The determinants of east asian regionalism (Los determinantes del regionalismo de Asia Oriental)

-

Documents
14 pages
Obtenez un accès à la bibliothèque pour le consulter en ligne
En savoir plus

Description

ABSTRACT
East Asia has been experiencing an epic progress of regionalism over the last decade with China, Japan, and Korea (CJK) as the most prominent actors. Regionally speaking, East Asia has been nurtured by a market-driven expansion of trade and foreign direct investment (FDI) that leads the bottomup regionalism process. However, this paper argues that the bottom-up process
alone is not enough since a more institutionalized approach is needed. From a static panel data simulation, it is found that sound transportation infrastructure, good governance, competitive taxation policies, sizeable markets, good education, democracy and the trend towards industrialization are the main factors that serve as building blocks for East Asian regionalism.
RESUMEN
Asia oriental ha experimentado un progreso épico del regionalismo en la última década, con China, Japón y Corea (CJK), como los actores más destacados. Regionalmente hablando, Asia oriental ha sido alimentado por una expansión impulsada por el mercado del comercio y la inversión extranjera directa (IED) que lidera el proceso de regionalismo, de abajo hacia arriba. Sin embargo, este trabajo sostiene que el proceso de abajo hacia arriba por sí solo no es suficiente, ya que se necesita un enfoque más institucional. Desde un panel de simulación estática de datos, se comprueba que la infraestructura de transporte, el buen gobierno, políticas de competencia fiscal, los mercados de gran envergadura, buena educación, la democracia y la tendencia hacia la industrialización son los principales factores que sirven como bloques de construcción para el regionalismo de asia oriental.

Sujets

Informations

Publié par
Publié le 01 janvier 2011
Nombre de visites sur la page 12
Langue Español

Informations légales : prix de location à la page  €. Cette information est donnée uniquement à titre indicatif conformément à la législation en vigueur.

Signaler un problème

Finanzas y Política Económica, ISSN: 2248-6046, Vol. 3, No. 2, julio-diciembre, 2011, pp. 13-26
Fithra Faisal
Hastiadi*
Waseda University The determinants of east
asian regionalism
Recibido: 3 de agosto de 2011
Concepto de evaluación: 3 de octubre de 2011 ABSTRACT
Aprobado: 25 de octubr
East Asia has been experiencing an epic progress of regionalism over
the last decade with China, Japan, and Korea (CJK) as the most prominent
actors. Regionally speaking, East Asia has been nurtured by a market-driven
expansion of trade and foreign direct investment (FDI) that leads the bottom-
up regionalism process. However, this paper argues that the bottom-up process
alone is not enough since a more institutionalized approach is needed. From a
static panel data simulation, it is found that sound transportation infrastruc-
ture, good governance, competitive taxation policies, sizeable markets, good
education, democracy and the trend towards industrialization are the main
factors that serve as building blocks for East Asian regionalism.
Keywords: regionalism, panel data, East Asia, trade
JEL Clasifcation: C33, R13, N15.
Los determinantes del regionalismo de Asia Oriental
RESUMEN
Asia oriental ha experimentado un progreso épico del regionalismo en
la última década, con China, Japón y Corea (CJK), como los actores más des-
tacados. Regionalmente hablando, Asia oriental ha sido alimentado por una
expansión impulsada por el mercado del comercio y la inversión extranjera
directa (IED) que lidera el proceso de regionalismo, de abajo hacia arriba. Sin
embargo, este trabajo sostiene que el proceso de abajo hacia arriba por sí solo
no es sufciente, ya que se necesita un enfoque más institucional. Desde un
panel de simulación estática de datos, se comprueba que la infraestructura
de transporte, el buen gobierno, políticas de competencia fscal, los mercados
de gran envergadura, buena educación, la democracia y la tendencia hacia
la industrialización son los principales factores que sirven como bloques de
construcción para el regionalismo de asia oriental.
Palabras clave: regionalismo, data panel, asia oriental, comercio*Graduate School
of Asia-Pacific Studies Clasifcación JEL: C33, R13, N15.
(GSAPS), Waseda University
Nishi-Waseda, Shinjuku-
ku, Tokyo, JAPAN. E-mail:
fithra@asagi.waseda.jp;
fithra_faisal@yahoo.com
13Fithra Faisal Hastiadi
and Kubota (2005) even pointed out democracy as INTRODUCTION
an important factor that could foster regionalism.
