I should start by telling readers that they will not be enjoying reading this book as much as I have enjoyed producing it. The chance to talk undisturbed for hours with Professor Wang Gungwu in the quiet of his various offices at the National University of Singapore is not a gratification given many mortals.

Over the last decade living in Singapore and working at the Institute of Southeast Asian Studies (ISEAS) of which Professor Wang is the chairman, I have had opportunities — though never enough, I must quickly add — to listen to him talk on a wide variety of subjects and in many different contexts. Along with everyone else in the audiences, I have always been impressed by how someone like him who gives so many lectures always manages to stay entertaining and interesting, be it in strength of delivery or profundity of content. Often he seems to speak without prepared paper, and always he provides a big picture of the subject at hand, giving new angles his listeners had not thought of.

And so the idea came to me to write a book based on interviews with Professor Wang. Apart from the obvious goal of recording some of his thoughts that his busy schedule does not allow him to put in print, I hoped that listening to him as he formulates his ideas would offer me some crucial insight into how he thinks, thereby delving into the mechanics and the organics of how he connects his thoughts.

Using this approach of having the doyen of Asian and East Asian history talk at length to an amateur historian has certain advantages, the chief of which is that the listener, meaning me, can take on the role of conveying the expert's big picture to the common reader in a non-academic fashion. The major disadvantage also stems from that aspiration, though. An amateur lacks the deep understanding of world history that would allow him to probe certain issues more thoroughly, or to be more critical of what he hears. As it was, I was often overwhelmed by the tightness of Professor Wang's thoughts, and by his ability to present streams of thought in an impressively interwoven form.

INTRODUCTION

When Jagdish Bhagwati (1991) famously described the maze of overlapping free trade agreements (FTAs) as akin to a ‘spaghetti bowl’, it spawned a host of gastronomical metaphors, some more bizarre than others. When the action on FTAs switched to Asia in the 2000s (Figure 3.1), Richard Baldwin (2004b) dubbed it the ‘noodle bowl’. When attention shifted to how to rectify the mess and return order to the world trade system, lasagna and even pizza came onto the menu (Hamada, quoted in Bhagwati 2008). Turning the spaghetti or noodles into lasagna involves consolidating the bilateral FTAs into a regional bloc, while the pizza involves subsequently linking these regional blocs through cross-regional tie-ups, eventually achieving fully multilateral trade. Turning lasagna into pizza is a culinary feat that finds its parallel at the political level in turning the regional blocs into a multilateral one. But both the lasagna and pizza processes are probably better represented by the activity involved in solving different kinds of jigsaw puzzles, as this is what they more closely resemble.

While the success in Bali in securing a multilateral agreement on trade facilitation, although yet to be ratified, may have resuscitated the World Trade Organization (WTO), it also marked the death knell for the single undertaking. Given that the Doha Round can no longer be concluded as originally intended, these alternative processes—trying to solve the regional and global jigsaw puzzles—are likely to continue. The ASEAN+6 group—consisting of the 10 members of ASEAN plus Australia, China, Japan, Korea, India, and New Zealand—are attempting to create a consolidated bloc called the Regional Comprehensive Economic Partnership (RCEP) by 2015, in order to supersede the various ASEAN+1 FTAs and other internal bilateral FTAs between individual countries (see Menon 2013a). At the same time, the ASEAN countries are aiming to conclude the ASEAN Economic Community (AEC) with the same deadline. Around the world, the US and the EU are pursuing a Transatlantic Trade and Investment Partnership (TTIP), while the US is also leading a Trans-Pacific Partnership (TPP) southwards that includes seven RCEP members, amongst others. There are several other agreements in place or being pursued around the world.

INTRODUCTION

Our colleague Hal Hill is one of Australia's most well-known economic scholars on growth and development in Asia. He spent much of the first part of his academic career exploring development issues in Asia through the lens of his work on Indonesia. More recently, since the mid-1990s, he has broadened his work on development issues in Asia into numerous studies of economic challenges in other key ASEAN countries. He is now widely recognised internationally as one of the world's leading specialists on ASEAN economic issues. And for those of us who know and work with Hal, he is not only an immensely knowledgeable scholar on development issues in the Southeast Asian region, he is also a warm and generous friend.

