result, we need to exercise caution in generalizing the positive effects for the remaining Asian countries for which there are no studies. Besides, we need to look at the impact on average job quality, an inverse measure of which is the extent of informality. The available evidence for India clearly shows that in the presence of restrictive labor regulations, import competition increases informality. Coupled with the evidence of complementarity between trade and labor-market flexibility also in some of the Latin American countries, we can expect labor reforms to restrict, if not reverse, the informality-increasing effects of trade reforms. It is interesting to note here that in contrast to the impact of import competition, export expansion seems to reduce informality, as seen in the case of Viet Nam.

Let’s next move to the issue of labor adjustment or mobility costs for workers, which also have significant implications for realized national gains from trade. These costs, incurred by a worker from moving from his/her current employment to another sector, turn ?out to be a few multiples of his/her annual average wage: roughly 4 times the average wage in South Asia and Central Asia and 3.5 times in East Asia and the Pacific. Looking at individual countries, the labor mobility cost is just below 3 times for India and the PRC and close to 5 times for Bangladesh, compared to between 1 and 2 ?times for developed countries. As a result, a sizeable proportion of the potential welfare gains from trade are being wiped out in Asia. In the relatively low-mobility-cost developing countries like the PRC and India, about 10%–15% of the potential gains from trade get wiped out, while in the high-mobility-cost countries like Bangladesh and the Philippines, about 33%–50% of the potential gains are eliminated.

Researchers suggest several policy options to reduce these adjustment costs. These policies include subsidizing destination-specific relocation costs, training programs to provide skills specific to destination sectors, unemployment benefits or insurance, job search assistance, subsidized employment through public works programs, announcing trade reforms in advance or gradual trade liberalization that would allow for advance planning, and relatively less stringent restrictions on the firing of workers. These policies can also be useful in addressing several other distributional effects of trade reforms that are found in various studies in the form of trade’s impact on labor-demand elasticities, the bargaining power of workers, and wage inequality, etc., as detailed in my recent ADBI working paper.

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High-Speed Rail: Necessary but not sufficient for socioeconomic development http://www.bddve.live/2019/02/high-speed-rail-necessary-but-not-sufficient-for-socioeconomic-development/ http://www.bddve.live/2019/02/high-speed-rail-necessary-but-not-sufficient-for-socioeconomic-development/#respond Thu, 21 Feb 2019 06:19:34 +0000 http://www.bddve.live/?p=3660 High-Speed Rail: Necessary but not sufficient for socioeconomic development Since its inception in Japan in 1964, high-speed rail (HSR), and its impact on the economy, has received attention from policymakers worldwide. Early HSR development was more of a race to go faster, and the early success led policymakers around the world to believe in the power of HSR for catalyzing growth. For the next 4 decades, the global HSR network saw moderate growth, reaching a combined distance of around 10,000 kilometers (km) in 2005. However, until that time, a number of criticisms of HSR emerged regarding the sluggish success of the new HSR routes compared to some early predecessors. The costs were seemingly too high for the benefits that the new HSR bought in. ?It is in the last decade that the world has seen rapid growth in the HSR network, with the People’s Republic of China (PRC) alone building around 30,000 km of the network. The rapid economic performance of the PRC, in tandem with its economic development, has once again fueled the debate on whether HSR is good for the socioeconomic development of a country.

This debate was deliberated on in a two-day conference on HSR Spill-Over Effects and Quality of Life (QOL), held at the Asian Development Bank Institute in Tokyo. The conference was attended by close to 75 eminent international researchers from academic institutions and government organizations, and senior officials from various HSR-operating companies. The conference focused on the modeling of the spillover and QOL effects of HSR, the impact of HSR on local and regional development, and deriving lessons from HSR-operating countries. It would be apt to summarize the discussions in the conference in one line: HSR is a necessary but not sufficient condition for the socioeconomic growth of a country. The following sections of this article will expand on this statement.

HSR is a safe, convenient, and environmentally friendly mode of transportation. In Japan, HSR operates at a maximum commercial speed of 270–320 km/hour. HSR in Japan is not only known for its speed (time-saving for passengers) but also for its remarkable safety (zero fatal accidents in 5 decades), punctuality (less than 30 seconds’ average delay per train), and convenience (1 train every 4 minutes).

Experience from the PRC has demonstrated the effects of HSR on QOL for people with regards to well-being, clothing, food, and transportation. People can afford comfortable housing in distant cities without compromising on commuting time or saving money. Such diversion to outer cities has also contributed to alleviating the problems of traffic jams and pollution in high-density urban areas.

Despite the advantages, operating a successful HSR comes with its own challenges. Although HSR may be the most preferred travel mode for the majority of HSR routes, not all HSR lines in Japan are commercially successful. However, such challenges have not deterred HSR operators from improving the quality of services. Instead, they have innovated the business model by efficiently utilizing station space. A typical HSR station in Japan is filled with shops, restaurants, and public services, creating an opportunity for HSR travelers and the public to use the space while generating revenue for the HSR operators. Stations are well-connected with urban railways, buses, and taxis, creating convenient transfers for passengers for their ongoing journeys. Typically, all large stations are surrounded by high-rise buildings, with large office and commercial spaces. Such concentration of economic activities has enabled operators to attract new trips. In this context, the discussions at the conference focused on finding answers to the following questions: Is HSR alone sufficient for creating such development opportunities? How can countries with no previous HSR experience achieve the same?

One of the fundamental challenges with HSR is its capital-intensive nature. Various methods for private sector participation have been unsuccessful because of the high risk of HSR investments. One proposed solution to counter the challenges was to use property tax revenues to improve the yield of HSR investments. Evidence discussed in the conference showcased a rise in property prices in the nearby regions after the introduction of HSR. These are spill-over effects of HSR. If some of these spill-over effects could be monetized and returned to investors, the overall yield could be improved. However, monetization of such spillover effects is not an automatic process. Evidence was also presented to show that investments in sectors such as education are essential for materializing these spillover effects. The governments local to the station area have a crucial role to play in land readjustment and land development processes (key to the property price appraisal). Moreover, practices of property price monitoring, tax collection, and revenue sharing must be institutionalized through effective stakeholder coordination.

Other evidence showed that HSR contributes to regional development. However, the interventions necessary to enable such regional development should be planned well in advance of the HSR opening. It is important is to promote the localization of the HSR, i.e., carefully assimilating the HSR in the regional master plan and taking measures to integrate the unique characteristic of each region with that of the HSR. For example, the data presented for the case of Japan suggests that the mere connection to HSR did not lead to a rise in local economic activities (tourism or the number of businesses, etc.), but only those regions that developed unique strategies using HSR as a tool benefitted. In Japan, a common practice among local governments is to develop tourist packages in collaboration with HSR operators to promote local tourism. In the absence of these unique characteristics, chances are that because of the HSR, economic activities might even move away from the region. Hence, efficient coordination between the national and local governments, local businesses, and the HSR-operating companies is necessary for realizing the abovementioned benefits.

Finally, the efficiency of HSR operation is dependent not only on its effective operation but also on the quality of each of the previous steps, such as design, materials, construction, etc. In this context, the need for robust capacity building and training efforts for managers, engineers, and the workforce, alike, were deemed necessary. Moreover, it was stressed that the objectives of training programs should not only be limited to skill development but also the development of the attitude that “quality is everyone’s responsibility”.