Their empirical work on the developing countries East Asian countries cannot escape from the fact
from 1970 to 1999 showed that regime change that they are now being more integrated than
toward democracy was associated with trade li-before. Regionally speaking, East Asia has been
beralization and regionalization. nurtured by a market-driven expansion of trade
Based on the aforementioned, knowing the and foreign direct investment (FDI). Kawai (2007)
factors that determine the formation of regio-described the data of a heavily expanded trade and
nalism (top-down process to match the existing FDI in the region over the past two decades.
bottom-up process) is becoming more and more The share of intraregional trade of ASEAN
crucial. Given this fact, this chapter tries to iden-Plus Three (APT) has been increasing dramatically
tify the variables that provide a clear path for the over the last decade. The share is now reaching a
formation of East Asian Regionalism (EAR). Thus, a staggering fgure as it almost reaches 60 per cent.
unifed East Asia could accelerate the momentum In comparison with the fgure in early nineties, it
of overall trade liberalization and boost regional can be concluded that East Asia is becoming more
economic growth.interconnected, and all of these facts have led the
The last part of this chapter is organized well known bottom-up process of regionalism.
as follows. The second section studies the basic Unfortunately, the bottom up process alone
concepts. The third section covers materials and is not enough. A more institutionalized approach
methods. The fourth examines the results, is needed in order to make the regionalism solid
and the last section presents some concluding and sustainable. Although the leaders of ASEAN+3
remarks.countries have repeatedly held meetings, the top-
down process in East Asia has still not reached its
potentials. It is fair to say that, as Capannelli (2011) BASIC CONCEPTS
argues, the increased economic interdependence in
East Asia over the last few decades has been heavily Democracy and regionalism
dominated by the markets rather than government
policies. Coordinated intergovernmental initiatives Many scholars believe that the types of regime can
for cooperation, including the creation of regional infuence the choice to join or not to join the free
institutions, have lagged behind. Different from trade scheme. However, whether or not democracy
Europe, economic integration in Asia has emerged promotes free trade still fnds some ambiguous
without a clear strategy for creating a unity across arguments among scholars. Given the global
the countries in the region (Asian Development trend toward democracy, the answer is of more
Bank, ADB, 2008; Drysdale, 2006; Kawai, 2005; than pedagogical interest. If democracy indeed
Petri, 2006; Soesastro, 2006). promotes free trade, then the spread of democracy
Feng and Genna (2003) argued that homo- should reinforce regionalism, because it creates a
geneity of domestic institutions is needed to go path to open the markets for poor countries that
together with the regional integration process. have historically lacked market access. However, if
Moreover, they pointed out infation, taxation and democracy can lead to protection, the formation
government regulation as representing factors for of regionalism will face substantial problem. Either
the economic institutions. Another variable that way, understanding and predicting the future of
might enhance integration is population, as al- regionalism requires an understanding of the de-
ready identifed by Tamura (1995). He argued that mocracy and trade policy relationship.
large population is a catalyst for integration due Milner and Kubota (2005) argue that de-
to economic agglomeration. Scholars like Milner mocratization, which implies a size increase in the
14
Finanzas y Política Económica, ISSN: 2248-6046, Vol. 3, No. 2, julio-diciembre, 2011, pp. 13-26THE DETERMInAnTS OF EAST ASIAn REGIOnALISM
selectorate, have a direct consequence in changing try their best to ensure their activities stay safe. To
the calculations of political leaders about the opti- do so, the anti free-trade actors need to lobby the
policy makers to impose high tariff by reciprocally mal level of trade barriers. They see that democra-
tization induces the adoption of trade policies that giving the policy makers bigger sound prognosis
better promote the welfare of consumers/voters at of consumer welfare. Naturally, the pro-trade ac-
large, which implies trade liberalization in this con- tivists would resist any kind of tariff hikes. For the
text. Although the interest of protectionist groups anti trade actors, the given characteristic means
remain important as the dynamic of democracies, lobbying cost. Since the frst scenario assumes anti
trade actors to have ample amount of resources other groups preferring lower trade barriers beco-
me more important for political leaders since they to handle the cost, the policy makers will then be
are now part of the selectorate upon which leaders stirred to set cuts on sanction.
can depend for their political survival. The number of anti trade actors is determi-
The work of Grossman and Helpman (1994) ned by a free entry condition which is a function of
on the political economy of protection tells so- the tariff. Higher tariff rates will lead to increasing
numbers of anti trade actors as they face lesser mewhat a different story compared to the aforesaid.
