1 ASEAN Economic Integration and Inclusive Growth 12 November 2014 By Arjun Goswami Director, Office of Regional Economic Integration Chair, RCI CoP Vice Presidency for Knowledge Management & Sustainable Development Asian Development Bank Presentation at “Ensuring Growth that Matters: ASEAN Integration and Inclusive Growth” 40 th APS Anniversary Lecture Forum

Outline of the Presentation Centrality of regional cooperation and integration (RCI) for ADB ASEAN’s role in regional economic integration Regional economic integration and labor productivity Regional cooperation and labor productivity Responding to productivity challenges: Importance of second-generation RCI 2

Centrality of RCI for ADB ADB Charter - Support for RCI RCI Strategy adopted in 2006 Strategy 2020: At least 30% of ADB’s operations to support RCI by 2020 Mid-Term Review of Strategy 2020 – RCI a niche area of strength for ADB – Next generation of RCI - responding to challenges of raising productivity, reducing inequalities, mitigating vulnerabilities 3

ASEAN’s Role in Regional Economic Integration (1) ASEAN’s regional leadership in integration Degree of ASEAN integration with Asia: 48.9% in FDI (2012), 68.3% in Trade (Jan-May 2014) ASEAN Economic Community by 2015 Four pillars of AEC: (1) single market and production base, (2) competitive economic region, (3) equitable economic development, and (4) integration into the global economy 4

ASEAN’s Role in Regional Economic Integration (2) AEC Blueprint: Core elements and priority actions AEC Scorecard: ASEAN achieved 76.5% of AEC targets due by March 2013, but work needs to be done 5 Source: Milo, Melanie Linkage between Greater Mekong Subregion Economic Cooperation and ASEAN Economic Community. Presentation at the Mekong Forum 2013: Towards More Inclusive and Equitable Growth in the Greater Mekong Subregion July 2013, Khon Kaen.

ASEAN’s Role in Regional Economic Integration (3) Progress and Challenges in Pillar 1 Goods trade liberalization: >70% of intra-ASEAN trade now tariff-free Goods trade facilitation: some progress on NSWs and self- certification, but challenge of harder reforms Trade logistics: wide variance in performance Services trade liberalization: progress on AFAS, financial services Skilled labor mobility: MRAs for 8 professions, but challenges in implementation Capital flows: Several initiatives, e.g. ASEAN Exchanges, ABMI, CMIM and AMRO 6

Regional Economic Integration and Labor Productivity (1) Labor productivity – Pre-AFC: Major driver of growth in ASEAN and Asia as a whole – Post-AFC: Wide economic diversity Slower labor productivity growth in some countries due to: – Cyclical factors – Labor market rigidities – Productivity differentials across sectors – More challenging external environment 7

Regional Economic Integration and Labor Productivity (2) In theory, regional economic integration can address emerging productivity challenges by enabling – Greater competition and efficiency – FDI, technology acquisition, and knowledge spillovers – Labor and capital reallocation – Labor mobility 8

Regional Economic Integration and Labor Productivity (3) For the Philippines, fully implementing AEC trade measures can: – Expand the country’s GDP by 7.5% by 2025 – Create 3.1 million additional jobs over baseline (6% increase in total employment) – Reverse deindustrialization and premature shift to services: greater share of agriculture and industry in employment 9

Regional Cooperation and Labor Productivity To boost productivity, economic integration through AEC is necessary, but not sufficient National and regional actions are important: – Skills development for structural reallocation – Infrastructure investment to address supply-side constraints – Addressing possible inequality from regional economic integration (BIMP-EAGA; regional financing mechanisms, including disaster risk management) 10

Responding to productivity challenges: Importance of second-generation RCI MTR action plan Requires new set of RCI instruments building on existing ones Cross-border connectivity still important, but also: – Special economic zones – Multi-modal transport and trade logistics – New financing mechanisms 11