On a more personal note, I remember clearly my first contact with Hal. It was in 1975 when I was working as an advisor in Parliament House in Canberra. Entirely out of the blue, an unexpected piece of correspondence arrived amidst the welter of official papers that flowed through the parliamentary office. It was a letter from Hal Hill, who had recently completed a Master's degree at Monash University. He said that he was interested in the possibility of studying for a doctoral degree at the Australian National University (ANU), perhaps specialising on the Indonesian economy. He asked for suggestions. I wrote back encouraging his interest in Indonesian studies. Hal quickly replied (in a letter, of course, because there was no such thing as email in the mid-1970s) saying that he had decided to delay a start on doctoral studies for a year or so, but that he would be in touch again later. I returned to the ANU in early 1976. Before too long, Hal had followed up his earlier enquiries and the head of our department, Professor Heinz Arndt, was very glad to be able to welcome Hal into the department as one of his family of PhD scholars working on the Indonesian economy.

In recognition of Hal's long interest in development issues across Asia, and especially his work on various ASEAN economies, it seems appropriate to discuss some aspects of a key topic in public policy for the region—the capacity of ASEAN states to meet the performance goals expected of them.

The world trading system has undergone a lot of flux and encountered great challenges in the last two decades. We have seen an increase in bilateral and regional free trade agreements (FTAs) as the multilateral trading system has faltered in its bid to reach agreement under the long-drawn-out Doha Development Agenda. Since the Asian financial crisis, the issue of a multipolar world and different speeds of development among developing countries is emerging. The way we do trade has also changed dramatically, moving from trading in goods produced from beginning to end in each country, to global production sharing, trade in parts and components, and final assembly within global production networks. The global economic crisis in 2008 has also led to tensions and to challenges to the multilateral trading system and institutions.

The purpose of this chapter is to discuss challenges facing the world trading system, policy priorities for safeguarding the integrity of a global rules-based trading system, and their implications for Indonesia. It begins with an overview of the current state of the world trading system. This is followed by a discussion of policy changes. The penultimate section looks at the likely implications of the policy options under consideration for Indonesia and how the country should position itself in the ongoing policy dialogue.

THE CONTEXT

Despite the seeming chorus of anti-trade or anti-globalisation voices, trade continues to be an important engine of growth, job creation, and poverty reduction. Countries such as Indonesia, a large developing country, have seen their economies transformed by trade and the opening up of the economy. The imperative has not changed. Trade should remain an important engine of growth, especially given that sustainable recovery in the world economy continues to elude us.

During the global crisis of 2008–2009, world trade contracted by almost 20 percent (Almunia et al. 2010). However, the fear of protectionism and a ‘second’ great depression abated and most of the emerging economies rebounded in 2010–2011. The G20 leaders and others have seen the importance of ensuring trade continues to flow and called for a standstill or refraining from protectionism. Even though some protectionist measures were taken by some countries in the aftermath of the crisis, the existence of the rules-based framework and the peer-pressure review introduced by G20 helped minimise increased protectionism.

INTRODUCTION

Until recently, Lipsey and Sjöholm's (2004a) study of manufacturing plants in Indonesia in 1996 was one of the few studies of wage differentials between foreign multinational enterprises (MNEs) and local plants, which accounted for the fact that MNEs tend to hire relatively larger shares of workers with higher education. They found that MNEs paid significantly higher wages than local, private plants even after accounting for the educational background of the plant's workforce and other plant-level characteristics, and that these conditional wage differentials were larger for white-collar workers than for blue-collar workers. Recently, Ramstetter and Narjoko (2013) re-examined the 1996 evidence and added evidence for 2006, obtaining qualitatively similar results for both years when all manufacturing plants are combined in one sample, though industry-level evidence was weaker. In addition, similar evidence for Malaysian plants in 2000–2004 (Ramstetter 2013) also suggests the existence of positive, MNE–local wage differentials after accounting for both worker education and occupation, in addition to other plant characteristics, both when all industries are combined and at the industry level.

