Inclusive Global Value Chains

George Manzano and Kristine Joy Martin

        Inclusiveness is a big word in the development community. Given the increasing ubiquity of global value chains (GVCs), policy attention has turned towards making these more 'inclusive.' APEC, for one, is promoting inclusiveness of GVCs through international cooperation.

        APEC is interested in GVC because it is perceived to be a game changer, i.e. a new paradigm that will increasingly define the patterns of international trade. Indeed, GVC has shaped the current global business environment in more ways than one. It has shifted the focus of the unit of trade from trade in goods to trade in tasks. Secondly, GVC encourages firms and countries to specialize in specific tasks and business functions based on their comparative advantages in order to ratchet up efficiency in production. GVCs provide potential mechanisms for all countries - whether these countries are large or small, developed or developing - to improve their income, employment, and productivity.

        The emergence of GVCs thus raises many important trade policy questions, which can be discussed and for which a consensus for collective policy action can be drawn out in APEC.

Why does APEC have to raise inclusiveness in GVCs as a policy objective?

        APEC raises the issue of inclusiveness for a number of reasons. Firstly, inclusiveness is at the very heart of development, i.e. what development is for, if not for people. Secondly, because participation in GVCs does not automatically lead to inclusive outcomes, there is a groundswell for a policy stance. In addition, as GVCs, by nature, reaches beyond borders, there are avenues for cooperation. APEC is thus, an appropriate forum to discuss and initiate policy responses, either at the collective level or at the level of individual APEC members, to promote inclusiveness in GVCs.

Inclusiveness at the extensive margin

        Inclusiveness can be understood in various ways. One way is to consider inclusiveness across countries, i.e. getting more countries to participate. Different countries, of course, have different initial capacities to participate in GVCs. Such differences may be due to different factors that are fixed, such as, country's geographic location and resource endowment. Conversely, the differences can also be due to public policy, such as, a country's human capital, physical infrastructure, and overall investment climate. Thus, to facilitate the entrance of developing countries into the GVC, proper trade and investment policies that aim to liberalize exchange of goods and services worldwide should be encouraged and implemented. We call attempts to broaden inclusiveness across countries as the extensive margin.

        Because of the nature of GVCs, where parts and components necessarily cross borders multiple times, countries with low trade barriers have better chances of participating. It also has been observed that GVCs tend to propagate in industries or product groups that have been subject to global trade liberalization. The passage of the 1997 Information Technology Agreement (ITA), which calls for the liberalization of IT products on an MFN basis by many countries, has been credited with the blossoming of GVCs in the electronics sector. To the extent that sectoral liberalization such as the ITA has promoted the participation of many countries - developed and developing alike - in the electronic GVC, it can be said that such initiatives foster inclusiveness across countries.

        Thus, inclusiveness at the international level could be fostered if APEC could take the lead in promoting more sectoral liberalization on an MFN basis. APEC has a role because the sheer size and economic weight of its members is likely to give it the critical mass which is needed to push for sectoral liberalization. In addition, APEC is a forum for cooperation, which makes it an appropriate venue to gather consensus and support for sectoral liberalization in different sectors.

        It is, however, not easy for APEC to negotiate for more sectoral liberalization because of the 'free rider' problem. Free riding entails that the countries which are not signatories to a sectoral liberalization agreement will also enjoy additional market access even without having to offer tariff concessions of their own. To lessen the possibility of free riding on the trade liberalization efforts by APEC, the challenge is to identify those areas in which the benefits of trade liberalization would redound mostly on APEC members rather than on non-members. These product groupings would be the promising candidates for sectoral trade liberalization. Wonnacott suggested a trade liberalization scheme on a selective product-by-product basis wherein countries choose the commodities for early liberalization based on a pre-defined criteria1.[1]

Inclusiveness at the intensive margin

        Inclusiveness in GVCs could also be enhanced among the elements of the value chain within a country. Inasmuch as there are lead countries at the international level, there are also lead firms that coordinate production across a series of producers, each with different tasks, along a domestic supply chain. The lead firms, which could be producers or traders, thus act as the nexus between the international and the domestic supply chain. By and large, policies aimed at promoting inclusiveness within countries deal with getting more small and medium establishment (MSMEs) and fostering more linkages especially between foreign firms with local firms. We call policy actions directed to promote inclusiveness within the country as the intensive margin.

