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Volume 5, Number 4

Economics and Research Department

Volume 5, Number 4October–December 2014

Features1 Asia in Global Value Chains7 Productivity Spillovers from

FDI in the People’s Republic of China: A Nuanced View

10 Fiscal Policy and Growth in Developing Asia

Publications13 ADB Economics Working

Paper Series16 Books

Events15 January–March 2015

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CONTENTS

The e-Quarterly Research Bulletin is a publication of the Economics and Research Department of the Asian Development Bank. A complete list of our publications, including working papers, can be found in www.adb.org/data/main

Asia in Global Value ChainsExcerpts from the Asian Development Outlook 2014 Update Theme Chapter

The rise of global value chains and their implications for growth and employment

Liberalized trade and modern communications ushered in cross-border production networks. Global Value Chains (GVCs) have blossomed since the late 1980s, distributing production steps across boundaries as tariffs and shipping costs fell, and advances in information and communication technology facilitated more complex production arrangements. Stages of factory production formerly performed in advanced economies have been relocated to developing countries to benefit from cheap labor and other locational advantages. This helped expand developing economies’ share of global output from 33% in 1988 to 50% in 2010.

Figure 1 uses network graphs to depict the emergence of GVCs and their geographic orientation. Three main hubs—the United States (US), Germany, and the People’s Republic of China (PRC)—occupy the center of a tightly knit

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Figure 1: Global Value Chains Expanding

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(continued on next page)

Figure 1. Global Value Chains Expanding continued

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Figures show the value added domestically in economies gross exports, based on the OECD–WTO TiVA database (accessed 15 September 2013). Only the top 5% of bilateral trade flow connections are shown. A force-directed algorithm is applied to lay out the data as network maps. The size of the nodes indicates relative magnitude of countries’ gross exports. The width of the arrows indicates the intensity of value-added transfers. Green nodes denote economies with the highest share of value added domestically, at least 80%. Orange nodes denote 60%–80% of value added domestically, and pink nodes 40%–60%.

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Asia in Global Value Chains(continued from page 2)


web of value-added transfers, mainly among regional economies engaged in split production processes. The US is at the center of GVCs both as the largest exporter of goods and services, measured in gross terms, and as the main exporter of value added to the exports of other economies. Germany and the PRC follow in rank in terms of gross and value-added exports. Compared with the US, these economies are positioned further downstream in the GVCs and are involved in a substantial share of value-added inflows and outflows.

In the European regional network, horizontal integration prevails, with value added to goods flowing in both directions between pairs of countries. Asian production networks are more hierarchical. At the top, Japan and the US inject value by providing key components and services directly to the PRC, which is the downstream hub. Malaysia, Thailand, and some other Southeast Asian economies as well as India also supply components to the PRC that often embody valued added by the US and other industrial economies. Other key players right at the center of the regional networks are the Republic of Korea, Singapore, and Taipei,China—each economy exporting high shares of foreign value added that reflect their strong GVC involvement.

The time progression panels in Figure 1 show that GVCs have expanded rapidly and grown more complex since 1995. By 2005, the PRC had overtaken Japan as the center of the Asian regional production network. GVC expansion reached a peak in 2008. This was because the global economic crisis slowed consumption in 2009, causing the temporary collapse of international trade and curtailing the trade flows associated with GVCs. GVC production has boosted the economies of those involved. Economies that have found their niche within global production networks have reaped income and employment dividends. While being part of a GVC exposes an economy to potential contagion from adverse shocks that hit others in the chain, the benefits seem to outweigh the costs.

Rapid output and income expansion accompanies GVC trade increases (Table 1). Even more than trade in final goods, specializing in a particular stage of production can bolster productivity and enhance economic growth. During 1995–2008 industries in which GVC trade doubled saw output grow 19% more quickly than other industries and economies enjoyed a 12% increase in real per capita income.

Industries with more extensive links to GVCs create more jobs. Higher industrial productivity arising from specialization in cross-border production enhances employment. Industries that doubled their GVC trade during 1995–2008 saw employment rise by 10%.

Risks to economies from shocks that hit others in the GVC exist but are limited. The 2011 earthquake in Japan and floods in Thailand, for example, had repercussions along their value chains. But a shock in the real economy to one member of a supply chain need not become a macroeconomic shock to the rest. Flexible labor and capital markets can help contain the impact within the affected sector. Further, a shock to one economy may become an opportunity for others in the network as they temporarily replace production of the affected competitor.

