Assessing Market Integration in ASEAN with Retail Price Data

• Published date: 01 October 2017
• DOI: http://doi.org/10.1111/1468-0106.12144
• Author: Vinh Q. T. Dang,Yu (Alan) Yang
• Date: 01 October 2017

ASSESSING MARKET INTEGRATION IN ASEAN WITH

RETAIL PRICE DATA

VINH Q. T. DANG*University of Macau

YU(ALAN)YANG Peking University

Abstract. We assess the extent of market integration the Association of Southeast Asian Nations

(ASEAN) using a comprehensive data set that contains actual local retail prices for 131 goods

and services in ASEAN countries (except Laos and Myanmar) over the period of 1990–2013.

We conduct two different, but complementary, approaches: analyzing price dispersion and testing

for convergence to the law of one price via panel unit root tests. The 1997 Asian crisis and, to a

lesser extent, the 2008 global crisis appear to have caused a considerable disruption in the process

of market integrati on. Despite significant tariff reduction under the ASEAN Free Trade Area

commitments in the past two decades, the level of price dispersion across ASEAN is higher in

2013 than in 1990. Panel unit root tests accounting for cross-section dependence show that

convergence to the law of one price holds for only a minority of retail prices, including those of

traded goods, in the ASEAN markets. We also consider a nonlinear exponential smooth transi-

tion autoregressive approach and a structural break as alternative adj ustment dynamics i n the

panel unit root tests. Overall, our results suggest that there is much to be done in ASEAN to

achieve a meaningf ul ASEAN economic comm unity.

1. INTRODUCTION

The Association of South-East Asian Nations (ASEAN) is emerging as an im-

portant regional political and economic entity. Formed in 1967 by Indonesia,

Malaysia, the Philippines, Singapore and Thailand, its membership has been

expanded to include Brunei (1984), Vietnam (1995), Cambodia (1999), Laos

(1997) and Myanmar (1997). The ASEAN Free Trade Area (AFTA), signed

in 1992 under the Common Effective Preferential Tariff (CEPT) scheme,

was the first trade bloc in Asia. In 2003, leaders of the member states commit-

ted to an ambitious goal of establishing the ASEAN Economic Community

(AEC) by the end of 2015. The AEC is conceived to possess these characteris-

tics: (i) a single market and production base; (ii) a highly competitive

economic region; (iii) a region of equitable economic development; and (iv)

a region fully integrated into the global economy (ASEAN, 2011). With a

combined population of more than 600 million people, which is larger than

that in the 28-member European Union (EU), ASEAN has the potential to

become a key player on the global stage if the economic community is success-

fully created.

Motivated by the establishment of the AEC, which is a very significant event

not only for the bloc members but also for Asia, we assess the extent of market

*Address for Correspondence: Vinh Q. T. Dang, Department of Economics,

University of Macau. E-mail: dangvinh@umac.mo.

Pacific Economic Review, 22: 4 (2017) pp. 510–532

doi: 10.1111/1468-0106.12144

© 2016 John Wiley & Sons Australia, Ltd

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integration in ASEAN.1AFTA has made significant progress in tariff reduc-

tion; the intra-regional tariffs of most products in the CEPT inclusion list have

been brought down to the 0 to 5% range. Have declining tariffs on intra-ASEAN

imports promoted greater market integration? To answer this question and

entertain other interests, our goals in this paper are: (i) to investigate whether

and how the level of price dispersion has changed over time and (ii) to test

convergence to the law of one price (LOP) in many actual retail prices across

ASEAN markets. The results from our inquiry will shed light on whether

ASEAN can realize the goal of ‘a single market and production base’, among

others, on the eve of the establishment deadline for the AEC.

Our research is also spurred by the paucity of studies on the economic integra-

tion in ASEAN. Unlike the formation of the European Economic Community

(EEC) and, later, the Economic and Monetary Union (EMU), the AEC has

received little attention from policy-makers outside the member nations and

there has been scant academic research into the establishment of the new trade

bloc. The absence of active research on the AEC can be attributed partly to

the unavailability of comparable data across member countries, particularly

for the five new members. In this paper, we utilize a unique and comprehensive

data set that contains highly comparable actual retail prices of 131 tightly-

defined goods and services in cities of eight ASEAN countries over 1990–2013

(data are not available for Myanmar and Laos). We will also compare our

results to studies performed on European Union (EU) countries and the USA

for easy interpretation.

Finally, investigation of the LOP in and of itself is an important research

topic. The LOP is the building block for the purchasing power parity (PPP);

these two parities feature prominently in open-economy macroeconomics. Test-

ing the LOP and PPP is one of the most active research areas in international

finance (Frenkel, 1978; Froot and Rogoff, 1995; Rogoff, 1996; Obstfeld and

Rogoff, 2000; Taylor and Taylor, 2004). Hence, our results also bear important

implications for future coordination and cooperation of financial and monetary

policies in ASEAN, particularly if the member states aspire to a monetary

union.

Our paper contains the following innovations. First, our focus is market

integration in the ASEAN. Most empirical studies on the LOP and PPP examine

developed countries, particularly the USA and the EU (Parsley and Wei, 1996;

Cecchetti et al., 2002). Although data from the five original ASEAN member

countries have been used in some studies, they are part of a much larger sample

of countries from various parts of the world and, therefore, the results produced

therein are not applicable in the context of the AEC. Our paper is the first study

1Economic integration encompasses trade, finance and other aspects. Motivated by the prospect of

the AEC and particularly the goal of ‘a single market and production base’, we focus on retail market

integration. Financial integration is a very important aspect of economic integration, but it will de-

velop only much later in the progression. Take economic integration in Europe as an example. The

European Economic Community (EEC), created by the Treaty of Rome in 1957, was a common

market and customs union. Financial integration in the form of monetary union came almost half

a century later.

ASSESSING MARKET INTEGRATION IN ASEAN 511

© 2016 John Wiley & Sons Australia, Ltd