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Jakarta Post

Time to not just integrate but connect the Asia-Pacific

  • Eduardo Pedrosa

    The Jakarta Post

Singapore   /   Thu, October 3, 2013   /  09:40 am
Time to not just integrate but connect the Asia-Pacific

Over the next few days world leaders will meet in Bali for the annual Asia-Pacific Economic Cooperation (APEC) Summit. While the gathering promises to boost Indonesia'€™s prestige as a global power, the event comes at a time when many emerging markets, including the host, are finding themselves challenged by volatile currencies and stock markets.

Since May, the rupiah has lost about 20 percent of its value against the US dollar, and the Jakarta stock exchange index is about 15 percent off its then high. While a weaker exchange rate might be seen as a loss of confidence in the economy, it also boosts the competitiveness of its battered export sector.

However, red tape, outdated policies and poor infrastructure remain obstacles. APEC'€™s work this year on resilient growth and connectivity can help overcome these obstacles.

For the global recovery to be robust and sustainable, governments need to implement policy initiatives that can remove uncertainties holding back private sector investment in production and employment.

These policies are the very same that APEC discusses each year under the poorly understood rubric of structural reform.

The term alone retains a sting, deeply associated with the reforms foisted on many economies as preconditions to bailout packages during the 1997-1998 crisis. People forget that many of these reforms helped to set Indonesia up for the run of growth that has doubled per capita incomes, but they have not forgotten the riots, political upheaval and human suffering. The lesson to be learnt is that we should not wait for a crisis to reform.

In 2010, APEC leaders presented a new growth strategy that emphasized structural reforms needed to achieve balanced and inclusive growth. APEC officials are due to assess progress on implementation by 2015.

The problem is that circumstances have changed and reforms are needed now, not in two years. The mere rumor that the US Federal Reserve would begin to reduce its quantitative easing program rocked emerging economy stock markets and currencies.

While a decision to do so was postponed, it is only a matter of months before such a decision is taken. Emerging markets have to be prepared for this. Raising interest rates is one policy action to keep money coming in.

Another is to take the tough decisions needed to make their investment environments more attractive. This will require the very same structural reforms that regional governments have been discussing at APEC for the past few years.

There is no doubt that emerging markets with large populations and rising incomes should remain an attractive proposition for investors. Despite the high-end luxury goods pervasive in regional capitals, as consumer markets, they are barely tapped.

Beyond the top 1 percent lie hundreds of millions of wannabe consumers. While the mobile phone is ubiquitous there are probably more of them than people who have access to clean water, electricity,
sanitation and a decent education.

APEC has a vision of a deeply integrated and prosperous region. It has done well so far and incomes in the region have doubled but inequalities within and among APEC members are on the rise. A lot more needs to be done to connect people within economies and Indonesia'€™s archipelago is an exemplar of this, where the price of rice in Papua can be double that in Java.

APEC thinks and works in the language of economic policy. It is difficult to appeal to the man or woman on the street with esoteric policy issues such as single windows for customs, competitive markets and third-party access regimes for electricity grids.

However, studies by APEC show that these things really do matter. The entry of low-cost carriers has lowered travel costs by a third '€” making travel a reality and not an aspiration for Asia'€™s new middle-class consumers.

Likewise, reforms in the electricity sector reduced prices by as much as 23 percent. These are not issues that grab headlines but they are critical if countries like Indonesia want to be competitive and generate incomes for their burgeoning populations. No amount of incentives is going to draw long-term investors to a country where electricity costs are high and products cannot be easily moved from factory to market.

A recent poll of Asia-Pacific opinion-leaders conducted by the Pacific Economic Cooperation Council revealed just this problem. While close to 75 percent of respondents thought that trade and investment liberalization and facilitation had been beneficial for growth in their economy, a majority of those polled in developing Southeast Asia and South America thought that the benefits had been limited due to supply-side constraints.

This point is crucial as the region is negotiating two big agreements, the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP). Both offer substantial economic benefits to the world economy, US$223 billion and $644 billion respectively. If they were to lead to a Free Trade Area of the Asia-Pacific the benefits would be much larger, around $1.9 trillion.

The problem is that these are just potential gains. To avoid domestic backlashes against integration such as those seen in Indonesia with the China-ASEAN agreement, addressing those supply-side constraints is prerequisite to ensuring that the benefits promised are actually delivered.

Financing such an effort will not be easy given the state of public finances. The ADB has estimated that during 2010-2020, developing Asia needs to invest around $8 trillion in infrastructure while the OECD estimates that globally $53 trillion of investment is needed, with $11 trillion alone for ports, airports and key rail routes. Public-private partnerships seem to be the most attractive solution but the risks in such projects are large and long-term; they require a stable and predictable policy environment.

The Infrascope studies conducted for the ADB and the IADB assess environment for PPPs in a number of regional economies, looking at issues such as: regulatory framework, institutional framework, operational maturity, investment climate and financial facilities. Some '€” notably Peru, India, Mexico, and Colombia '€” are ranked relatively highly, while others such as China, Indonesia, and the Philippines less well.

The types of policy reforms needed to make economies more attractive for PPP investors are those very same structural reforms APEC has been working on. The problem, as ever, is actually implementing them.

The writer is the secretary-general of the Pacific Economic Cooperation Council (PECC), one of APEC'€™s three official observers. The views expressed are his own.

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