        Making GVCs more inclusive can be achieved through many means. In this article we focus on (1) intensifying existing participation of Micro Small and Medium Enterprises (MSMEs) and (2) developing linkages of lead firms with local firms.

MSMEs

        Because GVCs are export-oriented, the firm-actors are operating under a very competitive environment. They are agile enough to modify products to suit the changing tastes and to adopt technology and production practices to remain cost effective. For these reasons, MSMEs that join GVCs are likely to enjoy positive spillovers of production technology as well as best managerial practices. However, the literature is replete with accounts of the many barriers that MSMEs face as they attempt to join, deepen and widen their GVC participation. These barriers are usually related to trade costs which could have structural or policy induced origins.

        Thus, government plays a big role in lessening trade costs for MSMEs. For example, it can provide financial aid to help companies access credit for more efficient operations. More importantly, it can also facilitate MSMEs compliance to international standards, especially since MSMEs find it difficult to adjust to global standards and regulations at public, private, and civil society levels. Note that the GVCs, standards and certifications are at the heart of a firm's ability to participate and compete.

Linkages

        The linkages of MSMEs and other local firms - especially those outside the special export processing zones (SEZs) - with lead firms or large multinational enterprises (MNEs) can also promote GVC inclusiveness. SEZs do not necessarily help in creating spill-over if the participating firms engage in processing activities with very little interaction with the local supplier firms. Thus, enclaves with little connection with the local firms are created.

        An opportunity to make GVCs more inclusive is through forging partnerships among lead firms and local firms outside SEZs. Local firms can be suppliers of manufactures while the lead firms can be the buyers. This would increase the smaller partner's market and capabilities which can eventually hook them to the GVCs [2].

        Policy should be directed at strengthening the linkages between the lead and the supplier firms in the GVC model that have the weakest link. APEC, being a body that supports economic and technical cooperation can consider initiating capacity-building programs or advocacy where linkages can be deepened in pursuit of inclusiveness, in the following areas:

1. On standards and international certification: Participation of firms in a GVC is conditional on their ability to meet the product or process standards of the lead firms. APEC can spearhead initiatives such as designing capacity building initiatives in certification compliance so as to facilitate the ability of small local firms to participate meaningfully in the production chain.
2. Entrepreneurship: In certain industries, supplier firms may have started as informal subcontract suppliers. However, transitioning towards formal status could be problematic. Given this difficulty, it is recommended that policy attention be directed towards facilitating the transition of informal establishments to the formal sector by reducing red tape and enforcing of property rights [3]. In addition, company programs where managers in lead firms could be trained and 'spun off' to head supplier firms could be explored.
3. Trade facilitation: Trade costs act as tax on supplier firms or as a fixed cost to internationalization. Trade costs need not necessarily be monetary in nature (tariff, taxes, etc). Delays can be particularly debilitating to the tight process flows of GVCs, thus any policy that improves export-import procedures at the border could encourage local firm participation. Programs to cluster service suppliers can create economies of agglomeration, lower transaction costs, and diminish the enclave behavior of lead firms.

Final Remarks

        The advent of the GVCs, on the crest of network economics, is an important development to warrant keen policy attention. APEC, for one, has taken an interest in GVCs, because fostering this mode of integration raises many policy issues that can be discussed in the context of economic cooperation. Missing out on the policy questions surrounding GVCs would make APEC less relevant. Furthermore, APEC desires to imbue regional integration with an inclusive character for developmental purposes.