They argue that if rational policymakers (govern- barriers to entry. The tariff itself is determined by
ment, parliament) maximize a weighted sum of the actions of policy makers when it optimizes a
campaign contributions and general welfare, the ‘politically realistic objective function’. The objec-
equilibrium tariff depends on the relative weights tive function here is defned as way to maximize
placed on each one in the government’s objective individual preferences. The intersection of a politi-
cally realistic objective function with the free-entry function. To the extent that special interest groups
are more active in a democracy (Olson, 1982), they conditions provides a set of combinations where
might constitute a greater weight, and therefore policy makers are choosing the politically-optimal
a greater level of democracy would lead to higher rule while allowingthe anti trade actors to enter
trade barriers. Conversely, political competition the game up to the point of no return.
generated in an active democracy might imply Reciprocal talks (taking the form of negotia-
tion between anti trade actors and policy makers) that policymakers weight more heavily −in gene-
ral− versus special interest welfare. These models will have a direct impact for a politically optimal
are silent as to which infuence might dominate; tariff. This scenario will shift down the objective
however, empirical work testing the protection for function of the policy makers since they have a
sale model has yielded results that are supportive new set of optimal rule. The shifting will −in turn−
of a positive linkage between democracy and trade drive some pro-trade actors to be marginalized as
they face increasing numbers of anti trade actors, (Mitra, Thomakos & Ulubasoglu, 2002).
To simulate the logic, the study goes through which also means increasing lobbying power
the juggernaut and Domino framework which was against them. This situation will decrease the cost
frst introduced by Baldwin (2006). Although it is of lobbying since the political resistance from the
known best for explaining the behavior of exporter pro-trade actors is decreasing linearly with the le-
and importer, it also serves well when it comes to aping size of anti trade actors. As far as Baldwin’s
politics. The main similarity would be the involve- juggernaut effect is concerned, the political eco-
ment of actors that seek a politically optimal point nomy forces driving the effect are strengthened
(equilibrium point). Those actors are:(a) policy by the tendency of special interest groups to fght
makers, (b) anti free-trade actors, and (c) pro-trade harder to secure gains. For them, joining the anti
actors. Moving on to the scenario where anti free- trade scheme will give new commercial opportu-
nities. Having said this, the higher tariff may play trade actors have dominant lobbying power that
infuences the whole system, pro-trade actors will a particularly important role in generating new
15Fithra Faisal Hastiadi
anti-trade political economy activity. Doing ano- antithesis of good governance, is often regarded
ther reciprocal talk is cheaper now, resulting to as a major root that creates all sources of pro-
further hikes on tariff. The cycle repeats itself until blem. Major donors and international fnancial
new equilibrium is met (the juggernaut effect). institutions are increasingly basing their aid and
As Geddes (1995) summarizes: loans on the condition that reforms ensuring
good governance are undertaken.
Until recently, it was widely accepted that The concept of governance is not new. It
democracies, especially fragile, uninstitutio- is as old as human civilization. According to the
nalized new democracies have difficulty ca- United Nations Economic and Social Commission
rrying out economic liberalization because its for Asia and the Pacifc (UnESCAP, 2010), gover -
costs make it unpopular and hence politically nance means: the process of decision-making and
suicidal to elected officials. Consequently, the process by which decisions are implemented
it was argued, authoritarian governments (or not implemented). Governance can be used in
should be more capable of initiating and several contexts such as corporate governance, in-
sustaining major economic reforms. ternational governance, national governance and
local governance. Given the fact that governance
The effects of democracy on trade can is the process that involves decision-making and
also be determined by the characteristics of the implementing, any analysis concerning gover-
voters. In his work on the political economy of nance should focus on the actors −formal and
trade, Mayer (1984) produces interesting fndings informal− that are drawn in the process.