In such a way, only when the recipient countries have taken sufficient measures to localize HSR as much as possible, the wider economic benefits, which can last for decades, can be realized.

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Services policies and manufacturing exports http://www.bddve.live/2019/02/services-policies-and-manufacturing-exports/ http://www.bddve.live/2019/02/services-policies-and-manufacturing-exports/#respond Wed, 06 Feb 2019 06:50:51 +0000 http://www.bddve.live/?p=3651 Services policies and manufacturing exports

Services and manufacturing are closely intertwined. Manufacturers use services as inputs into their production process. It is difficult to imagine a modern global value chain working without efficient transport services, financial services, logistics, and business services.

The Trade in Value-Added (TiVA) dataset of the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO) gives us a first indication of just how important services are for exporters of manufactured goods. Focusing on Asia, we see that the proportion of services value added in gross exports of manufactured goods since the 1990s has averaged just under 33% in countries of the Asia-Pacific Economic Cooperation (APEC) forum, Association of Southeast Asian Nations (ASEAN), and East Asia. Interestingly, the split between domestic and foreign origin services value added has changed significantly. Domestic origin services value added declined in Asia between 1995 and 2011. However, the total share of services remained constant, which implies that the foreign origin share increased. The 1990s and 2000s saw substantial liberalization of services markets all around the world, including in Asia. Indeed, the People’s Republic of China’s 2001 WTO Accession Agreement had real “bite” in services, and was associated with meaningful changes in policy that significantly opened key services markets to international competition (Mattoo 2003).

Value added of services in manufacturing

What does this dynamic mean for policy? Clearly, manufacturers need access to high-quality, competitively priced services. Particularly in the context of developing countries, this necessarily involves some recourse to world markets. Indeed, reliance on world services markets by manufacturers has generally been increasing over time. This dynamic suggests intuitively that services policies can have direct and indirect effects on the performance of manufacturers, including in terms of export market gains.

First, and best known, there is an indirect effect. Opening up services markets to foreign competition by lowering trade costs increases competitive pressure and favors the reallocation of resources from less productive firms to more productive ones. As a result, productivity in services sectors increases (Miroudot, Sauvage, and Shepherd 2012). This dynamic has been shown to operate at the level of individual firms by Hoekman and Shepherd (2017). Since many services are supplied locally, there is evidence of a productivity linkage between manufactured goods exporters and service suppliers in the same locality, which in turn fosters greater trade integration through the standard Melitz (2003) productivity selection channel.

Less well known is the prospect that services policies could have a direct impact on exporters of manufactured goods. The mechanism is simple. Manufacturers source a substantial proportion of their total services inputs from world markets. As a result, liberalization of trade policies that increase trade costs allows manufacturers to acquire those services at a lower price, which acts like a productivity shock and promotes export market success in the same way as the indirect effect. Hoekman and Shepherd (2017) again show suggestive evidence of such an effect using a gravity model, but it is little explored in the literature.

Counterfactual simulations: Reducing services trade restrictiveness vs. eliminating tariffs

To examine this effect in further detail, we estimate a standard gravity model for manufactured goods and include services policies (Services Trade Restrictiveness Index or STRI) as an explanatory variable. We then conduct counterfactual simulations using two scenarios: (i) a 10% reduction in the restrictiveness of services policies and (ii) elimination of manufacturing tariffs.

Our simulation results show that the impacts on trade flows of decreasing services policy restrictiveness are much larger than those for reducing tariffs. They are strictly positive in all cases, in line with expectations. Changes in exports and imports are typically 2–3 times higher under the first scenario than under the second.

Second, impacts on real manufacturing output are smaller than trade impacts in both cases. Arkolakis, Costinot, and Rodriguez-Clare (2012) show that the welfare gains to the United States from the totality of its international trade is between 0.7% and 1.4% of gross domestic product. Against that background, our simulation results for the impact of the two liberalization scenarios are in fact quite large. However, whereas the real output impacts of services liberalization are strictly positive, there are some small negative impacts in the case of tariffs, due to general equilibrium effects.

Third, as would be expected from larger import impacts, the effects on real output of liberalizing services policies are considerably larger than those from liberalizing tariffs. This sits well with existing evidence from computable general equilibrium models that the welfare implications of services liberalization are typically much larger than for goods, but it is striking that the result flows only from a consideration of the impact of services policies on manufacturing, not on the services sector itself.

Policy implications

Our results are of particular importance in developing Asia, where policy makers are strongly focused on manufacturing. In reality, development of manufacturing cannot be divorced from development of services. The two are closely intertwined. Nonetheless, it is typically challenging to give services the policy priority they deserve in developing Asia due to the strong belief that manufacturing is the key to medium-term productivity and income growth. That challenge is only made more daunting by the growth of “services pessimism” driven in part by the premature deindustrialization thesis, which asserts that only manufacturing can support rapid productivity growth and create large numbers of good jobs, and that manufacturing activity is peaking “too early” in the developing world.

A more weighty argument for policy makers in the region may be that services liberalization can boost manufacturing output and exports. In other words, policies that can bring about more competitive and integrated services markets are in fact perfectly aligned with the goal of promoting manufacturing. The possibility of a win–win scenario should appeal both to those convinced that the future of the region is in services and to those who argue that the manufacturing sector needs to continue to develop in much of the region.

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How services helped power “Factory Asia” http://www.bddve.live/2019/01/how-services-helped-power-factory-asia/ http://www.bddve.live/2019/01/how-services-helped-power-factory-asia/#respond Mon, 21 Jan 2019 08:07:57 +0000 http://www.bddve.live/?p=3639 How services helped power “Factory Asia” Measuring productivity in the services sector is fraught with difficulties. One key aspect of the “premature deindustrialization” argument is the hypothesis that services are low productivity relative to manufacturing, and that prospects for rapid and sustained productivity growth, which are the primary source of gains in per capita income, are greater in manufacturing than in services.

Rodrik (2016) argues that manufacturing has a special role in development and growth, as it is technologically dynamic and tradable (i.e., not constrained by small domestic markets). In a recent study (Shepherd 2019), we take a different approach, focused on trade data. Productivity differences are a key driver of trade flows between countries, according to Ricardian logic. If the relative productivity hypothesis behind the premature deindustrialization argument is true, we would expect to see it reflected in trade data. Specifically, we would expect countries to experience different patterns of revealed productivity growth between manufacturing and services.

Figure 1 shows growth in nominal gross exports over time, with all sectors re-based to equal 100 at the beginning of the sample (1995), so that changes can be interpreted in percentage terms. Although growth in manufactured goods exports outstripped that of other sectors in the golden age of development of “Factory Asia,” services in fact also enjoyed explosive export growth over time. The significant difference between manufacturing and services by 2011 is due to compounding over time. In fact, average annualized growth rates were very close: 12.5% per annum for manufacturing and 11.1% per annum for services. In any other environment, such a growth rate of services exports would be considered evidence of rapid and successful development of the services sector. Comparing rates of growth across macro-sectors suggests that although developing Asia enjoys a comparative advantage in manufacturing relative to all other sectors, there is nonetheless evidence of a comparative advantage in services relative to agriculture and, arguably, mining. In other words, the secondary and tertiary sectors are both sources of comparative advantage relative to the primary sector. From a development standpoint, this finding is important, as it suggests that movement out of low-productivity agriculture is benefiting both the manufacturing and services sectors. Second, these data do not support the assertions that manufactured goods are tradable in a way that services are not, nor that they have prospects for dynamic growth that services do not.