        We suggest two broad areas to promote inclusiveness in APEC. The first deals with increasing the potential for GVCs. The proliferation of GVCs could only increase the possibilities for developing countries to participate. APEC, as a collectivity, could engage in initiating sectoral liberalization. The second avenue addresses fostering linkages between lead firms, which are usually foreign, with local suppliers (small businesses or otherwise) within the country. The idea is to prevent enclaves of foreign led GVCs. Though there is a host of complementary policies that could improve linkages, we highlight those that will help local supplier firms acquire the necessary standards, deepen entrepreneurship and benefit from trade facilitation measures.

References:

1.  Wonnacott, P. (1994) "Merchandise trade in the APEC region: Is there scope for liberalisation on an MFN basis?" The World Economy, Special Issue on Global Trade Policy: 33-51
2. Ibid.
3. Organization for Economic Cooperation and Development (OECD), World Trade Organization (WTO) and UNCTAD. "Implications of Global Value Chains for Trade, Investment, Development and Jobs." Prepared for the G-20 Leaders Summit Saint Petersburg (Russian Federation), August 6, 2013

APEC Growth Strategy and Beyond

Wayne Chen

        APEC, as a premier forum to facilitate economic growth, trade and investment in the Asia-Pacific region, has been promoting cooperation on issues beyond its traditional agenda. Through economic and technical cooperation (ECOTECH), APEC is dynamic in narrowing development gap and enhancing capacity building among its member economies across the region. In so doing, APEC has improved economic growth in terms of both quantity to quality, and this feature demonstrates that APEC, a non-binding organization, significant in leading regional integration in the globe.

        The APEC Leaders' Growth Strategy announced in 2010, by following which all the 21 member economies achieved consensus on objectives of their pursuit of economic growth, was a milestone for APEC carry on its ECOTECH activities. In 2015, APEC is drafting the second framework to continue the collective endeavor for common prosperity for another 5 years. The essay views the 1st phase APEC Growth Strategy and beyond.

Emergence of Growth Strategy

        After 2000, APEC has been extending its Trade and Investment Liberalization and Facilitation (TILF) agenda by incorporating a wide range of capacity building activities as well as issues not directly related to trade. As shown by the three pillars of APEC's agenda--Trade and Investment Liberalization; Business Facilitation, and; Economic and Technical Cooperation-- announced in 1994, APEC has been focused on capacity building and APEC was achieving growth and prosperity for a common future through narrowing development gap.

Emergence of Growth Strategy

        After 2000, APEC has been extending its Trade and Investment Liberalization and Facilitation (TILF) agenda by incorporating a wide range of capacity building activities as well as issues not directly related to trade. As shown by the three pillars of APEC's agenda--Trade and Investment Liberalization; Business Facilitation, and; Economic and Technical Cooperation-- announced in 1994, APEC has been focused on capacity building and APEC was achieving growth and prosperity for a common future through narrowing development gap.

        In this context, anthropocentric issues, such as health, welfare, inclusiveness, and social safety net, have gradually involved in the agenda. The health working group was establish in response to the increasing risk of epidemic diseases in 2007, and the Emergency Preparedness Working Group was built in 2009 after the hit of tsunami and earthquake in the South Asia, South-East Asia, and Chile.

        Climate Change, Energy Security and Forestation, and other ecology related issues were later introduced to APEC. The Sydney APEC Leaders' Declaration on Climate Change, Energy Security, and Clean Development recognized that "economic growth, energy security and climate change are fundamental and interlinked challenges for the APEC region," therefore, Leaders are "committed... to ensuring the energy needs of the economies of the region while addressing the issue of environmental quality and contributing to the reduction of greenhouse gas emissions." 2 goals were revealed in the Declaration: 1) to increase forest cover in the region by at least 20 million hectares by 2020, and; 2) to reduce energy intensity of at least 25% by 2030, with 2005 as the base year.