concerning the unique characteristics of voters by Bringing the concept to practicality, go-
using the Heckscher-Ohlin framework (two factors vernment is deemed as one of the actors in go-
and two sectors). The fndings emphasize on the vernance. Other actors involved in governance
endowment of median voter. If the median voter is vary depending on the level of government that
well-endowed with labor, they will support imports is under discussion. In rural areas, for example,
of capital intensive goods but oppose imports of other actors may also include infuential lan-
labor-intensive goods. On the other hand, if the dlords, associations of peasant farmers, coope-
median voter is well endowed with capital relati- ratives, non-governmental organizations (NGOs),
ve to their national mean, then they will support research institutes, religious leaders, fnance
imports of labor-intensive goods, but oppose institutions, political parties, the military etc. The of capital-intensive goods. To correspond situation in urban areas is much more complex.
with Mayer’s work, Dutt and Mitra (2002) explain At the national level, in addition to the actors
that inequality raises trade barriers in capital rich above, media, lobbyists, international donors or
countries and lowers them in capital scarce ones. multi-national corporations may play a role in
Besides, left-wing governments adopt more protec- decision-making or in infuencing the decision-
tionist policies in capital-rich countries, but more making process.
free trade policies in labor-rich economies with All actors other than government and the
military are put into one pot as a part of the ‘civil right-wing governments.
society.’ Although formal decisions are delivered
and implemented at the national level by formal
Good governance and regionalism government structures, informal decision-making
structures, such as ‘kitchen cabinets’ or informal
Until recently, the development literature put advisors may exist. Corrupt practices are regarded
as an infuential factor determining such informal some excessive study on the terms governance
and good governance. Bad governance, as the decision-making process.
16
Finanzas y Política Económica, ISSN: 2248-6046, Vol. 3, No. 2, julio-diciembre, 2011, pp. 13-26THE DETERMInAnTS OF EAST ASIAn REGIOnALISM
To be more specifc, UnESCAP classifes good while industries with low-entry barriers create
governance into eight (8) major characteristics. It new firms. In addition, countries facing high
entry barrierstend to have only a few large frms is participatory, consensus-oriented, accountable,
transparent, responsive, effective and effcient, −and industries are characterized by large sales
equitable and inclusive, and follows the rule of law. turnover−,while countries with low entry barriers
It assures that corruption is minimized, the views have many smaller frms. Thus, their results sug-
of minorities are taken into account and that the gest that regulations create distortion in industrial
voices of the most vulnerable in society are heard in structure, increase industrial concentration, and
infuence the amount of participants to an indus-decision-making. It is also responsive to the present
and future needs of society. try in case of external shocks. Similarly, Klapper,
In the relation with regionalism, various Laeven and Raghuram (2004) examine data on
studies have demonstrated that governance is frms in Western and Eastern Europe and discover
crucial for regionalism. Adam Smith (1776) noted that entry regulations lead to less entry, especially
that private contracting is an important factor for in industries with naturally high-entry barriers.
Furthermore, they fnd that excessive regulations the mutually benefcial exchanges that promote
specialization, innovation and growth, which are deter the investment related to labor-intensive
also the main factors for the gains from free-trade industries.
leading to regionalism.
Bolaky and Freund (2004) demonstrate that
Transport infrastructure regulatory quality infuences the interaction bet-
and regionalism
ween trade and economic growth. They also argue
that countries with excessive regulations do not
Good infrastructure −especially transport infras-get beneft from trade. The argument is relatively
tructure such as roads, railways, and ports− will simple: Trade only benefts countries that have
provide steadiness and assuredness in making trade relatively low adjustment costs. In other words,
investment in a country. Besides, solid infrastruc-countries that are facing low cost for reallocation
ture tends to lower the cost of trade and leads to of labor and capital −from the import-competing
sustainable intra-trade and investment. Thus said, it sector to the exports sector− will get high beneft
lays foundation for the formation of regionalism.from trade. On the other hand, countries with too
According to the World Trade Organization, much regulation may face a relatively rigid econo-
WTO (2004), this sector is very crucial for moving mic structure. In this case, production factors are
goods and services from exporting to importing facing diffculties in moving to the sectors where
countries. Poor transport infrastructure or ineff-large welfare gains can be achieved. The economy
cient transport services are refected in higher direct may eventually end-up in a situation where trade
transport costs and longer time of delivery, while does not have a benefcial impact on the allo -
an improvement in the infrastructure of a country cation of resources within and between sectors.