However, none of these studies account for the potentially important effect of a plant's export status on MNE–local wage differentials. As Athukorala and Devadason (2012, 1503) explain in their study of foreign labour's effect on Malaysian wages: ‘export-oriented firms generally operate under greater demand pressure compared to domestic-market oriented firms which enjoy both policy-induced and natural protection’. Similarly, factor endowments-based theories of international trade imply that exporters are more likely to experience a tendency toward factor price equalisation than non-exporters. In the case of relatively labour-abundant economies like Indonesia and Malaysia, this would suggest that ratios of wages to capital costs should be higher in exporters than in non-exporters. Another body of literature emphasises the importance of high entry costs into export networks, and there is evidence firms able to bear the costs of export entry are likely to increase their demand for skilled labour and pay relatively high wages as a result (Bernard and Jensen 1997). However, none of these studies address the question of whether differences between exporters and non-exporters have differential effects on MNEs and local plants, and thus MNE–local wage differentials. The purpose of this study is thus to investigate whether MNE–local wage differentials differ between exporting plants and non-exporters.

Hal Hill has been an avid student of Asian economic growth and trade throughout his career. While that has not led him to do research specifically on trade in farm products, his fondness for conversing over shared meals with good food and wine is well known. Hence the agricultural focus of this chapter, with a particular application to Asia's trade in wine.

Rice wine is common in Asia of course, but wine made from grapes has had a very minor role traditionally. Prior to this century, grape wine was consumed only by Asia's elite and produced only in tiny quantities mostly in just Japan and, from the late 1980s, China. However, income growth and a preference swing towards this traditional European product have changed the consumption situation dramatically. China is also expanding its area of vineyards and is now the world's fifth largest producer of grape wine (hereafter called just wine), up from fifteenth as recently as 2001. That supply expansion has not been able to keep up with China's growth in demand, so wine imports have surged. Nor are those imports only of low quality. The average current US$ price of wine imports grew at 7 percent per year between 2000 and 2009 in Asia, compared with only 5.5 percent in the rest of the world. By 2009 that Asian average import price was nearly 80 percent higher than the world average, and more than four times higher in the case of Hong Kong and Singapore. Even the unit values of China's imports of both bottled still wines and sparkling wines were above the global average by 2009 (Anderson and Nelgen 2011). Meanwhile, after removing its tariff on wine imports in February 2008, Hong Kong has become the world's most important market for ultra-premium and iconic wines.

What is the future of Asia in the world's wine markets? Will China's wine production eventually exceed its consumption domestically? How important will wine demand be in the four next-most-populous Asian countries (India, Indonesia, Pakistan, and Bangladesh)? Who else will satisfy Asia's growing thirst? How will the various wine quality categories develop in Asia? Which wine varieties will Asians prefer? What roles will excise and import taxes play? What is the future of the austerity drive China introduced in 2014 that has dampened conspicuous consumption of luxuries such as expensive wines?

INTRODUCTION

This chapter examines how economic links between the ASEAN countries and the two Asian giants, China and India, have changed over the past two decades. The first section summarises the literature on the rise of China and India, and the implications of this rise for the global economy. This section also examines the literature on the threats posed by China to both ASEAN and other parts of the developing world, and the implications for ASEAN of the growth of ‘Factory Asia’. The second section examines the statistical evidence on patterns of ASEAN merchandise trade, investment flows, and migration between ASEAN and other parts of Asia. The third section of the chapter discusses the implications of the free trade agreement between ASEAN and China and ASEAN and India for patterns of trade and investment across Asia. The main conclusion of the paper is that the ASEAN countries have benefited from increased economic links with China and to a lesser extent India. But economic links within ASEAN and between ASEAN and other OECD countries remain very important. The free trade agreements between ASEAN and both India and China became fully operational in 2010; in neither case do they appear to have led to a dramatic increase in bilateral trade or investment flows.