        Given the long history of expanding the APEC agenda, it is not surprising that the APEC Growth Strategy soon served as a comprehensive framework upon which various APEC issues were coordinated and integrated after the Strategy came in place in 2010.

        In 2009, APEC was seeking to develop a new growth paradigm for the changed post-crisis landscape considering that "growth as usual" is not realistic anymore. The Growth Strategy drafted in 2010 was comprised of 5 attributes, namely: Balanced Growth, Inclusive Growth, Sustainable Growth, Innovative Growth and Secure Growth.

        The Balanced Growth refers to growth across and within economies that will unwind imbalances and raise potential output through macroeconomic policies and structural reforms. The Inclusive Growths emphasizes that economic growth needs to take social inclusiveness into account by promoting equity, human resources, employment and welfare of vulnerable groups. The Sustainable Growth or Green Growth urges the use of natural resources and economic activities to be ecological friendly and its applications are often technology oriented in the APEC context. Innovation is crucial to the development of other growth attributes given that ICT is such powerful tools for transition to knowledge based economy. The Secure Growth accommodates issues of emergency preparedness, health, food security, anti-corruption and anti-terrorism.

       

Applications of the APEC Growth Strategy

        Since 2010, the Growth Strategy has been supervising capacity building activities across the APEC region by shaping annual priority areas. Through the lens of Growth Strategy, member economies could also be categorized by their development progress. For example, developing economies are supportive to social inclusiveness and infrastructure investment which are crucial for narrowing development gap and disparity with the society. Developed economies that are of advantage in R&D are focused more on innovative growth and sustainable growth which lead to cutting-edge technologies, IPR and energy saving devices. The USA and Russia are in particular active in this regard.

        In practice, the Growth Strategy has been utilized intensively in evaluating projects and initiatives within APEC, and therefore, the Growth Strategy was implemented from a top-down manner, from the Leaders to the Working Groups. However, on the other hand, the Strategy was not fully used in evaluating the outcome of initiatives or assessing the performance of working groups due to the lack of qualitative goals. In 2015, while APEC member economies reviewed the first Growth Strategy and working collectively on the new one, it was suggested to involve clear goal or quantitative objective as G20 does, but such comment was not much echoed particularly by developing economies.

Looking Forward       

        The 2nd phase of the Growth Strategy-- APEC Strategy for Strengthening Quality Growth--- was drafted by all member economies during the 3rd Senior Officials' Meeting in Cebu and is being submitted to Leaders for endorsement in November. in the new Strategy, 3 Key Accountability Areas (KAA), namely: Institution Building, Social Cohesion, and Environmental Impact were newly added for examining and prioritizing APEC initiatives and meanwhile the 5 growth attributes remain. It is not clear yet what changes the addition of KAAs is bringing up, APEC Leaders may not elaborate address priority works of the Growth Strategy in detail. Instead, the new Growth Strategy can be linked and interpreted in line with UN ongoing tasks, such as the Millennium Development Goals and the Sustainable Development Goals to highlight its significance accelerating regional integration and development. APEC still needs to further elaborate the Strategy to member economies, APEC fora and subfora. Similarly, the APEC working groups will need to study the comprehensive Strategy and translate it into strategic plans and work plans for implementation.

       

       
       

Overview of the 2015 APEC Study Centers Consortium Conference

Chen Ho

Introduction 

        The APEC Study Centers throughout the APEC region have been meeting with each other every year. This year, the APEC Study Centers Consortium Conference was held in Boracay Island, Philippines on May 12-13, 2015. The main hosts of the Conference were the Philippine Institute for Development Studies (PIDS) and the Philippine APEC Study Center Network (PASCN).