Figure 1: Exports by Macro-sector, Developing Asia, 1995=100

Figure 1: Exports by Macro-sector, Developing Asia, 1995=100

Source: Organisation for Economic Co-operation and Development (OECD) and World Trade Organization (WTO) Trade in Value-Added (TiVA) database; and author’s calculations.

Of course, even the relatively small sample of economies used in this analysis displays significant heterogeneity. To make this clear, Figure 2 shows average annualized growth rates of exports in each macro-sector for our developing Asia sample. In Brunei Darussalam; Hong Kong, China; India; Cambodia; the Philippines; Singapore; and Taipei,China, the growth rate of services exports is either higher than the growth rate of manufacturing exports, or is very close to it. Even in a manufacturing powerhouse such as the People’s Republic of China (PRC), the two rates are surprisingly close, as they are again in Malaysia, a country that is relying heavily on manufacturing in its effort to move from middle- to high-income status. The overall conclusion from Figure 2 is that there is a broad basis for arguing that services are a vital component of total trade growth in developing Asia.

Figure 2: Average Annualized Growth Rates of Exports by Macro-sector, 1995-2011, Developing Asia

Figure 2: Average Annualized Growth Rates of Exports by Macro-sector, 1995-2011, Developing Asia

Source: OECD-WTO TiVA database; and author’s calculations.

To formalize these insights, we make use of a recently developed Ricardian model of trade (Costinot, Donaldson, and Komunjer 2012). Under Ricardo’s logic, one important driver for trade is not absolute differences in productivity, but relative differences. In other words, we are interested in whether the PRC or Singapore is relatively better at producing financial services relative to electronics. A by-product of their model is a simple and intuitive methodology for estimating a theory-consistent measure of revealed comparative advantage using a standard gravity model. They take their insight to the data using trade in goods only, and their work has been extended to a more disaggregated level by Lemain and Orefice (2013). To our knowledge, this is the first application of the same methodology to services, in particular to allow for patterns of comparative advantage across goods and services sectors.

Results show that developing Asia typically has a comparative advantage in manufacturing sectors relative to agriculture. The most important point, however, is that the degree of advantage varies considerably across countries within sectors and across sectors within countries. Similarly, there is no simple conclusion to be drawn about relative patterns of comparative advantage in goods and services in developing Asia. Results are highly variable across countries and sectors, but there are many instances in which developing Asian economies have a comparative advantage in services subsectors relative to agriculture and in certain services subsectors relative to some manufacturing subsectors. In the PRC, for example, the extent of the comparative advantage in wholesale and retail trade relative to agriculture is comparable to that for textiles and clothing or machinery in manufacturing. Similarly, the degree of comparative advantage of the Philippines in transport services relative to agriculture is stronger than what is observed in all manufacturing sectors except for electronics.

The key conclusion is that policy makers should be wary of oversimplifying the relationship between manufacturing and services. On the one hand, the servicification of economies all around the world (e.g., Bamber et al. 2017), including in Asia, means that it is now quite impossible to talk about trade or productivity growth in manufacturing without considering services inputs. On the other hand, we have also shown that the experience of developing Asia has not been that countries choose “manufacturing” or “services” in an aggregate sense, potentially at the expense of the other, but that the two interact in complex ways. Similarly, our results suggest that “services pessimism” in developing Asia—the idea that only manufacturing can produce rapid and sustained productivity growth—is not warranted as a general proposition. Rather, we see that in individual countries, particular services subsectors have exhibited rates of revealed productivity growth that are absolutely comparable to what has been seen in manufacturing during the golden age of Factory Asia. In other words, it is important to look at the realities of performance at a disaggregated level before drawing strong conclusions about the development potential of particular sectors.
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References:

Bamber, P., O. Cattaneo, K. Fernandez-Stark, G. Gereffi, E. van der Marel, and B. Shepherd. 2017. Diversification through Servicification. Report prepared for the World Bank.
Costinot, A., D. Donaldson, and I. Komunjer. 2012. What Goods Do Countries Trade? A Quantitative Exploration of Ricardo’s Ideas. Review of Economic Studies 79:581–608.
Lemain, E., and G. Orefice. 2013. New Revealed Comparative Advantage Index: Dataset and Empirical Distribution. Working Paper 2013-20, CEPII.
Rodrik, D. 2016. Premature Deindustrialization. Journal of Economic Growth 21(1):1–33.
Shepherd, B. 2019. Productivity and Trade Growth in Services: How Services Helped Power Factory Asia. ADBI Working Paper 914. Tokyo: ADBI.

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What can services trade policy do for sustainable development? http://www.bddve.live/2019/01/what-can-services-trade-policy-do-for-sustainable-development/ http://www.bddve.live/2019/01/what-can-services-trade-policy-do-for-sustainable-development/#respond Wed, 09 Jan 2019 08:29:16 +0000 http://www.bddve.live/?p=3622 What can services trade policy do for sustainable development?

The 2030 Agenda for Sustainable Development has many services dimensions; improved access to and provision of services are necessary for attaining many of the Sustainable Development Goals. Because of their effects on competition in services markets and the ability of foreign providers to supply services to consumers and firms in developing countries, services trade policies should be considered in the arsenal of policy instruments that can be used in efforts to realize sustainable development objectives.

Services are important for sustainable development for at least two reasons. First, services matter for economic growth. Financial services are critical in providing funds to firms for investments and working capital. Connectivity, whether facilitating the physical movement of goods and people (transport services) or the exchange of knowledge and information (telecommunications services), is all about services. Information and communication technology (ICT) services, the internet, and electronic or e-commerce platforms provide the means for products to be exchanged between businesses or sold to final consumers, including increasingly products that can be digitized. Business services such as accounting, engineering, consulting, and legal services reduce transaction costs associated with the operation of markets and the enforcement of contracts, and they are a channel through which process innovations are transmitted across firms in an industry and across industries. In short, the performance of a wide range of services sectors matters for the overall productivity of the economy and growth in per capita incomes.

Sustainable development is of course not limited to economic growth and increasing per capita incomes. This is clear from the multidimensional nature of the Sustainable Development Goals (SDGs). These span 17 broad objectives ranging from reducing poverty to improving public health and protecting the environment. The second reason services matter for sustainable development is that service sector performance is salient for many “non-income” dimensions of the SDGs. The specific targets associated with 11 of the 17 SDGs explicitly refer to access to services or quality improvement in at least one distinct sector as a means of attaining the goal in question. For instance, financial services are mentioned in the context of SDG 1 (end poverty in all its forms everywhere) where “access to […] financial services, including microfinance” is part of target 1.4. Access to financial services is also explicitly required to end hunger, achieve food security and improved nutrition, and promote sustainable agriculture (SDG 2), to ensure healthy lives and promote well-being for all at all ages (SDG 3), to promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all (SDG 8), and to build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation (SDG 9).1

Trade and investment are key channels through which consumers and firms can improve access to higher-quality, more varied, and cheaper services. Moreover, trade and investment can potentially improve the performance of domestic services sectors through competitive pressures and knowledge spillovers. An important stylized fact in this regard is that trade costs for services are much higher than trade costs for goods. One reason for this is that governments maintain restrictive policies toward trade and investment. Reducing services trade restrictions therefore is a potentially salient instrument in the context of efforts to realize the SDGs.