THE RISE OF CHINA AND INDIA AND THE ‘THREAT’ TO SOUTHEAST ASIA

The Asian crisis and its aftermath

In 1996, the ASEAN-6 all had per capita GDP above both China and India, with the possible exception of the Philippines (Table 5.1). Four of these six countries had achieved more than three decades of sustained economic growth, and were selected for inclusion in the World Bank's 1993 ‘Asian Miracle’ report (Singapore, Malaysia, Thailand and Indonesia). The World Bank, and many other observers, argued that these countries had ‘got their policies right’ and should be taken as models by less successful economies in other parts of the developing world. The 1993 report, written in the aftermath of the violence in Tiananmen Square, did not include China as one of the Asian miracles, although there was some discussion of the ‘growth spillover’ from Hong Kong into southern China.

In February 1998 Indonesia toyed briefly with the idea of introducing a currency board system as a means of extricating itself from the Asian financial crisis. Although the then president Suharto announced his government's intention to implement such a system, international and domestic opposition was so vociferous that he aborted the plan. In my view, this opposition was ill-informed. Moreover, it was motivated, to a considerable extent, by a desire to use the crisis to force a president widely disliked among the urban intelligentsia to discontinue some of his favoured economic policies—if not to bring about an end to his presidency—rather than giving top priority to dealing with the crisis itself. The nature of the crisis as it played out in Indonesia remains poorly understood, such that an analysis of the currency board proposal provides an opportunity to correct some misunderstandings and dispel some of the myths about this major episode in Indonesia's modern history. In this chapter I argue that in fact Suharto's embrace of the proposal was sensible, and that it was motivated by the desire to restore macroeconomic stability—which would have been not only to his own benefit but also that of Indonesia's citizens.

BACKGROUND

The Asian financial crisis began to engulf Indonesia in July 1997. It had started in Thailand as a consequence of severe mismanagement of the balance of payments in that country. Specifically, Thailand had clung to a pegged exchange rate for many months in spite of rapidly dwindling foreign exchange reserves, a fact that it managed to hide from public view for some time by selling its reserves forward and failing to disclose this fact (King 2001, 441). When the inevitable could be postponed no longer, Thailand was forced to devalue its currency suddenly and without warning, causing shock and consternation among investors worldwide who, until that time, had regarded the Southeast Asian region as a safe and profitable place in which to lend and invest.

Indonesia was tarred with the same brush, despite the fact that for many months its central bank had been fighting to prevent appreciation of the currency rather than depreciation, as a consequence of which it had accumulated very large international reserves (Figure 12.1)—quite the opposite of the Thai case.

INTRODUCTION

Indonesia and India are the world's most populous nations, and are known for their diverse ethnic, linguistic, and religious mix (Nehru 2013). Apart from population and ethnic diversity, they also share one other important attribute—both countries witnessed rapid economic growth for well over a decade, and are seen as growth successes, at least for a part of their recent history (Indonesia for 1967–1996 and India for 1993–2010). Rapid, sustained economic growth is not a feature we witness in many developing countries—in fact, the Commission for Growth and Development (2008) finds that only ten countries from the developing world have experienced sustained growth in the post-World War II period: Botswana, Brazil, China, Hong Kong, Indonesia, Korea, Malaysia, Singapore, Taiwan, and Thailand. India would be added to this list if more recent growth data were available. What is also common to the growth experiences of Indonesia and India is that the period of rapid economic growth came to an end—in 1996 for Indonesia and in 2010 for India.

This chapter examines whether there were common causes for the end of rapid growth in these two very disparate countries. It does so by situating the growth experiences of these two countries within a wider understanding of the nature of economic growth in developing countries. In recent years, there has been a realisation that the emphasis in the previous growth empirics literature on long-run growth or levels of income is not compatible with the ‘stylised facts’ of economic growth (Pritchett 2000). Massive discrete changes in growth are common in developing countries, and most developing countries experience distinct growth episodes: growth accelerations and decelerations or collapses (Jerzmanowski 2006). If this is the case, it is not surprising that Indonesia and India had rapid growth episodes that eventually came to an end. While the East Asian financial crisis is seen as the catalyst for the end of rapid growth in Indonesia, and the ‘policy paralysis’ of the ruling government and the global slowdown are seen as the proximate causes of the growth slowdown in India, we argue in this chapter that there are deeper institutional factors that can explain the end of the rapid growth episodes in these two countries that are broadly similar.