Table 1: Global Value Chain Trade Growth versus Income,Employment, and Output Growth, 1995–2009

Dependent VariableReal GDP per

Capita Growth

Industry-Level Employment

GrowthIndustry-Level Output Growth

GVC trade (growth) 0.120* 0.100* 0.190*(0.037) (0.016) (0.042)

R2 0.650 0.410 0.650Number of observations 221 1,236 1,248

* = significant at 1%, ( ) = standard error, GDP = gross domestic product, GVC = global value chain, R2 = coefficient of determination.Notes: ADB estimates using data from the trade in value added (TiVA) indicators of the Organisation for Economic Co-operation and Development and the World Trade Organization, and employment data from the World Input–Output Database. The dependent variable is annualized growth between periods (1995, 2000, 2005, 2008, and 2009). All estimates include year and economy fixed effects, while the industry-level employment and output growth estimates also include industry fixed effects.Source: Ma and Van Assche. 2014. Unpublished.

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Services are the dominant source of value in goods produced by global networks. From initial product conception to after-sales support, services add value to final goods. Yet trade statistics underestimate their role because services are intangible, which makes them difficult to identify and count, and their inputs become embedded in the final goods. Cost breakdowns have shown services contributing 65%–80% of total value in mass-produced consumer goods. For specialty goods like designer clothing, the share is even higher. Firms profitably differentiate their products through the services bundled with them. By integrating services with goods to emphasize their unique strengths, producers can reach new market segments and command higher prices.

Asia has benefited the most from the rise of cross-border production networks. Regional production networks appeared in the 1980s as Japanese conglomerates invested in East and Southeast Asia to benefit from such locational advantages as lower labor costs. Once established, production networks attracted multinationals from other developed economies, turning regional networks global. Declining trade barriers in East and Southeast Asia—particularly since the PRC’s accession to the World Trade Organization (WTO) in 2001—made these subregions even more attractive to foreign investment. From 1995 to 2008, the share of Asia’s GVC trade in worldwide manufacturing exports almost doubled, from 8.6% to 16.2% (Figure 2). GVCs have grown most quickly in Asia, evolving into increasingly complex arrangements.

Yet GVC benefits are largely concentrated in East and Southeast Asia. These economies including Japan accounted for the bulk of the region’s GVC trade in 2008. While the surge of GVCs in Asia reflects the PRC’s growing role as the regional hub for final assembly, the underlying reality is more complex. The core components in the final goods exported to affluent markets, and hence the bulk of added value, originate mainly from industrialized East Asian economies—Japan; the Republic of Korea; and Taipei,China—and in the more

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advanced Southeast Asian economies, such as Malaysia and Thailand.

Few countries in Central Asia, South Asia, and the Pacific have found their GVC niche. These economies face multiple challenges to linking with GVCs, some of them beyond the reach of policy. A remote location can preclude involvement in GVCs. High transport costs would be magnified by a GVC that required frequent shipments of intermediate goods between production stages. Underdeveloped transport infrastructure exacerbates geographic disadvantages. In the World Economic Forum’s Global Competitiveness Index 2013–2014, East Asia’s transport infrastructure scored 5.0 on a scale of 6.0, and Southeast Asia scored 4.0. In contrast, the Pacific scored only 2.1, Central Asia 3.3, and South Asia 3.4 (Figure 3.a).

Regulatory hurdles and policy deficiencies further erode an economy’s appeal. Red tape and burdensome procedures delay the movement of goods. While exporters in East or Southeast Asia need to complete six documents on average, exporters in Central and South Asia must deal with nine (Figure 3.b). The

EU = European Union, NAFTA = North America Free Trade Agreement.Note: ADB estimates using data from the trade in value added(TiVA) indicators of the Organisation for Economic Co-operation and Development and the World Trade Organization.Source: Ma and Van Assche. 2014. Unpublished.

Figure 2: Global Value Chain Trade Sharesof World Manufacturing Exports, by Region and Subregion

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combination of poor infrastructure and red tape imposes unacceptably high costs for GVCs. Whereas exporting standard cargo takes only 18 days from Southeast Asia or 19 days from East Asia, it takes nearly 50 days from Central Asia (Figure 3.c).