Main Points of the Sessions 

        The Conference primarily consisted of six sessions. In Session 1, the focus was on "Pathways to FTAAP." The participants agreed that APEC should provide the strongest support for realizing the FTAAP. Specifically, APEC should serve as the platform for communication, exchange of best practices, and capacity building. In addition, APEC should maintain its support for the principle of open regionalism and the World Trade Organization. Another important point was that the participants believed that in any pathway to FTAAP, the role of small and medium enterprises (SMEs) should be emphasized and that concrete actions to advance SMEs should be developed (PIDS 2015). Most importantly, APEC should ensure that all APEC members can become members of the FTAAP. The reason was that the FTAAP was a product of APEC and APEC members had reached consensus to achieve the FTAAP. The economic benefits to APEC would be substantial when all APEC members could participate in the comprehensive FTAAP.

        In Session 2, the main topic of discussion was "Connectivity through Services." The main point was that efficiency in services had increasingly been associated with higher labor productivity and competitiveness in manufacturing. Moreover, services had been recognized as the facilitator of global value chains and logistics chain in particular. The main challenge was that the services sector continued to be highly restrictive in many parts of the world as well as the APEC region. Furthermore, the difficulty of changing domestic regulations had led to the reluctance of economies to liberalize their services sector. It is suggested that economies should promote knowledge sharing and the development of a knowledge community for promoting regulatory reforms (PIDS 2015).

        Session 3 was about "Trade and Investment Patterns and Supply Chain Connectivity." It was mentioned that the extent of gains from regional integration would depend greatly on the volume and quality of trade and investment patterns, infrastructure, and connectivity in the region. The experiences of Thailand and Viet Nam indicated that factors such as real interest rate, degree of openness, and exchange rate could significantly affect and explain foreign direct investment (FDI) trends and patterns. Another important point was that policies that promoted investments and lowered trade transaction costs were considered crucial to FDI inflows (PIDS 2015).

        With regard to Session 4, the emphasis was on "Fostering SMEs' Participation in the Regional and Global Economy." It was related that SMEs could be a major driver for economic growth. SMEs had contributed by creating a stable economy given their flexibility and capacity to easily absorb both skilled and unskilled labor. The viability of SMEs is important for developing competitive and efficient markets. Presently, SMEs had faced the greatest difficulty in borrowing money from banks. The reason was that most SMEs did not have credit data and the perceived risks in lending to SMEs. A suggestion was made that stronger financial cooperation must be advanced and a credit rating system for SMEs should be developed. In addition, with trade being integrated by production and supply chains, natural disasters can cause serious problems for SMEs. It was estimated that only 25 percent of SMEs had re-opened following natural disasters. APEC should enhance the resilience of SMEs (PIDS 2015).

        Session 5 was about "Investing in Human Capital Development." It was mentioned that education, training, and human resource development could raise the output and productivity of workers. However, several issues continued to be important, such as developing 21st century workforce, aligning education and training to industry needs, and strengthening the productivity of SMEs through skills training. Another suggestion was that it would be necessary to create an environment that would encourage academic and technical exchanges. APEC economies could send at least five percent of the students enrolled in their leading universities to universities in other APEC economies to stimulate cross-border education. It was also suggested that an APEC Qualification Framework could be created. The Framework would function as a standard for comparing the training, qualifications, skills, and competencies of various semi-skilled workers (PIDS 2015).

        The focus of Session 6 was on "Building Sustainable and Resilient Communities." With regard to climate change, it was suggested that there was the need to enhance the supervision of change by adopting an integrated approach, given the wide-ranging impacts of climate change. Intersectoral and inter-agency collaboration would be necessary and further multidisciplinary research to understand climate change would be needed. Moreover, fiscal risks arising from natural disasters were a concern shared by most APEC member-economies. Individual governments often shoulder a large part of the cost of disasters, particularly in developing economies. A suggestion was the promotion of insurance and other risk-sharing schemes. In addition, APEC could contribute to the mitigation of the adverse effects of environmental degradation. Since these were cross-border issues, solutions must be derived through international cooperation. A suggestion was that APEC could liberalize a number of environmental goods in the APEC list, so as to contribute to global efforts to foster sustainable development (PIDS 2015).