In a recent paper (Fiorini and Hoekman 2018), we show that more open services trade policies appear to have a strong association with availability of (access to) several services that figure prominently in several SDGs, specifically financial, ICT, and transport services. Our findings suggest that removing policy barriers to services trade and investment may matter more for enhancing access to services than for increasing overall economic growth, although we also find that more open trade policy regimes toward transport services are positively associated with per capita income levels.

Our analysis further illustrates that reform of trade and investment policy alone might not be sufficient to improve access to services. Because of the intangible nature of services, foreign providers (exporters and investors) must generate at least part—and often much—of the value added of their economic activity in the importing country. They will therefore be affected by the local business environment. This in turn implies that the magnitude of the potential positive effects of a more open trade and investment regime may be conditional on the quality of institutions in the liberalizing economy (Beverelli, Fiorini, and Hoekman 2017).

Consider, for instance, financial services. The figure below shows that countries with lower barriers to trade and investment in financial services, as measured by the Services Trade Restrictiveness Index compiled by the World Bank, tend to perform better in terms of household access to financial services only when the quality of their institutions is high enough.2 This relationship is represented by the downward slope of the solid line. In the case of countries with low-quality institutions, there is no positive association between open trade regimes and domestic access to financial services (as can be seen by the dashed line).

Access to Financial Services, Services Trade Policy, and Institutions

Access to Financial Services, Services Trade Policy, and Institutions

STRI = Services Trade Restrictiveness Index.
Source: Authors.

That trade and trade policy are a means of implementing sustainable development has long been understood. However, the text of the SDGs tends to put the emphasis on measures to facilitate or promote developing country merchandise exports. Our research suggests this is too limited. The focus should extend to policies affecting imports of services and inward investment by service suppliers, as these can affect the availability and quality of a range of services that are relevant for specific SDGs. At the same time, greater focus on services trade restrictions needs to be complemented by greater attention to the quality of regulatory and economic governance institutions that have a major bearing on the magnitude of the potential positive effects of services trade and investment reform.
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1?See https://sustainabledevelopment.un.org/topics/sustainabledevelopmentgoals for the more detailed targets for each SDG.
2?Access to financial services is measured using the share of population above 15 years of age with an account at a formal financial institution. Data are sourced from the Global Financial Development Database of the World Bank. Quality of institutions is proxied with regulatory quality as measured in the Worldwide Governance Indicators database.

References:

Beverelli, C., M. Fiorini, and B. Hoekman. 2017. Services Trade Policy and Manufacturing Productivity: The Role of Institutions. Journal of International Economics 104(C):166–82.
Fiorini, M., and B. Hoekman. 2018. Restrictiveness of Services Trade Policy and the Sustainable Development Goals. ADBI Working Paper 903. Tokyo: Asian Development Bank Institute.

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Sectoral labor income share dynamics: Cross-country evidence from a new dataset http://www.bddve.live/2018/12/sectoral-labor-income-share-dynamics-cross-country-evidence-from-a-new-dataset/ http://www.bddve.live/2018/12/sectoral-labor-income-share-dynamics-cross-country-evidence-from-a-new-dataset/#respond Thu, 13 Dec 2018 09:31:28 +0000 http://www.bddve.live/?p=3603 Sectoral labor income share dynamics: Cross-country evidence from a new dataset

The study of the labor income share plays an important role in understanding the relationship between national income and personal income. However, most of the empirical studies on the labor income share are conducted at the country level, while the limited number of industry-level analyses focus primarily on advanced countries due to limited data availability.

In order to analyze the sector-level labor income share incorporating data from developing countries, we construct a new dataset at the 10-sector level.1 We collect information from three secondary data sources: the Groningen Growth Data Center 10-Sector Database, the Socio-Economic Account (SEA),2 and ILOSTAT.3 These datasets allow us to calculate the sectoral labor income shares for 53 countries across six regions.4 Of the countries, 20 are classified as developing countries.5 In this article, we would like to share the preliminary findings from the new dataset at the three-sector level to unveil the bigger picture.

In Figure 1, we show the unweighted regional averages of the labor income share in three broad categories.6 One must note that the numbers could be biased due to potential measurement error arising from sector-specific characteristics. For example, the labor income share could be overestimated for industries with many self-employed or seasonal workers, such as the agriculture and construction industries. This is because it is difficult to capture all the workers in such industries, and, as some studies suggest, in surveys, the self-employed tend to report incomes that are higher than their actual incomes.

Figure 1: Labor income shares across regions

Figure 1: Labor income shares across regions

Source: Authors’ calculations.

With these caveats in mind, we find that the tertiary sector offers the most generous rewards to labor. One exception is for the Europe and Central Asia region, where the secondary sector’s ratio of labor income to sectoral value added is larger than the other two sectors. In contrast, labor in the primary sector receives the smallest share of income and is significantly lower compared to the other sectors in all regions but two. The two exceptions are the Middle East and North Africa region and the sub-Saharan Africa region. Interestingly, both regions have their smallest labor income shares in the secondary sector, and the differences between the three sectors are smaller than for the other regions.

To see the relationship between sectors, we plot the changes in the labor income share in the secondary sector against those in the tertiary sector. The left-hand panel of Figure 2 shows the scatter plot for 22 countries in the Europe and Central Asian region. A quick glance at the graph suggests a positive correlation between the changes in the two sectors.

Figure 2: Changes in labor income shares: Manufacturing versus services

Figure 2: Changes in labor income shares: Manufacturing versus services

LIS = labor income share.
Note: The change in the labor income share is based on the starting and the ending year of the sample available for each country. For further details, see: Oishi and Paul (2018), Sectoral Labor Income Share Dynamics: Cross-Country Evidence from a Novel Data Set. ADBI Working Paper No. 875.
Source: Authors’ calculations.

During the sample periods, determined by the data availability for each country, the changes in the labor income share in the tertiary sector are the largest in Luxembourg (LUX) and Austria (AUT), and their changes are negative.7 Their changes in the secondary sector are also the largest and negative.8 About two-thirds of the countries in this region, 16 countries out of 22, experienced positive changes in their tertiary sector labor income shares. Among these, Germany (GER) experienced the largest changes.9 In the secondary sector, Greece (GRC) and Lithuania (LTU) experienced the largest positive changes.10 Compared with Germany and Lithuania, Greece shows a somewhat proportionate increase in both the tertiary and the secondary sectors.11 Portugal (POR) is the only country that appears in the fourth quadrant, showing a positive change in the secondary sector but a negative change in the tertiary sector. Including Portugal, only seven countries have opposite changes in their secondary and tertiary sectors.