All Asian economies face the challenge of strengthening links to dynamic production chains. GVCs present opportunities to policymakers and industrialists to reevaluate their domestic comparative advantages, with a focus on being competitive at selected stages of production rather than over the whole process. Actors need to be attuned to both opportunities and challenges.

Forging stronger links with global value chains

Falling tariffs, logistics, and transport costs nurture cross-border production, but more can be done. Simulations of simple two-stage chains in Southeast Asia show that GVCs magnify trade costs by as much as 80%. As chains become more complex, they further amplify the costs of moving intermediate goods between customs territories. Savings from small reductions in costs are similarly amplified and therefore offer outsized benefits for production network growth. Public policy can help connect an economy to cross-border production networks or fortify existing ties.

GVCs thrive only where tariffs are low and predictable. The PRC, for example, allowed processing firms to import components duty-free. This policy helped boost growth and productivity in the processing sector, supporting firms’ efforts to shift quickly from simple labor-intensive manufactures to more sophisticated high-technology goods. Yet, even if tariffs are low today, uncertainty about future rates can dissuade firms from investing in GVCs. The authorities can make tariffs more predictable by normalizing trade relations with partners, lowering bound tariffs under the WTO, and eschewing temporary trade measures. As with tariffs, low and predictable rates for other taxes, including value-added taxes collected at the border, benefit GVCs.

Figure 3: Selected Global Value Chain Competitiveness Indicators

Note: Similar rankings are observed in the time required to import and in documents required to import.Sources: World Bank, Doing Business. http://www.doingbusiness.org; World Economic Forum, The Global Competitiveness Report 2013–2014. http://www.weforum.org/reports/global-competitiveness-report-2013-2014; and World Bank, Logistics Performance Index. http://lpi.worldbank.org (accessed 30 May 2014).

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Better logistics and transport infrastructure may cut trade costs even more than tariff reduction. Delays in moving goods from inland factories to the coast, through customs facilities, or through ports themselves, add to shipping costs. Trade delays are significant: 9 days for imports into East Asia and 19 days into South Asia. In parts and components trade, each day in transit equates to an ad valorem tariff of 0.6%–2.1%. Infrastructure investment can ease port congestion and speed inland transport. Streamlining customs procedures to eliminate unnecessary paperwork further trims shipping times. International cooperation—such as investment in regional transport corridors or WTO trade facilitation—can complement national efforts.

Process and product standards must not be hijacked as barriers to trade. As with tariffs, GVCs magnify costs from nontariff measures, such as product standards. As production lines span more jurisdictions, harmonized standards gain importance. Harmonization is less a question of eliminating standards than of ensuring that they are appropriate, because standards are crucial to public policy. Regulations should not discriminate or unduly add costs, but ensuring compliance does require investment in laboratories and other facilities for calibration, accreditation, certification, and conformity assessment.

Asia can boost income and employment by building on its reputation as the world’s workshop. Over the past 2 decades, the region has established itself as a global leader in GVC development and manufacturing—accruing the dividends of faster output, income, and employment growth as a result. Policies that enhance free trade in goods and services, and that foster the integration of regional markets for goods and their components can further cement this reputation. Looking ahead, Asia is well positioned to deepen, broaden, and upgrade its role in global production networks.

References

Asian Development Bank. 2014. Asian Development Outlook 2014 Update: Asia in Global Value Chains. Manila.

Ferrarini, B. 2013. Visualizing Global Value Chains. AIEN blog entry provided by B. Ferrarini in a personal capacity. http://aienetwork.org infographic/20/visualizing-global-value-chains

Ma, A. and A. Van Assche. 2014. Global Value Chains and Economic Development in Asia. Background paper submitted to the Asian Development Bank. Unpublished.

Shannon P., A. Markiel, O. Ozier, N. S. Baliga, J. T. Wang, D. Ramage, N. Amin, B. Schwikowski, and T. Ideker. 2003. Cytoscape: A software environment for integrated models of biomolecular interaction networks. Genome Research. 13 (11): pp. 2498-504.

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Productivity Spillovers from FDI in the People’s Republic of China: A Nuanced ViewGalina Hale, Cheryl Xiaoning Long, and Hirotaka Miura

Foreign direct investments (FDI) into the People’s Republic of China (PRC) have been a key engine of growth in the past decade. The country absorbed a large proportion of FDI flows to developing and emerging markets, and has arguably allowed for the transfer of technology to the PRC in the course of its transformation as the world’s biggest manufacturing base.