Professor Hal Hill has been a tower of strength and inspiration for economic research on the Indonesian economy over almost three decades, both for international as well as Indonesian scholars. This author's academic career spanned much the same time period as Professor Hill's, both as a PhD scholar and a decade later as a researcher for 20 years at the Australian National University (ANU). Our interests have been similar—understanding the diversity and resilience of the Indonesian economy, often against all odds, internationally, and often in spite of the interventions by politicians in Jakarta. The author personally owes a great debt of gratitude for Hal Hill's support and a wonderful friendship, for much of this period, especially during his 20 years as a researcher at the ANU in 1991–2011. Terima kasih Pak.

During his career, Professor Hill developed a healthy scepticism of regulated markets in the Indonesian context. Partly, this scepticism reflects changes in the approaches to development policies among main-stream economists since the 1960s and 1970s when he began his career. It also manifests a judgment that successive Indonesian governments have been unable to keep their promise of improving efficiency and erasing inequities through market interventions, partly because of weak legal institutions and poor governance. In this chapter, I take up this theme by focusing on some of the effects of regulations of Indonesia's labour market in recent times.

One of Indonesia's main development problems is that a high proportion of the workforce—around two-thirds—are employed in low-productivity agriculture and in the informal sector. Mainly, this is related to Indonesia's stage in economic development as a lower middle-income country. The meagre stock of both physical capital per worker and human capital reflects Indonesia's stage of development. Not enough workers have moved into higher productivity jobs especially in manufacturing, and that transfer slowed after the Asian financial crisis of the late 1990s, despite reasonable and improving rates of economic growth in the 2000s (World Bank 2010b).

It has been suggested that both low productivity and high wages in some segments of the economy have contributed to high and rising unit labour costs relative to productivity, compared with neighbouring countries (Nellor 2013). That process has also contributed the poor employment record. Part of the problem relates to the dualistic structure of output in manufacturing, which is related to technology and market orientation.

What explains volatility in world food prices? Are the ‘fundamentals’ of supply and demand the basic factors? Can national or international policies towards food grain reserves help to stabilise food prices? What are food stocks ‘worth’ if the levels of grain reserves, especially in large countries, affect food trade policies in these countries? This effect would be the reverse of the usual causation where policies can directly affect the levels of both public and private stocks.

There are four basic ways the economics profession thinks about these questions.

The first is second nature to economists, who use basic supply and demand models as the fundamental explanation of price formation. The ‘fundamentals’ approach uses these models to generate an equilibrium price, where the global level of stocks is an exogenous factor that influences the probability of a price spike when there are shocks to supply or demand. A number of well-calibrated models using this structure are used routinely, especially by international research centres such as the Food and Agriculture Organization (FAO), the Food and Agricultural Policy Research Institute (FAPRI), and the International Food Policy Research Institute (IFPRI) to understand the impact of changing trends in supply and demand, and shocks, to food prices.

The second approach explicitly introduces the storability of the commodity into price formation. The supply of the storage model brings in expectations and makes stock levels endogenous with price formation. To be empirically useful, however, reasonably accurate and timely data on levels of stocks held by commercial trade are critical. These models have a long history, but the standard reference remains Williams and Wright (1991). A modern application with important implications for the role of biofuels in food price formation is Roberts and Schlenker (2013).

The third approach recognises that such stock data are often not available for commodities where individuals and small firms hold a major share of stocks between harvest and consumption, a factor that is especially important for the world rice market (Timmer 2009b). To cope with this reality of the industrial organisation of some commodity markets, a behavioural model adds hoarding by individuals, with levels of stocks in the hands of these agents largely unobserved but important for short-run price formation. In this approach, ‘non-traditional speculation’ in financial and commodities markets can also impact price formation without having a visible impact on measured stock levels (Timmer 2012).