The right-hand panel of Figure 2 shows the scatter plot for countries from other regions, mostly classified as developing countries. Overall, similar to the previous plot, we find a positive correlation. However, unlike the previous plot, more than half of the countries experienced a decrease in their tertiary sector labor income shares. In addition, we observe that regardless of the direction of the change, the percentage point changes in the tertiary sector are much larger than those in the secondary sector. We have 18 countries in this plot, and 15 countries are either in the first or third quadrants, which means that both the secondary and tertiary sector labor income shares moved in the same direction. Costa Rica (CRI) increased its labor income shares in both the secondary and tertiary sectors by the most among all countries,12 although there are countries with a longer sample period than Costa Rica. Another country worth noting is the Republic of Korea. Among the three countries with changes in opposite directions for their secondary and tertiary sectors, the Republic of Korea experienced significant changes in both sectors,13 while the other two countries’ changes were fairly close to zero.14

Many countries aim to improve people’s lives through increasing the labor income share and undertaking policy measures. However, as we have seen, some countries show opposite movements between the secondary and tertiary sectors. This suggests that the country-level evaluation of a policy may mask the dynamics. A policy may also lead to changes in opposite directions for the labor income shares of each sector. Therefore, if a government intends to target an increase in the labor income share to promote public welfare, sectoral analysis is indispensable.

There is no “ideal benchmark” or “specific target” for the labor income share. Interpretation of the labor income share requires careful attention and deeper understanding of each economy. And, of course, our calculation of the labor income share includes various noises and biases. However, we hope this sectoral analysis of the labor income share will contribute to evidence-based policymaking and lead to better policy outcomes.
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1?We follow the classification used in the Groningen Growth Data Center 10-Sector Database (https://www.rug.nl/ggdc/productivity/10-sector/).
2?The SEA is provided by the World Input Output Database (http://www.wiod.org/home).
3?ILOSTAT is provided by the International Labour Organization (ILO) (https://www.ilo.org/ilostat).
4?We follow the World Bank’s regional group classifications. We have 9 countries from East Asia and the Pacific, 27 from the Europe and Central Asia, 8 from Latin America and the Caribbean, 2 from the Middle East and North Africa, 2 from North America, and 5 from sub-Saharan Africa.
5?We follow the World Bank’s country classification by income level for 2018–2019.
6?Here, the primary sector includes the agriculture, hunting and forestry, fishing, and mining and quarrying sectors, following the International Standard Industrial Classification of All Economic Activities Rev. 3.1. The secondary sector covers the manufacturing and construction sectors. The tertiary sector consists of electricity, gas and water supply; wholesale and retail trade; repair of motor vehicles, motorcycles, and personal and household goods; hotels and restaurants; transport, storage, and communication; financial intermediation, renting, and business activities (excluding owner occupied rents); public administration and defense; education, health, and social work; other community, social, and personal service activities; and activities of private households.
7?Luxembourg -29.12 percentage points from 1995 to 2008 and Austria -27.46 percentage points from 1995 to 2007.
8?Luxembourg -20.13 percentage points and Austria -22.24 percentage points.
9?20.41 percentage points from 1996 to 2008.
10?Greece increases 11.47 percentage points 2000 to 2006 and Lithuania increases 10.72 percentage points from 1995 to 2008.
11?11.47 and 10.79 percentage points, respectively, during its sample period of 2000 to 2006.
12?58.41 percentage points in the tertiary sector and 31.23 percentage points in the secondary sector during 1998 to 2008.
13 While the tertiary sector increases by 21.15 percentage points, the secondary sector decreases by 11.29 percentage points during 1993 to 2008.
14 Egypt 5.34 percentage points and -1.40 percentage points for the second and tertiary sectors, respectively, from 1996 to 2007. Chile increases 1.69 and -0.72 percentage points for the second and tertiary sectors, respectively, from 2006 to 2011.

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Productive services with the help of internet technologies http://www.bddve.live/2018/12/productive-services-with-the-help-of-internet-technologies/ http://www.bddve.live/2018/12/productive-services-with-the-help-of-internet-technologies/#respond Wed, 12 Dec 2018 08:48:14 +0000 http://www.bddve.live/?p=3595 Productive services with the help of internet technologies

One long-standing concern in the economic field has been that services contribute little to economic development. Services would suffer from a so-called Baumol’s cost disease (Baumol 1967), meaning factors such as labor cannot be easily substituted for more productive factors using existing technologies, as it happens in manufacturing. Over time, this would lead services to become a drag on the economy relative to other more productive industries.

Services and internet technology

In an era of the internet and many advanced forms of digital and information and communication technology (ICT), that notion of services appears to have become increasingly out of date. Already, services traded online make up more than a quarter of global trade—and this share is ever growing. Moreover, services such as in information and information technology (IT), communications, and finance have demonstrated high productivity levels (IMF 2018) as well as being digital-intensive.

Over the years, the productivity levels of some of these digital-intensive services have been positive, albeit not always in line with manufacturing productivity. New types of ICT, platforms, and cloud computing are just a few examples that have helped some previous stagnant services become more tradable and productive, thereby showing some pro-development features. In fact, services that make more use of these new digital technologies often are real contributors to economic growth.

The figure below shows on the horizontal axis an indicator that measures the extent to which sectors are using the internet as well as internet technologies and software: what we call “data intensity.” Not surprisingly, the IT and information services sector, which has caught up with manufacturing, uses digital technologies extremely intensively, as do finance and publishing services.

Data intensity using software over labor (D/L) and contribution to value added

Data intensity using software over labor (D/L) and contribution to value added

ICT = information and communication technology, IT = information technology.
Source: Author’s calculations using United States Census, Bureau of Labor Statistics, and EU KLEMS data.

The vertical axis plots a second indicator and measures the contribution of ICT services to value-added growth. More specifically, it shows how well sectors are able to make use of ICT as instrumental in adding value to an average Organisation for Economic Co-operation and Development (OECD) economy. The figure clearly shows a strong increasing trend; the more services use internet technologies, the more they contribute to economic development by creating greater levels of value added.

However, whether the contribution of digital-intensive value added in services truly translates into optimal allocation of technology resources is another question. Policies can determine to a large extent whether technology is effectively used across sectors. If applied suboptimally, the contribution of ICT services may in fact generate value-added growth but not much productivity growth. More generally, this would mean that misallocation occurs, which in this case is the way technology is (under)used.

Policies on the cross-border flow of data

To a great extent, that is what is happening. Countries have started to regulate, for instance, how companies should employ data, how industries should compete with online platforms, or how sectors should use cloud computing technologies. Some of these regulatory policies aim to solve market failures such as the right to privacy when companies work with personal data. Other policies, however, have an unnecessarily distortive effect rather than achieving a noneconomic objective.

For instance, data localization can be considered a distortive policy. It mandates a company to keep data inside a country’s territory, to process and work with the data locally, and/or to store the data locally. In addition, some countries apply other domestic regulatory rules that make it burdensome to work with data, such as the requirement to hire a data processing officer, which particularly for small and medium-sized enterprises (SMEs) can be costly.

Distortive policies that aim at restricting internet technologies have a negative impact on productivity, as shown in Ferracane, Kren, and van der Marel (2018). That, in turn, prevents countries from translating value added resulting from ICT used in services into productivity generated without misallocation of (internet) technologies. Policies related to the domestic use of data in particular, such as requirements for data processing officers for SMEs or strict data retention, tend to restrict productivity in digital-intensive services.