Hale, Long, and Miura (2014) examine to what extent FDI flows impact domestic firms in the PRC, in terms of technology transfers as well as production and other management techniques that increase overall productivity. They also assess the impact of FDI flows, in terms of externalities on domestic firms in the same


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Figure 1: FRN and HMT Shares in 2000 and 2006

industry or horizontal spillovers, including the impact on upstream or downstream industries or vertical spillovers. They differentiate spillovers from aggregate FDI flows originating from Hong Kong, China; Macau, China; and Taipei,China or HMT, and from FDI coming from the rest of world.

The motivation for segregating FDI flows from HMT and those from the rest of the world rests on the difference in the concentration of investments by industry category and the extent of technological sophistication. Figure 1 shows the share of FDI flows between HMT and the rest of world in 2000 and 2006 by industry category.

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Productivity Spillovers from FDI in the People’s Republic of China: A Nuanced View(continued from page 7)

Note that FDI flows from the rest of the world originate mainly from advanced economies. A greater share of advanced economies’ investments is in more technologically sophisticated industries compared with FDI flows from HMT. The authors argue that the magnitude and direction of spillovers would therefore be different between FDIs from both sources.

FDI spillovers occur mainly through increased competition in input and output markets as well as demonstration effects and induced innovation on the part of domestic firms. The channels for spillovers act mainly through their indirect effects on firms’ total factor productivity (TFP). Process improvements and increases in the quality of intermediate goods with the presence of FDIs in intermediate goods producers are likewise expected to positively impact the productivity of backward and forward linkage industries. Private sector firms are generally expected to benefit more from FDI spillovers since they are more responsive to market developments. Corollary to this, the preponderance of state-owned enterprises (SOEs) in a particular industry or province in the PRC is expected to limit the extent of spillovers from FDIs. The magnitude of spillovers is also expected to be greater when FDIs originate from advanced economies rather than from HMT, given that the former invest in industries that are more technologically sophisticated.

The authors note that much of the literature on spillovers from FDIs going into the PRC focus on horizontal spillovers, despite the importance of vertical spillovers. The findings in the literature also present mixed results, largely due to variations in the choice of sample firms and industries and the methodologies employed. To rectify this, they utilize the most recent and comprehensive database of firms in the PRC from the Industrial Surveys of Medium-Sized and Large Firms (2000–2006), employ a robust econometric technique that accounts for endogeneity in some of the explanatory variables, and examine vertical spillovers in addition to intra-industry externalities. Seven years of firm-level panel data allow for the examination of dynamic effects,

which is crucial as various kinds of FDI spillovers take time to materialize. They also extend the analyses to differentiate effects attributable to different sources of FDIs and the impact of the technological sophistication of industries to the magnitude of spillovers. Hale, Long, and Miura analyze the impact of FDIs in terms of spillovers in two phases: (i) by estimating the TFPs of firms in the PRC, assuming Cobb-Douglas production functions with capital, labor, and intermediate inputs as determinants of output, and then (ii) examining the relationship of TFPs with the estimates of foreign ownership shares in forward, backward, and horizontal industries while progressively controlling for origin of FDI’s, whether from HMT or the rest of the world, and the extent of technological sophistication of industries, as measured by their respective patent propensity. They also estimate several model specifications by adding year fixed effects and firm fixed effects variables as well as running analyses on subsamples of firms in terms of extent of private ownership.

In line with expectations, Hale, Long, and Miura find that private domestic firms in the PRC tend to benefit more from FDI spillovers than state-owned or mixed ownership domestic firms in the same industry classification, but benefit less than other firms from the presence of FDI in upstream industries. The latter is corroborated by a similar finding that the presence of SOEs also tends to lower spillovers on domestic private firms due to foreign presence in upstream industries.

In the specification with fixed year effects, the impact of FDIs on vertical linkages disappear in the full sample, but are statistically significant for the subsample of private firms. There is a positive effect downstream (i.e., improvement in the quality of inputs) and a negative effect upstream due to the effects of competition on backward linkages. In the benchmark specification with fixed year and fixed firm effects, there is only one statistically significant effect of FDI presence on TFP—that of the presence of HMT firms in the same industry. This effect is positive and twice as large in private firms as it is for the full sample.