Comments and Suggestions 

        The annual APEC Study Centers Consortium Conference has been an important event for the Centers to gather together and discuss major APEC issues for that year from the perspective of researchers. From the Conference, valuable suggestions have been presented that could be further developed. In order to enhance the linkage between APEC and the APEC Study Centers as well as to strengthen the linkage among the APEC Study Centers, it is suggested that APEC provides funding for one research project each year to the APEC Study Centers. The APEC Study Centers would choose the topics for research, so as to ensure that the APEC Study Center are able to undertake outstanding research.

        It is also suggested that the APEC fora and the APEC Study Centers could collaborate on examining APEC issues. This means that the APEC fora could request comments and suggestions from interested APEC Study Centers. In doing so, the APEC fora would have access to good quality research. The APEC Study Centers would enhance their knowledge of APEC issues and the views of the APEC fora.

Reference 

PIDS. 2015. "Summary Report of the APEC Study Centers Consortium Conference 2015." Manila: PIDS. 

Implications of ADB Joining Forces with AIIB

Darson Chiu

        Takehiko Nakao, President of the Asian Development Bank (ADB) announced during ADB's 48th annual meeting in early May this year that ADB would work together with the Asian Infrastructure Investment Bank (AIIB) through co-financing development projects. However, Nakao put down AIIB on April 20 this year by stating that it would take a very long time for AIIB to catch up with ADB in terms of available resources as well as outright influence in the region. What have been the critical reasons making ADB eventually turning the tables around on AIIB within only two weeks?

        After Bretton Woods Conference charting financial agendas and regulations for major world political and economic powers in 1944, the World Bank (WB) led by the US and ADB jointly dominated by the US and Japan have been financing development projects in conjunction with other poverty reduction missions across the Asia-Pacific region and rest of the world. The initiative of establishing AIIB was announced by China in October 2013, a purposely set timing, as China served as the host of APEC meetings the following year.

        There is without doubt an extremely strong demand for emerging economies in the region to finance their much needed infrastructure improvement. It is estimated around US$ 700 billion required to meet the needs of infrastructure development in Asia per annum. Furthermore, given Asian economies' excess savings and significant gaps in economic development, directing capital to infrastructure could more or less ensure continued growth, especially when most Asian economies are losing steam for growth at this moment. From the simple supply and demand perspective, the lending capacity of ADB is unable to sufficiently finance infrastructure development projects in the region even with its proposal of expansion, enhancing its credit line each year by 50% to US$ 20 billion starting from 2017. But this is definitely not the only reason that explains why ADB has decided to join forces with the AIIB.

        During the 2014 APEC meetings, as there were doubts that the formation of AIIB was intentionally to challenge existing multilateral financial institutions, the WB and ADB. And Chinese APEC delegates in many international occasions often stressed that AIIB was not set to compete but complement works of WB and ADB. In addition, Chinese APEC delegates even claimed that AIIB could cooperate with the WB and ADB in joint projects. Therefore, the AIIB did extend its goodwill gesture before; however, neither WB nor ADB responded to that offer with adequate courtesy. The US and Japan did not wish to see a burgeoning new bank led by China to go beyond the works long been doing by the WB and ADB. The White House even warned its allies against joining AIIB then considering there's a possible purpose behind the AIIB to hold down the operations of WB and ADB.

        The big turning point would be when the United Kingdom announced in March this year that it intended to become a prospective founding member of the AIIB and be the first major Western power and a long time US ally to seek to join the China-led bank. Right after that announcement, the US expressed its unease at UK's decision by issuing serious concerns regarding if the new bank would be able to meet the modern governance benchmarks. As the UK is also a member of ADB, it is not irrational for the European country to join in Asia's development projects that might be equally relevant to the AIIB. In spite of everything, an estimated investment of about US$ 11 trillion in infrastructure for the next 15 years of emerging Asia is just too tempting.

