Connectivity in East Asia

• Date: 01 July 2016
• Published date: 01 July 2016
• DOI: http://doi.org/10.1111/aepr.12132
• Author: Douglas H. Brooks

Connectivity in East Asia

Douglas H. BROOKS†

The AustralianAPEC Study Centre

As Asian economies have become more connected through physical andinstitutional infrastructure,

the region’s trade has grown and changed. Intraregional trade has increased its share, in large part

through the expansion of trade in intermediates in connection with development of global value

chains. At the sametime, as part of the same process and as part of the structural transformation that

underlies most economic development, the share of services in Asia’s trade has risen. Policies that

support the development of regional infrastructure and the flow of goods and services, as well as

factors of production, can increase the benefits from connectivity. Meanwhile, regional cooperation

has a key role to play in mitigating negative impacts that may arise from the vulnerabilities that

accompany greater connectivity.

Key words: connectivity,global value chains, infrastructure, structural transformation, trade

JEL codes: F15, F13, O14, O19

1. Introduction

Asia’s re-emergence as an economic powerhouse owes much to the expansion of its

international trade and investment, and particularly to its intraregional flows of traded

goods (raw materials, intermediate goods, and final goods) and services, capital,

information,and, to a lesser extent,labor. Asia’s increased connectivity and integration have

been fostered by theconnections of supporting infrastructure, both hard (physical) and soft

(institutional), greater credit availability, and efficient logistics services. This connectivity

may be defined as the linking of geographical locations, economic activities, and

institutions, to enable flows of goods, services, finance, technology, ideas, and people.

In the Ricardian model of international trade with at least some immobile factors of

production, comparative advantagedetermines the gains from trade throughspecialization

in production and the movement of final goods. In today’s globalized economy,

governments struggle to monitor and control flows of financial capital, to develop mutual

recognition agreements for the movement of skilled labor (and despair of controlling the

illegal migration of unskilled labor), and encourage investment in other countries’natural

resources. Flows of traded final goods frequently derive from flows of intermediate goods,

and are now as likely to engender trade in services as vice-versa. Flows of information

The author gratefully acknowledges helpful comments by Ken Waller, David Green, and the

participants of the Twenty Second Asian Economic Policy Review Conference, Tokyo, 10 October

2015. Bekzod Abdullaev providedvaluable research assistance.

†Correspondence: Douglas H. Brooks, The Australian APEC Study Centre, RMIT University, Room 26,

Level 6, Building 80, 445 Swanston Street, Melbourne, Vic. 3000, Australia. Email: doug@apec.org.au

doi: 10.1111/aepr.12132 Asian EconomicPolicy Review (2016) 11, 176–194

176 ©2016Japan Center for EconomicResearch

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and other intangibles incite andenhance flows of goods, services,and factors of production,

as well as logistics to facilitatethe flows. Internationally, these developments have beenmost

obvious, and probably most beneficial, in East Asia.

Changes in technology and policy have influenced intrafirm transaction costs and

therefore production processes, allowing fragmentation, outsourcing, and offshoring.

Where previous production and delivery systems have become “unbundled”due to

technological developments, as in the energy sector, they have led to rethinking the roles

of public and privatesectors. Where they have foundmore efficient modes of transportation

and distribution(such as the advent of standardizedshipping containers, or applyingdigital

technology to reform customs procedures) they have lowered trade costs and sparked a

proliferation of outsourcing for parts, components, and services.

1

As recently as the 1960s, the prevailing paradigm of economic policy in developing

countries supported import substitution and infant industry protection. The newly

industrialized economies (NIEs) of Hong Kong, Korea, Singapore, and Taiwan had

reasons

2

to challenge that orthodoxy, rapidly increased their trade and for the most part

welcomed foreign direct investment. Technological developments, such as the

introduction of container transport, and financial deepening and exchange rate

realignments following the end of the Bretton Woods currency system and the mid-

1980s Plaza Accord facilitated the process. As their growth accelerated, their example

helped persuade other economies, particularly in East Asia, to adopt similar paths. While

this process came to be known as “export-led development,”imports of capital goods (in

large part to support production of exports) played an even more critical role –most

countries in the region ran persistent trade deficits from the mid-1970s until the

1997–1998 Asian Financial Crisis.

The tradability of many manufactured goods produced during East Asia’s

industrialization meant that economies could expand rapidly without turning terms

of trade against themselves, while specializing in a relatively narrow range of goods

allowed a more manageable policy reform process. As global value chains took hold

through the region they facilitated entry to manufacturing but diminished returns

from it, contributing to further structural transformation toward modern service-based

economies.

Information and knowledge, and their increased prevalence as the region has become

more connected, have played a key role in recent developments. Knowledge is non-

rivalrous, building potential links between international integration and growth. Grossman

and Helpman (2015) note that integration of peoples and cultures facilitates the flow of

knowledge across national borders and foreign ideas can prove useful for inventing or

improving products or production processes. Furthermore, integration of product markets

via international trade affords those who invent or improve products a greater potential

market in which to earn returns even as it subjects them to additional competition from

foreign rivals. Finally, international interactions affect the incentives for creation of new

knowledge as well as those for technological diffusion, with consequences for productivity

growth. Knowledge spillovers tend to accelerate growth, as a lower cost of further

innovation arises with advances made elsewhere.

Douglas H. Brooks Connectivityin East Asia

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