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Productivity Spillovers from FDI in the People’s Republic of China: A Nuanced View(continued from page 8)

Consistent with the literature on TFP, the authors find that an increase in private ownership is associated with an increase in TFP. They also find that horizontal spillovers associated with FDI from HMT are higher for private firms, and that higher magnitudes of private ownership are associated with negative spillovers in the presence of both HMT and non-HMT FDIs in upstream industries. The latter suggests that firms with FDIs redirect their output toward foreign-owned firms or SOEs. Further analyses suggest that the PRC government may have undertaken measures to protect SOEs from the negative impact of foreign presence or firms with direct foreign investments, or prefer to transact with other foreign-invested firms. Firms receiving direct foreign investments are in some way incentivized to establish or maintain subcontracting or other arrangements with SOEs in downstream industries. The foregoing implies that the more state-owned firms there are, the less likely private firms gain benefits from foreign presence.

Hale, Long, and Miura note that technological sophistication could have mixed effects on the magnitude of horizontal spillovers. Higher technological sophistication could have positive demonstration effects on domestic firms, but could also induce foreign-invested firms to curtail technology transfers by making them more protective of their intellectually property. The authors note though, that positive effects tend to

dominate especially for HMT-invested firms. They also find that spillover effects on forward linkages tend to be larger for technologically sophisticated firms receiving investments from foreign firms not coming from HMT, suggesting that non-HMT foreign firms investing in the PRC have more advanced technologies.

The results of the authors’ econometric analyses have three policy implications. First, private firms obtain more positive spillovers from FDI supports the recommendation of enhancing efforts aimed at privatization. Second, regulations aimed at protecting state-owned firms not only defeat their initial purpose, but also become obstacles toward obtaining positive spillovers. Lastly, since the findings support the notion that technologically sophisticated firms tend to guard their proprietary technologies and limit the extent of horizontal spillovers to domestic firms, improvements in intellectual property rights protection should be accorded to foreign investors so as to encourage technology sharing and induce more positive spillovers.

Reference

Galina, Hale, Cheryl Xiaoning Long, and Hirotaka Miura. 2014. Productivity Spillovers from FDI in the People’s Republic of China: A Nuanced View. Asian Development Review. 31 (2). pp. 77–108.

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Fiscal Policy and Growth in Developing Asia Arnelyn Abdon, Gemma Estrada, Minsoo Lee and Donghyun Park

Abdon, Estrada, Lee, and Park (2014) examine the role of fiscal policy in developing Asia, including how the region could fine-tune its existing conduct of fiscal programs. Building on the literature on fiscal policy, public finance, and economic growth, they analyze the marginal effects of income and property taxes on the rate of economic growth as well as the impact of increases in government spending on physical and social infrastructure.

The literature on fiscal policy generally shows that taxes affect economic growth negatively given their distortionary effects on prices and the disincentives to consumption and investment that go with them. Government spending on infrastructure and other capital expenditures generally boosts economic growth, whereas fiscal spending on ordinary operating expenses tends to show mixed results. Recent studies show that spending on social infrastructure or on education, public health, and social protection have significant positive impacts on total factor productivity and long-run economic growth.

Research also shows that benefits accruing from fiscal policy are typically higher for advanced economies,

and that underdeveloped institutions and corruption tend to drag down the positive effects of fiscal policy in developing countries. Developing Asia, in particular, tends to have lower tax revenues relative to gross domestic product (GDP) as well as lower actual tax collection relative to potential tax revenues (Figure 1). Although tax collection has significantly improved since the 1990s, the ratio of total taxes to GDP still has a wide margin for improvement (Figure 2).

The tax structure has also evolved with the improvement in tax ratios in developing Asia. While trade taxes are relatively high in the 1990s, at about one-fifth of the total, they declined substantially after a decade to just slightly above 10%. Consumption taxes, on the other hand, went up from 35% of total in 1990 to approximately 43% in 2000. Personal and corporate income taxes account for about 14% and 25% of total taxes, respectively, in the same year. The authors note that indirect taxes are the dominant sources of revenues for governments in the region.


GDP = gross domestic product, LAO PDR = Lao People’s Democratic Republic, OECD = Organisation for Economic Co-operation and Development.Note: Tax e ort is defined as the ratio of actual tax collection to potential tax revenue.Source: Abdon, Estrada, Lee, and Park (2014).