        Despite the reproving signal from the US, Germany and France also joined the UK in becoming members of AIIB in March this year. Following these European Union fellow members, Italy was soon set to join the Chinaled bank. That means four out of seven G7 member countries, four largest European economies and the once most reliable US allies have "jumped ship" in a way, and it is probably enough and about time for the White House to put aside its animosity towards the new bank and consider revising the game plan.

         Jack Lew, the US Treasury Secretary stated in late March this year that US would position itself to welcome a China-led development bank on the conditions that the bank could complement existing institutions, implement good governance practices, and attain transparency. During a press conference set for welcoming Japanese Prime Minister Shinzo Abe's visit on April 28, the US president Barack Obama said the AIIB could be a positive thing for the region of Asia as long as it adopted high standards to finance development projects. The presidential press pronouncement unveiled the fact that how to address AIIB was definitely on the agenda of Obama-Abe meeting.

        Adding these all up; we can summarize several concluding points here. First, the US leadership in Asia-Pacific region was challenged by China, and then jeopardized by its European allies. As the EU Big Four also own memberships in ADB, it is sensible for them to continue their endeavors and help Asia's development projects. And it's probably unfounded to stop them from doing so. Second, as the only major ally of US now, Japan tried to seek US opinion of whether to join or jointly contain AIIB. The former seemed improbable, as Japan had been joined the US expressing skeptical of whether the AIIB would redundantly overlap the functions of existing institutes in the first place. The new bank looked so influential and powerful making the latter also seemed less likely to succeed, despite the Japanese ADB president attempted to discourage AIIB several days before the Obama-Abe meet up in April.

        Finally, the optimal solution would be using ADB to join AIIB thru the means of co-financing projects. The merits of doing so are multiple: a) Japan and the US can also enjoy a share of potential business opportunities associated with AIIB, b) Japan and the US can keep an eye on AIIB through cooperation, as then AIIB needs to be more transparent when working together with ADB, c) AIIB did offer the willingness to combine forces in the past, so ADB would hardly get a thankless cold shoulder from AIIB, and d) the AIIB does need to pull experience and expertise from ADB.

        Finally, the optimal solution would be using ADB to join AIIB thru the means of co-financing projects. The merits of doing so are multiple: a) Japan and the US can also enjoy a share of potential business opportunities associated with AIIB, b) Japan and the US can keep an eye on AIIB through cooperation, as then AIIB needs to be more transparent when working together with ADB, c) AIIB did offer the willingness to combine forces in the past, so ADB would hardly get a thankless cold shoulder from AIIB, and d) the AIIB does need to pull experience and expertise from ADB.

The Year of Promising Economic Integration in the Asia-Pacific

Eric Chiou

        The year of 2015 is going to be indicated as a remarkable year for economic integration in the Asia-Pacific region. Not only the negotiation of Regional Comprehensive Economic Partnership (RCEP) is scheduled to be concluded by the end of this year, but also the Trans-Pacific Partnership (TPP), after a series of intensive and difficult negotiations, aims to reach a principle framework agreement in this year. In addition, an ambitious vision of the ASEAN Economic Community (AEC) is planned to be fulfilled within this year, which will make it one of major global player in the world, and become the seventh largest economy as well as the most consolidated trade bloc in Asia.
     
         Furthermore, foreseeing robust demands of infrastructure financing in developing countries in Asia, China initiated the proposal of Asian Infrastructure Investment Bank (AIIB), in order to provide sufficient financial support to bridge the gap of financial needs for infrastructure development in the region. The Bank is expected to operate by the end of this year and its establishment has been considered positive contribution to deepening regional economic integration and spurring economic momentum by strengthening physical connectivity in the Asia-Pacific region. Based on these favorable factors, the year of 2015 is likely to be a promising watershed in the history of Asia-Pacific economic integration.