lowers the costs of trading. A study conducted by Furthermore, excessive regulations may encourage
Limão and Venables (2001) shows that if there is an a country to produce goods for which it has no
improved infrastructure in a country –moved from comparative advantage or the terms of trade have
median point to top 25% of the total countries be-been unfavorable over recent decades.
ing surveyed−, it will cause a signifcant reduction Moreover, Fisman and Sarria-Allende (2004)
on transportation cost up to 481 kilometers of over-fnd out two different outcomes for industries in
land travel and 3,989 kilometers of travel by sea. countries that are (a) having or (b) not having ex-
The shift of improvement will also causean increa-cessive regulations. In responseto shocks, industries
sed volume of trade by 68%, which is equivalent with high tariff barriers expand the existing frms
17Fithra Faisal Hastiadi
to being 2,005 kilometers closer to other countries. It is the overall change in circumstances accompan-
Meanwhile, countries facing ineffcient transport ying the movement of population and resources
from primary production activities to manufactu-services will experience higher overall transport
costs. Poor quality of infrastructure increases to- ring production and associated services. In relation
tal transport costs as it increases direct transport with regionalism, industrialization in developing
costs and the time of delivery. A study conducted countries creates mechanization for the parts
by Wilson, Mann and Otsuki (2005) demonstrates and components that are being channeled from
that transport costs and lack of infrastructure wear the developed countries. Regionally speaking,
down the potential income of local producers. the industrialization process will help to enhance
The study performed by WTO (op. cit.) recognizes the region like a factory for the overall product
the negative impact of a lack of infrastructure on fragmentation process. For East Asia, the example
domestic income. Transportation infrastructure has of Japan’s production networks to the Southeast
been proved to have a pronounce effect on trade as Asian countries can be taken into account .Japan
it channels through the effect on the comparative is widely known as the producer of highly value
advantage to trade of a country. added engine parts and components, but actua-
Yeaple and Golub (2002) make quantifca- lly, the entire production process includes several
tion that explains to which extent the difference South-East Asian countries: Indonesia is responsible
in government infrastructure is affecting the exis- for assembling gasoline engines and horns; Philip-
ting Total Factor Productivity (TFP) at the sectoral pines specializes in making transmission and com-
level. They found that road infrastructure provision bination meters; Malaysia takes part to assemble
contributes as a signifcant factor in productivity engine parts and condensers; Thailand assembles
growth of a sector and production specialization diesel engines and air conditioning systems. This
of a country. Moreover, the road infrastructure entire process of production networks is spurred
turns out to be signifcant not only as a factor by the industrialization in the South-East Asian
affecting productivity growth in the transportation countries (Watanabe, 2008).
equipment sector, but also as a factor infuencing
the process of specialization in the production of
Population and regionalism
textiles and apparel.
Big population serves well not only for the demand
Industrialization and regionalism for the goods from trade but also as supply of labor
for the industrialization process. Indeed, it creates
By defnition, industrialization means the process sustainable paths toward regionalism. Looking at
whereby a society or country (or region) transforms the literature, the effect of population on trade is
itself from a primarily agricultural society into a bit equivocal.
one based on the manufacturing of goods and Matyas (1997) fnds that population has the
services. Individual manual labor is often replaced positive tendency of raising trade volumes and the
by mechanized mass production and craftsmen level in which it produces gains from specializa-
are replaced by assembly lines. Characteristics of tion. On the other hand, Dell`Ariccia (1999) fnds
industrialization include the use of technological a negative relation between population and the
innovation to solve problems as opposed to supers- volume of trade. In addition, Bergstrand (1989)
tition or dependency upon conditions outside hu- reports positive effect of gross domestic product
man control −such as the weather− as well as more (GDP) per capita on trade. He describes a negative
effcient division of labor and economic growth. In- GDP per capita coeffcient in a way that the product
dustrialization is a historical phase and experience. group which is subject to the estimation is not
18
Finanzas y Política Económica, ISSN: 2248-6046, Vol. 3, No. 2, julio-diciembre, 2011, pp. 13-26THE DETERMInAnTS OF EAST ASIAn REGIOnALISM
capital intensive but labor intensive. Since higher wage rate in countries where capital is abundant.
population numbers decrease GDP per capita on a This eventually equalizes the wage rate between
two countries in the long term. This equalization labor intensive basis, it can be seen a negative rela-
tionship between population and trade fows. in wage is true if the educational gap among the
According to nuroglu (2010) who studies countries becomes reduced and less signifcant.
the six big economies of the Organization of the
Islamic Conference (OIC), the impact of population
METHODOLOGYon trade will differ as it depends on the length of
period of estimation (short-term vs. long-term).