Figure 1: Comparative Tax Revenue Indicators, 2012

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Fiscal Policy and Growth in Developing Asia (continued from page 10)

Fiscal expenditures in developing Asia typically account for 20% of GDP between 1990 and 2011, based on purchasing power parity adjusted incomes. This is substantially smaller than the Organisation for Economic Co-operation and Development (OECD) average of 30% (Figure 3). Note that the ratios are more or less constant from the mid-1990s to 2004 for developing Asia and up to 2007 for the OECD. Fiscal expansion accelerated in the region from 2006 to 2009, before declining in 2010 and 2011.

To assess the impact of the evolution of the tax structure and patterns of fiscal expenditures on long-run economic growth in developing Asia, Abdon, Estrada, Lee, and Park (2014) utilize a model and estimation procedure implemented by Acosta-Ormaechea and Morozumi (2013) to estimate the marginal effects of various tax types and fiscal expenditures on growth. The estimated effects of a 1% increase in various income taxes and a property tax on growth rates of low-, middle-,

and high-income countries, after all other taxes are adjusted downward by an equivalent amount, are shown in Figure 4.

Except for the positive effect of personal income taxes on economic growth of low-income countries, all income tax categories have substantial negative effects on middle-income countries.

Owing to their progressive nature, personal income taxes can discourage growth at a magnitude that is substantially higher relative to consumption taxes. The authors note that while consumption taxes raise the price of goods, they typically do not discourage savings and investment, provided they remain constant over time. Corporate income taxes, however, are harmful to growth since they tend to discourage investments in capital and other innovations that could boost productivity. High corporate income taxes also tend to discourage the inflow of foreign direct investments. On the other hand, a 1% increase in property taxes tends to increase long-run economic growth by 0.42% in middle-income countries and by 0.28% in high-income countries. Property taxes encourage growth by shifting private investments away from residential real estate toward activities with higher returns.

Abdon, Estrada, Lee, and Park (2014) employ a similar approach to the measurement of the effects of fiscal expenditures on economic growth. Consistent with the literature, they find that social protection, which includes education, raises long-run economic growth in all alternative model specifications. Other expenditure categories with statistically significant impact on long-run economic growth include defense spending, health services, and transportation and communication.


OECD = Organisation for Economic Co-operation and Development.Note: Unweighted average.Source: Abdon, Estrada, Lee, and Park (2014).

Figure 3: Fiscal Expenditures as aPercentage of Gross Domestic Product

0

10

20

30

40

1990 1993 1996 1999 2002 2005 2008 2011

%

OECD Developing Asia

12


The results of the analyses on the impact of various fiscal expenditure categories, e.g., tax instruments, on economic growth show that the composition of taxes and government spending matters in developing Asia. When the region improves fiscal revenue mobilization efforts across all categories to expand its relatively limited revenue base, governments would do well to impose a mix of taxes that would minimize adverse effects on growth while at the same time prioritizing fiscal spending on education and social protection to further boost long-run economic growth.

Fiscal Policy and Growth in Developing Asia (continued from page 11)

FEATURES

References

Acosta-Ormaechea, S. and J. Yoo. 2012. Tax Composition and Growth: A Broad Cross-Country Perspective. IMF Working Paper. No. 12/257. Washington, DC: International Monetary Fund.

Acosta-Ormaechea, S. and A. Morozumi. 2013. Can a Government Enhance Long-Run Growth by Changing the Composition of Public Expenditure? IMF Working Paper. No. 13/162. Washington, DC: International Monetary Fund.

Abdon, A., G. Estrada, M. Lee, and D. Park. 2014. Fiscal Policy and Growth in Developing Asia. ADB Economics Working Paper Series. No. 412. Manila: Asian Development Bank.

Source: Acosta-Ormaechea, S. and J. Yoo (2012).

Figure 4: Marginal Impact of a 1% Tax Increase, O�set by a 1% Reduction in Other Taxes,on Economic Growth, by Country Income Category

Low income Middle income High income

-0.40

-0.20

0.00

0.20

0.40

0.60

Income tax Personalincome tax

Corporateincome tax

Property tax

Perc

enta

ge

13

Volume 5, Number 4

PUBLICATIONS

ADB Economics Working Paper Series

• 402-Financing Post 2015 Development Challenges Hiranya Mukhopadhyay and Rosa Mia Arao This paper proposes a composite fiscal flexibility index to identify Asia and Pacific countries that are well-poised to meet enhanced post-2015 development financing requirements.