Conclusion

In short, inhibiting the movement and use of data with unnecessarily restrictive policies is likely to delay any solution to the Baumol’s cost disease of low productivity that we see in various services. In addition, some studies (e.g., van Ark 2016) find that ICT such as data services still need to be further “infused” in many other sectors before witnessing large productivity payoffs. Distortive policies frustrate prospective economic developments of embedding ICT into the wider economy.

While it is obvious that certain measures are necessary to protect the privacy of citizens and national security, the economic impact of restrictive policy restrictions on data and other internet technologies should be carefully weighed in order to strike the right balance between different important policy priorities, without excessively increasing costs for firms and, eventually, consumers.
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References:

Baumol, W.J. 1967. Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crises. American Economic Review 57(3): 415–26.
Ferracane, M.F., J. Kren, and E. van der Marel. 2018. Do Data Policy Restrictions Impact the Productivity Performance of Firms and Industries? ECIPE DTE Working Paper Series No. 1. Brussels: European Centre for International Political Economy.
International Monetary Fund (IMF). 2018. Manufacturing Jobs: Implications for Productivity and Inequality. IMF World Economic Outlook Report April 2018. Washington, DC: IMF.
van Ark, B. 2016. The Productivity Paradox of the New Digital Economy. International Productivity Monitor 31(Fall): 3–18. Ottawa, Canada: Centre for the Study of Living Standards.

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No matter how poor you are, there is always a way to improve sanitation http://www.bddve.live/2018/11/no-matter-how-poor-you-are-there-is-always-a-way-to-improve-sanitation/ http://www.bddve.live/2018/11/no-matter-how-poor-you-are-there-is-always-a-way-to-improve-sanitation/#respond Wed, 21 Nov 2018 08:50:53 +0000 http://www.bddve.live/?p=3582 No matter how poor, you are there is always a way to improve sanitation

The “out of sight, out of mind” attitude is proving to be critical for the slow progress toward target 6.2 of the Sustainable Development Goals (SDGs), focusing on global, safely managed sanitation. There is a general lack of awareness among users on the whereabouts of their poop, and the discussion on wastewater management is scarce and still a taboo topic in many parts of the world, leading to a lack of safely managed sanitation services. Besides the lack of demand hampering progress, the supply side of wastewater management is equally grim.

The slow rate of supply can be attributed to the fact that governments across developing Asia have been largely focused on networked sanitation. The cost and time intensive nature of networked options has led to unmet demands and the generation of untreated wastewater, leading to health, environmental, and economic losses as 50% of the global population has been relying on crude on-site systems.

To find solutions for accelerating the progress on the SDGs for sanitation, the Asian Development Bank Institute (ADBI), in partnership with the Bill and Melinda Gates Foundation, hosted the Development Partner Roundtable and Policy Dialogue Session on Sustainable Sanitation in Asia during 20–22 September 2018 in Tokyo. The objective of the event was to deliberate ideas on scaling up and accelerating the city-wide inclusive sanitation (CWIS) and fecal sludge management (FSM) approaches.

More than 28 experts from various multilateral and bilateral development agencies and other development partners brainstormed at the first-of-its-kind development partner roundtable. The brainstorming was systematized through so-called “human-centered innovation”, a bottom-up approach facilitated by i.school. The learnings from the roundtable were then discussed with government officials from 9 countries and over 25 other stakeholders during the policy-dialogue session, leading to a consensus on championing “sanitation for all from now”.

The roundtable started with development partners showcasing their experiences and learnings on the role of leadership, institutional arrangements, and financing mechanisms for sustainable sanitation. Donor partners pressed on prioritizing the whole sanitation service chain along with the integration of sanitation in overall water management. However, the experiences of large-scale FSM in Asia and small-town projects in Nepal highlighted a range of challenges. The meeting presented innovative financing and the capacity building of both governments and private operators through the piloting of new technologies and policies for encouraging a multi-pronged approach.

Group exercises began by identifying the obstacles to the efficacy of existing scenarios, leading to participants ideating innovative solutions for overcoming the roadblocks, which were then presented by the respective groups.

Several ideas emphasized a global awareness movement to boost demand, prioritize access to safely managed sanitation, and undertake efficient operations and maintenance practices. The ideas stressed drawing lessons from the spillover effects of an effectively managed FSM service to create value for users and increase their willingness to pay. Other ideas promoted the benchmarking of cities’ performance for healthy competition. The use of GPS-enabled management systems to optimize the desludging process and mobile apps to enable smooth operator payments, etc. were also discussed. Another idea stressed on developing a certification framework for the employment of new technology as well as for certified training programs for all involved in the FSM service chain.

The findings of the roundtable were then discussed with government officials from Bhutan, Cambodia, the Kyrgyz Republic, Malaysia, Myanmar, Nepal, Tajikistan, Sri Lanka, and Timor-Leste at the Policy Dialogue Session, where they highlighted the ongoing activities, institutional arrangements, and challenges in their respective countries through an open discussion.

The experience of these countries reaffirmed the marginalized state of the sanitation sector, which heavily focuses on sewered sanitation. Interestingly, the case of Malaysia highlighted the unsustainability of sewered sanitation, caused by its heavy capital and operational burden, reaffirming the importance of the CWIS and FSM approaches. Then, an analysis of large-scale FSM experiences in Asia showcased the lack of strong government ownership and leadership, the ineffective enforcement of mandatory desludging, and competition for the private sector as critical factors for unsuccessful FSM.

These challenges when put into the perspective along with the lessons from the roundtable helped identify feasible policy pathways. An institutional analysis of the sanitation systems in Japan and in India showcased how the clear division of roles and responsibilities among different stakeholders were achieved for the effective management of sanitation. Innovative financing mechanisms, such as municipal, local currency, and green financing channels and blended finance, provided practical solutions for accessing the capital. In addition, an evidence-based case study of Dumaguete city commissioned by ADBI demonstrated the reality of the spillover effects of an effectively managed FSM service and proved that attractive business models to deliver FSM services can be proposed when governments take action to utilize the spillover effects and work to improve the returns to the project investors. The sharing of these practical ideas for the countries culminated in common notion that “no matter how poor you are, there is always a way to improve sanitation”.

The two-day long brainstorming and discussions concluded in a real policy impact when the representative from Malaysia agreed to “take the lessons back” and champion for a mandatory desludging program. The proceedings of the event convinced not only a participant who agreed to “include the CWIS concept as a central part of the national waste water management” but also the whole forum of the scalability of the city-wide approach to a country-wide inclusive sanitation approach.