This essay employs a fxed effect model in panel In the short run, population may have a positive
data. The model can be specifed as follows:impact on trade fows as it may raise the number
of labor force, the level of specialization, and im-
Y = X β + λ + η +ε t=1,..., T i=1,...,N [1]ply more products to export. However, in the long it it t i it
run, a bigger population has more possibilities to
λ and η are time and individual specifc effects decrease income per capita, which make every in- t i
respectively, x is a vector of the explanatory varia-dividual to be poorer, and, therefore, it may cause
bles, (i) is the time component of the panel, (N) production and exports to decrease. In addition,
is the cross-section dimension (or the number of lower income per capita tends to decrease the
cross-section observations), and N x T is the total demand for imports as well. Having said this, diffe-
number of observations. The procedure consists in rent results across period and region can be seen
running the models in order to have a consistent when measuring the effect of population on trade.
estimator for the β coeffcients, and the model Hence, it creates different conclusions.
(fxed or random) choice depends on the hypo-
thesis assumed for the relationship between the
Education and regionalism error-term (ε ) and theregressors (x ). The static
it it
panel data analysis developed in the empirical sec-
Policies concerning enhancement in the feld of tion of the paper was based on two basic panel
education have long been known and have played models: the fxed (FE) and the random (RE) effect
a signifcant role in development. A high-quality models. The FE estimator uses a transformation in
human resource development is regarded as the order to remove the unobserved effects (αi) and
genuine product of education that can improve any time-constant explanatory variable. A general
any strategy related to competitiveness. That being representation of a FE model is:
said, good education is the key to reach economic
growth and to escape from poverty. yx  i t i it i i t [2]
Some developing countries have been suc-
cessful in attracting FDI due to qualifed human
Where i= 1,...N and t= 1,...T , where (x) represents
skills. In the East Asian context, the sound policy the explanatory variables, (y) is the dependent
that promotes education can eventually diminish variable and (ε ) the error term.
itincome gaps between the Northeast and Southeast
If the average over time is considered:
Asian countries. The fact that product fragmenta-
tion is becoming a trend in this region also serves
yx i t   i t [3]to the regional convergence. As stated by Jones i t i i
and Kierzkowski (2001), fragmentation increases
Subtracting (14) from (15) for each (t):the wage rate in countries where labor is a relatively
abundant production factor, while it lowers the
19Fithra Faisal Hastiadi
yy(xx i t)   i t [4] yy (1)(xx )(u u )i t i t i it i t i ti t i 0 i it i tit i

  or yx [4a] [7]i t i tyy (1)(xx i t)(u u )i t i i t i 0 i it i tit i
2 2 2 1(  T ) ( x 0 )Where for it     i tThe FE transformation is called the within
0 1
transformation and the FE estimator (or the wi-
One of the advantages of using such trans-thin estimator), which is the ordinary least square
formation and the RE model is that it allows ex-(OLS) estimation of equation (4a), the pooled OLS.
planatory variables that are constant over time. By Under the assumption of strict exogeneity for the
examining equation (1), one can relate the RE esti-explanatory variables (E(e / x , a ) = 0) the FE es-
it it i
mator (pooled OLS known as POLS) and FE where timator is unbiased. If any explanatory variable is
the POLS is obtained for the case where λ = 0 (the constant over time for all (i), it is swept away by
 unobserved effect, αi is not important) while the the FE transformation (x = 0) the OLS estimation it
FE is the estimator for λ = 1. The choice  between by FE also requires that the errors are homosedastic
the FE and the RE estimators is based on whether and serially uncorrelated over time.