• 408-Fiscal Policy and Inclusive Growth in Latin America Lessons for Asia Sang-Hyop Lee and Donghyun Park This paper shows that Latin America’s experience with inclusive fiscal policy can offer lessons for developing Asia in its quest to leverage public spending and taxation to spread the benefits of growth.

• 410-Industrialization and Global Value Chain Participation: An Examination of Constraints Faced by the Private Sector in Nepal Yurendra Basnett and Posh Raj Pandey This paper examines Nepal’s constraints in participating in regional and global value chains.

• 411-Industrial Policy in Indonesia: A Global Value Chain Perspective Julia Tijaja and Mohammad Faisal This paper traces the evolution of industrial policies in Indonesia. Using the mineral sector as case study, it says the effectiveness of policies in enhancing global value chain participation depends not only on policy design.

• 412-Fiscal Policy and Growth in Developing Asia Arnelyn Abdon, Gemma Estrada, Minsoo Lee, and Donghyun Park This paper estimates the impact on growth of changing the composition of taxes and government spending. It shows that developing Asia’s governments can maximize the contribution of fiscal policy to growth by closely examining their revenue and expenditure mix.

• 413-Benefit Incidence of Public Transfers: Evidence from the People’s Republic of China Ke Shen and Sang-Hyop Lee This paper employs the National Transfer Account framework and shows the benefit incidence of public transfers across generations and socioeconomic groups in the People’s Republic of China in 2009.

• 414-Are Current Tax Spending Regimes Sustainable in Developing Asia? Sang-Hyop Lee and Andrew Mason This paper projects government spending on education, health care, and social protection in developing Asia up to 2050 given demographic changes and economic growth.

• 415-Government Spending and Inclusive Growth in Developing Asia Seok-Kyun Hur This paper assesses the effects of fiscal policy on both equity and growth, and examines whether it is possible to design fiscal spending to enhance equity without sacrificing economic growth, and vice versa.


14


PUBLICATIONS

• 416-Fiscal Resources for Inclusive Growth Arindam Das-Gupta This paper presents a framework to assess the fiscal resource bases of economies in developing Asia as well as the growth and distribution effects of fiscal resources.

• 417-Do Governance Indicators Explain Development Performance? A Cross-Country Analysis Xuehui Han, Haider Khan, and Juzhong Zhuang This paper finds that better governance is associated with faster growth and higher income levels, but governance’s relationship with development may vary across dimensions of governance and a country’s stage of development.

• 418-The People’s Republic of China’s Potential Growth Rate: The Long-Run Constraints Jesus Felipe, Matteo Lanzafame, and Juzhong Zhuang This paper estimates the People’s Republic of China’s potential growth rate in 2012 at 8.7%. This is the natural growth rate, or the rate consistent with a constant unemployment rate and stable inflation. The paper also discusses the determinants of potential growth, namely, the growth rates of labor productivity and the labor force.

ADB Economics Working Paper Series

• 419-The Declining Share of Agricultural Employment in the People’s Republic of China: How Fast? Jesus Felipe, Connie Dacuycuy, and Matteo Lanzafame The transfer of workers out of low-productivity agriculture is fundamental for the People’s Republic of China (PRC) to progress and become a high-income economy. This paper shows that the share of employment in agriculture in the PRC will decline to about 24% by 2020, and will reach 5% by 2042-2048.

• 420-Manufacturing Matters…. but It’s the Jobs That Count Jesus Felipe, Aashish Mehta, and Changyong Rhee This paper explores the relationship between manufacturing and economic prosperity. Achieving a manufacturing employment share of 18%-20% is absolutely necessary to attain high-income status. However, high manufacturing employment shares are becoming more difficult to sustain as incomes rise, suggesting that the path to prosperity through industrialization may be difficult today.

• 421-Middle-Income Transitions: Trap or Myth? Jesus Felipe, Utsav Kumar, and Reynold Galope This paper classifies countries into four income categories and discusses middle-income transitions. It finds that, historically, it takes a “typical” country 55 years to graduate from lower-middle income to upper-middle-income status, and 15 years to graduate from upper-middle income to high income.

