East Asia: Regional Integration Among Open Economies Homi Kharas Sector Director & Chief Economist East Asia & Pacific Region World Bank Presentation at National Economic & Social Development Board (NESDB), Bangkok 7 April 2006

Share of country’s intra- and extra-regional exports in GDP Korea Rep Korea Rep China & HK 94-96China & HK Thailand 94-96Thailand Emerging East A Emerging East A Japan 94-96Japan NAFTA NAFTA EU 94-96EU Exports to Intra/GDPRest of exports/GDP Note: Intra-regional exports in the case of the EU and NAFTA refer to intra-exports to the region. In all other countries intra-regional exports are exports to Emerging E. Asia.

East Asia’s aggressive reduction in tariffs Source: UN-TRAINS

Emerging East Asia’s countries have high shares of FDI from other East Asian countries

Dispersion in equity returns is falling Sounrce: Datastream, weekly dividend-adjusted return

Questions 1. Trade direction: Regionalism or Regionalization? 2. Trade pattern: Heckscher-Ohlin or Krugman? 3. Finance: Country differentiation or Co-movement? 4. Policy priorities: Goods or Services? International or Domestic? International or Domestic?

Percentage point change in extra-regional and intra-regional market shares between average and average 1. Trade direction: Regionalism vs. Regionalization

Regionalism vs. Regionalization

Statistically, China & Hong Kong, Korea and Japan import more from East Asia than predicted 2. Trade pattern: Heckscher-Ohlin vs. Krugman

The explosive growth in East Asia’s parts and components trade is broadly shared across most economies

China & Hong Kong have experienced a notable technological upgrading

Share of foreign affiliates (FA) in total China’s trade, Foreign affiliates played a key role in China’s explosive growth of parts & components trade Source: Gaulier et al. (2005).

The fragmentation of production by multinational corporations has changed the allocation of production networks in East Asia

3. Finance: Country differentiation vs. Co-movement The influence of external news is increasing. The influence of external news is increasing. On average, equity markets in East Asia are showing greater integration with the region, Japan, and the US.

4. Policy Priorities: Goods vs. Services

Main Messages 1. East Asia is integrating, but at a different pace in trade, finance and services. 2. Integration is driven by the private sector, with public regionalism in a supporting role. 3. Regional integration is complementing global integration combining best practices from the region with the best from the world. 4. The public policy agenda is largely behind-the-border in trade facilitation, improving investment climate, liberalizing services, and encouraging FDI and domestic capital market development.