the unobserved effects (αi) can beconsidered as The RE estimator is more adequate if it is
parameters to be estimated, or as an outcome assumed that the unobserved effect is not co-
of a random variable, suggesting the use of aFE rrelated with all the explanatory variables, and
or a RE model respectively. Since the time period the estimation is carried on by a generalized least
(1998-2007) exceed the individual observations square (GLS) estimation. The equation representing
(Indonesia, Malaysia, Thailand, Philippines, China, the RE model is:
Japan and Korea), the fxed effect model is con-
sidered the most appropriate method (Nachrowi y=β +βx +α +ε [5]it 0 i it i it
& Usman, 2008). Thus said, this essay formulate
specifc model as follows:If the unobserved effect (α ) is thought as unco-
i
rrelated with each explanatory variable (x ),using
it
O p p e e n nXWWW....WZZZZZZ ......ZZ eea transformation (FE estimator) to eliminate (α ) i ti t i ti t 11 11tt 22 22tt 33 33tt NN N Nt t 11i1i1 22i2i2 33i3i3 tt i Ti T i ti ti
will result in ineffcient estimators. Estimation of O p e n XWWW . ..WZZyZ=β.+β. .x+αZ +εe i t i t 1 1t 2 2t 3 3t N N t 1i1 2i2 3 iti30 i itt i Ti it t
equation (5) for ( α) uncorrelated with the explana-
i [8]
tory variables is the RE model. If the composite error
terms are defned as (υ = α + ε), equation [5]
it Following Hastiadi (2010) and Hastiadi
can be written:
(2011), the formula can be defned as:
Where:
y=β++β x +α+ +ε [6]it t i it i t 0 i it i it Open = Regionalism for time t and country i
it
X = Independent Variables (ASEAn4 + CJK’s
it
In this case, it is necessary to remember railways, tax, democracy, governance,
that (u ) are serially correlated over time and the it industry, gross school enrolment rate,
pooled OLS estimator is not the choice since it
infation and population)
ignores the positive serial correlation, and the idea
W and Z are dummy variables which are defned
it itis to use the GLS to take into account to resolve
as follows:
the serial correlation problem. The GLS estimation
W = 1 for country i, where i = Indonesia,
it
will be a pooled OLS estimation of the transformed Malaysia, Philippines, Thailand, China,
model, which can be represented as follows: Japan, Korea.
20
Finanzas y Política Económica, ISSN: 2248-6046, Vol. 3, No. 2, julio-diciembre, 2011, pp. 13-26THE DETERMInAnTS OF EAST ASIAn REGIOnALISM
= 0 for others indices describe various aspects of the
Z = 1 for Period t where t = 1998, governance structures of a broad cross
it
section of countries, including measures 2000..., 2007.
= 0 for others of Voice and Accountability, Political sta-
bility, Government Effectiveness, Regula-
The following are the explanations for the tory Quality, Rule of Law, and Control of
variables as it is replicated from Hastiadi (2010; Corruption. In general, the Governance
2011): index provides explanatory power to
explain the capability and quality of go-
(a) the study uses the proxy of trade vernance from each member country. The
openness (net export per GDP) for regio- better indicator a country has, the more it
nalism. The variable of openness is used has the chance to capitalize regionalism.
to represent regionalism, since regiona- (f) The macroeconomic variable, which is
lism creates openness to some sectors of represented by inflation, creates ambi-
guous expectation. High inflation might economy. Openness here functions as a
dependent variable that is determined by deter the formation of EAR since the very
some independent variables. (b) Railways beginning, but some scholars prove the
as transported goods (million ton/km) is other way around. One of argument su-
used to explain physical infrastructure pporting the latter proposition is given
readiness. Pairing up with this variable is by Cohen (1997) who argued that the in-
flationary policy (high inflation) resulting the gross school enrolment rate, which
serves as the basis for human capital from the government action will tend to
infrastructure. Gross enrollment ratio is raise the obstacle to private investors,
the ratio of total enrollment, regardless which –in turn– demand for greater inte-
of age, to the population of the age gration. The loss of discretion in the fiscal
group that officially corresponds to the and monetary policy will then reduced
the risk of uncertainty. (g) Large market level of education shownSound infras-
tructure (both physical and human) will together with the ongoing industriali-
provide steadiness and assuredness in zation process sums up the last aspects
making investment among members. of EAR formation. The sheer size of the
In other words, good infrastructure will East Asian population creates not only
only lead to a sustainable intra-trade and the potential demand for the goods tra-
investment that serve as the basis of EAR. ded in the region, but also the supply of
(c) Democracy is measured by means of- labor force and the low absolute level of
the index of democracy produced by Po- wages. In other words, Lewis’s unlimited
lity IV project data set. Democratization supply of labor will persist longer in East
is expected to open-up new avenues of Asia. The process will lead to an upward
support for free trade vis-à-vis regiona- trend towards industrialization (value
lism. (d) The next variable is the taxation added as percentage from GDP) in the
policy, whereby the higher the rate, the region. The trend is very important since
more it will diminish the prospects of homogeneity in industrialization among
EAR. (e) Another meaningful variable is countries in the region will smooth the
governance, which is measured by the six progress of EAR.