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Perspectives on Mekong-Japan cooperation for inclusive growth and mutual benefits http://www.bddve.live/2018/11/perspectives-on-mekong-japan-cooperation-for-inclusive-growth-and-mutual-benefits/ http://www.bddve.live/2018/11/perspectives-on-mekong-japan-cooperation-for-inclusive-growth-and-mutual-benefits/#respond Fri, 16 Nov 2018 03:11:12 +0000 http://www.bddve.live/?p=3576 Perspectives on Mekong-Japan cooperation for inclusive growth and mutual benefits

Introduction

Rapid economic development in recent decades has transformed Southeast Asia and prepared the region to join international production networks, which allow greater exports of manufacturing products, textiles, and other primary high-quality valued added products to the international market. This economic development has been achieved thanks to investments from around the globe into the region as a result of a favorable labor force, connectivity and innovation growth, and regional political stability as driven by the Association of Southeast Asian Nations (ASEAN) vision. Faster connectivity along with human resource development in the Southeast Asia region, especially the Mekong subregion, has provided many opportunities for the region for growth and increased the social well-being of the people through income generation and employment. Connectivity through roads, railways, sea, and air has compressed time and space, allowing goods and services to flow internationally in a much faster manner and more efficiently in terms of cost reductions in logistics and, thus, has created a favorable functioning market for supplying goods and services linking production from the Mekong subregion into regional and global supply value chains. Besides hard infrastructure connectivity, the Mekong subregion has also progressed steadily in soft infrastructure as terms, regulations, and standards have developed to facilitate trade and investment in the region as well as outside the region.

Connectivity, innovation, and economic growth

The coordinated development of soft and hard infrastructure is essential for maintaining growth in the region. The new international division of labor calls for a novel approach to infrastructure development, in which the Mekong subregion has been prepared to participate actively for the promotion of economic corridors, including the Southern Economic Corridor (SSEC), East-West Economic Corridor (EWEC), and North-South Economic Corridor (NSEC). These economic corridors, together with the fast acceleration of domestic infrastructure development with special economic zones, urban amenities and other economic activities, have promoted the region to some extent to participate in production networks, reducing the cost of service links that connect remote places of production to urban agglomeration. Mekong subregional connectivity is just one part of the puzzle of larger connectivity in ASEAN and, further, ASEAN connectivity to the rest of the world. Another initiative is the One Belt One Road (OBOR) initiative, led by the People’s Republic of China (PRC), which is a large connectivity development strategy linking the PRC to Eurasian countries and the rest of Asia.

The Mekong subregion has embarked on fast progress toward infrastructure development in recent decades. Thus, quality infrastructure, connectivity, and innovation are keys for ensuring prosperity and sustainable development in the region. The development of connectivity and innovation promotes agglomeration forces and dispersion forces generated by production–consumption interactions in both internal and external economies in which people and ideas can move more easily (Kimura 2018). One practical example of new economic geography creating a “location advantage” through connectivity and innovation is the Cambodian labor force migration. Currently, about 1 million out of 16 million Cambodians are in Thailand working as unskilled labour—in intensive sectors and the informal sector—rather than in Phnom Penh. The question is how Phnom Penh can attract labour from rural areas and, at the same time, invite production from Thailand. If the wage gap between Bangkok and Phnom Penh is too large, people will not come to Phnom Penh, but production blocks may be motivated to come. On the other hand, if the wage gap is too small, production blocks will not come, but people may flow into Phnom Penh. How can Phnom Penh attract both production blocks and people? The answer is the improvement of location advantages and liveability in Phnom Penh (Economic Research Institute for ASEAN and East Asia 2015).

An ADB study found that the road situation between Phnom Penh and Ho Chi Minh City was relatively bad in 1999. Before upgrading the roads, the travel time from Phnom Penh to Ho Chi Minh City was about 9–10 hours, and cross-border trade at Moc Bai (Viet Nam)–Bavet (Cambodia) was about $10 million per year. However, the situation completely changed in 2014 after both hard and soft infrastructure development between Phnom Penh and Ho Chi Minh City. The travel time was reduced to 5–6 hours, and cross-border trade at Moc Bai–Bavet grew to $708 million per year. Further, the connectivity also promoted other economic development. For example, investment brought to Trang Bang Industrial Park (in Moc Bai) included 41 projects with $270 million in new investments and, as a result, created about 3,000 jobs.

Mekong-Japan Cooperation for inclusive growth

Mekong-Japan connectivity aims to promote quality infrastructure development in the Mekong region and enhance institutional connectivity through the improvement of systems, the development of special economic zones and other industrial bases, industrial promotion measures, improvements in customs procedures, and people-to-people connectivity so that the whole region can benefit from growth. The key pillars of cooperation development for infrastructure are to fill in the missing links in the East-West and Southern Economic Corridors; connect the corridors more smoothly through the improvement of systems, such as customs procedures, to promote land development along the corridors (e.g., through the development of industrial parks and industrial promotion measures); improve access from neighboring areas to corridors so that the region can develop as a whole; and develop the industrial human resources for supporting growth in the region and strengthening people-to-people networks.

During the Mekong-Japan Cooperation (MJC) meeting in 2018, it was reported that in 2015, Japan pledged ¥50 billion of official development assistance (ODA) over 3 years in order to support quality growth, and it has already implemented two-thirds or more of that ODA. In recent years, Japan has advanced cooperation relating to infrastructure development, such as Cambodia’s Sihanoukville Port, Myanmar’s Yangon-Mandalay railway, and Thailand’s high-speed railway. Japan is contributing to the development of “quality infrastructure,” but is simultaneously moving ahead with expediting yen loans. The Japanese government also expects that the Mekong countries’ governments will undertake initiatives to expedite this process. Strengthening soft connectivity is the key to reducing distribution costs and facilitating trade within the region.

The Mekong subregion has benefited largely from the infrastructure improvement brought by ODA support from Japan through high-quality roads, bridges, and other hard and soft infrastructure. This assistance includes: (1) hard infrastructure development in the Mekong subregion, bringing improvements in transportation and the distribution of goods; (2) maritime economic corridor development, allowing the Mekong subregion to connect to Malaysia, Singapore, Indonesia, Brunei Darussalam, and the Philippines; and (3) soft infrastructure in the ASEAN framework for laying out terms, procedures, and regulation to facilitate trade.

Conclusion and recommendations

Connectivity and innovation play central roles in economic growth. Thus, countries in the Mekong subregion, particularly Cambodia, the Lao People’s Democratic Republic, Myanmar, Thailand, and Viet Nam (CLMTV), require different levels of policy environment to facilitate investment opportunities. Among the key development partners, it has been recognized that MJC has brought about quality infrastructure, helping to build human resources in CLMTV and bring knowledge and innovation to the region. It is worth mentioning that the Asian Development Bank’s investment in the Mekong subregion and the MJC ODA, together with other investment partners, such as the People’s Republic of China, the eurozone, and the United States, can and will transform this region to catch up with other advanced countries in the near future.

Below are key recommendations for the Mekong subregion, especially CLMTV:

  • CLMTV will need to work more towards institutional connectivity to facilitate international commercial trade and policies and remove behind-the-border issues as quickly as possible.
  • The subregion should accelerate innovation through research and development to increase capabilities and human resource development to attract more industrialized investment and high industrial technology.
  • The region seems to strike towards innovative development (4.0) in which policies will be needed for facilitating the backbone of economies, such as small and medium-sized enterprise development, smart cities, smart agriculture, and innovation in all sectors. Strengthening institutional frameworks, establishing procedures, and enabling access to support services, the credit market and finance, technology upgrading, market expansion, and entrepreneurship can promote inclusive growth and development in the region.