15

Volume 5, Number 4

January

• ADO 2015 Writers’ Workshop 13–15 January, ADB Headquarters

• Briefing Seminar: Bangladesh Country Diagnostic Study January, ADB Headquarters

• Fact-Finding Mission: Bangladesh Country Diagnostic Study (TA 8266) January, Dhaka, Bangladesh

February

• Attachment Program to the Regional Training Course on Statistical Business Registers (R-CDTA 8594) 4–11 February, Malaysia

• Report Launch: Power Sector Reform (TA 7931) February, Republic of Korea

• Report Launch: Maldives Country Diagnostic Study (TA 7686) February, Maldives

• Consultation Workshop of Cambodia Employment (TA 7951) February, Phnom Penh, Cambodia

March

• Workshop: Gender (TA 8620) March, ADB Headquarters

• Training: Impact Evaluation March, ADB Headquarters

• First Consultation Workshop: Bangladesh Country Diagnostic Study (TA 8266) March, Dhaka, Bangladesh

• Second Consultation Workshop: Tajikistan Country Diagnostic Study (TA 8266) March, Dushanbe, Tajikistan

• Final Consultation Workshop: Fiji Country Diagnostic Study (TA 7686) March, Suva, Fiji

EVENTS


Maria Socorro G. BautistaManaging Editor

Maria Susan M. TorresEditorial Assistant

Noli R. SotocinalMary Ann MagadiaContributors

Rhommell RicoDesign, Typesetting, and Layout

The next issue of the e-Quarterly Research Bulletin is scheduled for release in March 2015. You may send your comments and suggestions for this issue, as well as requests for additional material to [email protected]

The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of ADB or its Board of Governors or the governments they represent. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB.

ISSN: 2227-0434

BOOKS

© Asian Development Bank Publication Stock No. ARM147037-3

New measures have opened up insights into the extent and complexity of global production networks. The chapters in this timely book deploy new tools to understand how global value chains change the nature of global economic interdependence, and to assess how that in turn changes our understanding of policies in this new environment.

The authors bring to bear a wide variety of methodological tools and data, and perspectives ranging from the firm-level micro economy to the global macro economy. The book has two broad themes. The first is national economies’ heightened exposure to adverse shocks (natural disasters, political disputes, recessions) elsewhere in the world as a result of greater integration and interdependence. The second theme is focused on the evolution of global value chains at the firm level and how this will affect competitiveness in Asia. It also traces the past and future development of production sharing in Asia.

Employing an array of the latest methods and data to study global value chains, the book will prove a valuable resource for international organizations and regional bodies who have an active interest in anything related to global supply chain analysis. Researchers, academics and students in the fields of international trade and economics will also find its assessment of the evolution of global value chains at the firm level, and how this affects competitiveness in Asia, to be an insightful guide.

Benno Ferrarini is Senior Economist at the Economics and Research Department of the Asian Development Bank, Philippines and David Hummels is Professor of Economics at the Department of Economics at Purdue University and Research Associate of the National Bureau of Economic Research, USA.

Asia and Global Production Networks

EDITED BY

Benno Ferrarini David Hummels

Asia and G

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Asia and Global Production NetworksIMPLICATIONS FOR TRADE, INCOMES AND ECONOMIC VULNERABILITY

JOB NO 1439 DATE SENT 17.09.14 TITLE Asia and Global Production Networks EDITOR Caroline CornishPRODUCTION CONTROLLER Ilsa Williamson ORDER 52090 SPINE BULK 25mm JACKET SIZE Royal PPC 234mm x 156mm COLOURS CMYKPLEASE NOTE Colours on printed laser proofs may differ slightly to those viewed on PDFs due to the nature of laser printing compared to the colour values seen on screen.

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ASIAN DEVELOPMENT BANK

Cambodia: Diversifying Beyond Garments and TourismCountry Diagnostic Study

Cambodia has enjoyed over 2 decades of robust growth, with rising foreign investment and deepening integration into global and regional value chains. The country—once riven by civil war and conflict—is now politically stable and increasingly making its mark as the world’s eighth-largest rice producer, Asia’s 10th-largest garment exporter, and a rising tourist destination. Yet Cambodia faces considerable challenges. It suffers from major infrastructure deficits; limited skills development and education quality; and weaknesses in governance. Fiscal resources are also stretched. Moreover, for a successful transition to a modern industrialized economy, Cambodia needs to diversify and upgrade its productive capabilities. This publication examines the opportunities and the challenges, and offers recommendations for long-term socioeconomic strategy.

About the Asian Development Bank

ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to approximately two-thirds of the world’s poor: 1.6 billion people who live on less than $2 a day, with 733 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration.

Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

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