governance indicators estimated by Kauf-
mann, Kraay and Mastruzzi (2008). These
21Fithra Faisal Hastiadi
by 0.01 point. The insignifcant role of infation RESULTS AND DISCUSSION
for EAR is expected due to the ambiguity given.
Governance gives us positive and signifcant im-As Hastiadi (2010; 2011) failed to give deep and
pact to openness. One point rise in the governance concise analysis of the variables used, this study
index will raise the tendency of openness by 0.26 aims to present a comprehensive analysis of the
point. This means that corruption control, voice regression. Table 1 presents the regression result
and accountability, regulatory quality, government from the panel data model. The railways (as a proxy
effectiveness, political stability, and rule of law play of transport infrastructures)give positive coeff-
important roles for EAR. cient for openness as expected. The percentage of
growth of railways in kilometers tends to raise the
Table 1.
net export per GDP (Openness) by 0.12 point. The
result confrms the importance of transportation Factors affecting openness
infrastructure to create greater possibilities for
regionalism. The negative sign of the coeffcient Dependent Variable: OPENNES
for tax describes the opposite relation between
Independent
Coeffcient t-Statisticcorporate tax rate and the future prospect of EAR: Variable
the higher the rate, the more it will deteriorate LOG(RAILWAYS) 0.115860 2.059379**
the EAR. The percentage of tax rate being raised
TAX -0.029831 -3.530943***
tends to lower the likelihood of openness by 0.02
DEMOCRACY -0.004282 -2.051852**
point. The negative sign of democracy gives the
GOVERNANCE 0.257508 3.860438***
conclusion that democratic environment hampers
INDUSTRY 0.049930 4.861010***
the possibility of joining any regional trade scheme.
LOG(POPULATION) 0.863634 2.154852**
With democracy, delivering a policy would become GROSS EDUCATION 0.011445 2.217493**
diffcult since the government has to meet the
InFLATIOn -0.001545 -0.441719
expectation of stakeholders. Trade liberalization is
R-squared 0.99251
surely a controversial topic that can only fnd po-
Adjusted R-squared 0.98975
litical resistance from people who fnd themselves
note: Statistical signifcance is indicated by *(10%),
to be potentially affected by such policy.
**(5%), and ***(1%).
Source: Own work
Fortunately, the magnitude is not very high since
one (1) point rise in the index only lowers the ten-
CONCLUDING REMARKSdency of openness by 0.004 point. The variable of
industry yields positive coeffcient in which it can
be concluded that the trend towards industrializa- It can be said that regionalism in East Asia is driven
tion in East Asia has opened the chance of making by the market or, in other words, the bottom-up
regional grouping. One point rise in this variable process of regionalism. Notwithstanding, the pro-
will –most likely– raise the tendency of openness cess should be matched with the top-down process
by 0.04. The variable of population has not only which assembles leaders and policy makers into one
positive, but also the biggest coeffcient. Indeed, table of negotiation. This is very important since
population is regarded as the most important va- the present scheme will mount serious problems
riable that serves as a foundation towards EAR. One in the future. High regional export concentration
point rise in population will raise the likelihood of countries, high infation and high tax rate in some
openness by 0.86. The variable of education also ASEAN countries will pose serious threat with the
shows a positive coeffcient. One point rise in the absence of sound policy. Efforts to bring East Asian
coeffcient will help to raise the possibility of EAR regionalism to its path is not like it has never been
22
Finanzas y Política Económica, ISSN: 2248-6046, Vol. 3, No. 2, julio-diciembre, 2011, pp. 13-26