The views expressed here are personal and do not reflect ERIA’s position.
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References:

Economic Research Institute for ASEAN and East Asia. 2015. Comprehensive Asia Development Plan 2.0.
Han, P. 2018. Presentation on Perspectives and Path Forwards for Mekong-Japan Cooperation for Inclusive Growth. Presentation at Regional Conference on Mekong-Japan Cooperation, organized by Cambodia Institute for Cooperation and Peace (CICP) supported by Japan Embassy to Cambodia, Phnom Penh, 23 March 2018.
Kimura, F. 2018. How Can Connectivity Support Innovation? Presentation at ERIA-IDE JETRO Roundtable on Connectivity and Innovation, 30 January 2018, Jakarta.

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Productivity spillovers from services firms in low- and middle-income countries: What is the role of firm characteristics and services liberalization? http://www.bddve.live/2018/11/productivity-spillovers-from-services-firms-in-low-and-middle-income-countries/ http://www.bddve.live/2018/11/productivity-spillovers-from-services-firms-in-low-and-middle-income-countries/#respond Wed, 14 Nov 2018 09:47:29 +0000 http://www.bddve.live/?p=3569 Productivity spillovers from services firms in low- and middle-income countries: What is the role of firm characteristics and services liberalization?

It has been widely acknowledged that services play an important role for other industries, in particular manufacturing. A study by the Organisation for Economic Co-operation and Development (OECD) finds that services represent at least 30% of the value added in manufacturing exports (OECD 2014). Another study by the World Bank suggests that countries with a higher services content in their downstream economies are also those producing more complex goods (Saez et al. 2015). These developments are strongly linked to the emergence of global value chains, which depend on the quality of embedded services, ranging from quality control, logistics, storage facilities, packaging, insurance, and distribution (Taglioni and Winkler 2016).

Services not only serve as inputs to the manufacturing sector but are also a relevant source of productivity spillovers, i.e., knowledge diffusion in the form of unintentional transmission or intentional transfer. The strong dependency of firms on services inputs implies that improvements in services sectors, including services firms’ performance and services reforms, are likely to affect all downstream sectors. Second, the performance of downstream sectors depends to a larger extent on the availability and quality of domestic services firms due to the limited cross-border tradability of services compared to material inputs (Javorcik 2008).

However, there is still a knowledge gap on the spillovers from services to manufacturing, in particular for low- and middle-income countries, which our new study aims to fill. Several studies suggest a performance-enhancing effect of services usage within sectors and firms. Others point to the relevance of services inputs to downstream industries, in particular manufacturing sectors. Using a cross-section of more than 38,000 manufacturing and 24,000 services firms in 105 low- and middle-income countries over the period 2010 to 2017 from the World Bank’s Enterprise Surveys, our new study focuses on the productivity and technology spillovers from services to manufacturing firms as well as the role of firm characteristics and a country’s services liberalization in mediating spillovers (Winkler 2018).1

Our study confirms positive spillovers to manufacturing firms resulting from the higher average regional productivity and technology intensity of services firms but rejects the existence of spillovers from the presence of services firms alone. This finding is of high policy relevance as it suggests that the number of services firms in a region and their share in a region’s total output are not sufficient to generate spillovers—what matter are the productivity and technology intensity of services firms.

Our analysis also highlights the importance of firm heterogeneity in influencing spillovers, both from the perspective of services and manufacturing firms. The extent of spillovers depends on both the potential of services firms to generate spillovers and the capacity of manufacturing firms to internalize them (see Figure 1). Our findings suggest that some types of manufacturing firms benefit more strongly from services spillovers than others, in particular those that are large, foreign-owned, and exporters. At the same time, some types of services firms have a higher spillover potential: foreign ownership status and the top manager’s experience are linked to a higher productivity and technology spillover potential, whereas exporting is only associated with the latter.

Figure 1: Conceptual framework of services spillovers

Figure 1: Conceptual framework of services spillovers

Source: Author’s own illustration, partially drawing on the conceptual framework on foreign direct investment spillovers by Farole, Staritz, and Winkler (2014).

A country’s income status also matters for services spillovers. Our results suggest a U-shaped effect for productivity spillovers from services firms, i.e. spillovers are larger in upper-middle and low-income countries than in lower-middle income countries. The results are different for technology spillovers, which benefit lower-middle and low-income countries more. In addition, our findings show that the productivity of services firms is more sensitive to firm characteristics in low-income countries.

Finally, we find that greater liberalization in mode 1 and mode 3 services trade increases spillovers from services firms to manufacturing firms via a productivity-enhancing effect in the services sectors. The results suggest that lower regulations in mode 1 services trade (cross-border trade) increase productivity spillovers, whereas a lower restrictiveness in mode 4 services supply (presence of natural persons) reduces them. Testing for the direct link between services liberalization and services firm productivity, our study finds a positive connection for mode 1 and mode 3 (commercial presence abroad) services trade but a negative one for mode 4 services trade. Since mode 4 services supply is estimated to represent only a small fraction of total services trade, the correlation with overall services liberalization is still positive (see Figure 2).

Figure 2: Overall Services Trade Restrictiveness Index and median services labor productivity

Figure 2: Overall Services Trade Restrictiveness Index and median services labor productivity

LICs = low-income countries, LMICs = lower-middle income countries, STRI = Services Trade Restrictiveness Index, UMICs = upper-middle income countries.
Notes: Services labor productivity is measured as output per worker. A lower STRI score indicates greater services liberalization.
Source: Author’s illustration using data from the World Bank Enterprise Surveys.

Several policy implications can be derived from our analysis:

  • First, openness to foreign investment and trade helps magnify both the absorptive capacity of manufacturing firms and the spillover potential of services firms.
  • Second, policies aiming at skills and technological upgrading can increase the spillover potential of services firms, while manufacturing firms benefit from policies facilitating their growth.
  • Third, the findings suggest that policy interventions that improve the productivity of services firms and the absorptive capacity of manufacturing firms have a larger impact in lower-income countries.
  • Finally, services trade reforms increase productivity spillovers to manufacturing firms, but not across all modes of services supply. While liberalization in mode 1 and 3 services supply seems to be beneficial, liberalization in mode 4 services trade reduces both the spillover potential and actual spillovers.

Click here to read the working paper.

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1 The study is closest in nature to the study by Hoekman and Shepherd (2017), who find evidence for regional productivity spillovers from services to manufacturing firms using the World Bank Enterprise Surveys for the period 2006–2011.

References:

Farole, T., C. Staritz, and D. Winkler. 2014. Conceptual Framework. In Making Foreign Direct Investment Work for Sub-Saharan Africa: Local Spillovers and Competitiveness in Global Value Chains, edited by T. Farole and D. Winkler. Washington, DC: World Bank, 23–55.
Hoekman, B., and B. Shepherd. 2017. Services Productivity, Trade Policy and Manufacturing Exports. Special Issue: Services and Manufacturing Activity, World Economy, 40, 3, 499–516.
Javorcik, B. 2008. Can Survey Evidence Shed Light on Spillovers from Foreign Direct Investment? World Bank Research Observer, 23, 2, 139–159.
Organisation for Economic Co-operation and Development (OECD). 2014. Global Value Chains and Africa’s Industrialisation. African Economic Outlook 2014. Paris: OECD.
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