        As the most vibrant and long-standing locomotive in promoting economic integration, APEC has been one of the most dynamic forums and a critical incubator for cultivating various ideas toward a common goal of facilitating free and open trade and investment in the Asia-Pacific region. Meanwhile, it has also played as the most persistent advocate and assiduous actor in carrying out numerous policy measures to enhance regional trade and investment.

        For example, APEC has adopted the global Trade Facilitation Agreement and also set a goal of increasing 10 percent from 2009 levels in regional supply chain performance by the end of this year. This initiative targets at reducing customs bottlenecks for goods at borders by enhancing custom cooperation among APEC members, which expects to improve efficiency, lower operation costs, and facilitate trade flows across APEC countries.

        To continue the efforts and progress made in 2014, one of APEC's priorities in this year is "Enhancing Regional Economic Integration." As a host member in 2015, the Philippines has laid out a plan to organize a task force and launch a two-year collective strategic study on issues related to the realization of a Free Trade Area of the Asia-Pacific (FTAAP), in order to ensure the fruitful results of the Beijing Roadmap for APEC's Contribution to the Realization of the FTAAP to be maintained and carefully implemented.

        Moreover, from a geopolitical aspect, heightened tensions over territorial disputes in recent years have gradually lessened since last fall, while the forecast of moderate economic growth for most countries in the region in 2015 has also played a positive role for allowing national leaders to keep cool head and concentrate on the issues of how to stimulate economic growth, instead of augmenting their existing political frictions. Last year, the lukewarm, but symbolic meeting between Chinese leader Xi Jinping and Japanese Prime Minister Shinzo Abe signified a historical turning point and showed deliberate efforts to turn down their rising suspicion and hostility in recent years.

        In a word, an overall geopolitical environment in 2015, so far, provides a fairly constructive and peaceful milieu in fostering economic integration. Nevertheless, despite various advantageous elements being depicted above, some critical hindrances to the final achievement of regional integration remain challenging in the coming months of this year. Here are possible challenges worthy of further discussion.

        First, despite the latest TPP negotiation just taking place in Hawaii in March, some thorny issues, such as intellectual property rights (IPR), have not been solved, which cast a shadow over the prospect of successfully concluding the TPP this year. Furthermore, with the upcoming presidential election in the United States in 2016, the chance for the Obama administration to obtain the Trade Promotion Authority (TPA) from US Congress seems gloomy.

        If the United States could not attain the TPA to complete the final stage of negotiation, the TPP may eventually turn out to be a failed attempt. At this juncture, Abe's visit to Washington in late April becomes crucial. If two leaders from Japan and the US can effectively narrow their differences and reach consensus in the meeting, this breakthrough may generate sufficient political momentum to compel US Congress to grant the TPA to the Obama administration. Then, the TPP will be more likely to be concluded within this year, given that two largest TPP members are able to settle their differences.

        Second, compared with intensive negotiations among TPP members, the progress and pace of RCEP seem relatively limited and slow. Although these indications do not necessarily suggest that the RCEP may become an illusion in the end, this tepid development certainly invokes some concerns over its quality and future implementation, even if RCEP members eventually reach a deal this year.

        It is estimated that the RCEP accounts for 28 percent of world economy and its implementation will produce income gains of $240-644 billion to the world economy in a decade. However, these inspiring figures are likely to be illusionary, if the final agreement of RCEP fails to live up to its original objectives of being a high quality regional free trade bloc.

       A similar predicament can be applied to the AEC, since it is exactly a product and also a victim of so-called "ASEAN Way." The characteristics of ASEAN Way have highlighted consensus-building, flexibility, mutual respect for differences, etc. The outcome and effectiveness of AEC will be dubious, if it fully abides by and operates in accordance with the ASEAN Way. Hence, what matters is not whether the AEC can be established or not, but to what extent the contents of the AEC can be faithfully implemented by ASEAN members.

        Despite some possible weaknesses, the formation of AEC will certainly generate a big boost to regional economic integration in the Asia-Pacific. At least, it will consolidate its pivotal role as a center of regional integration and spur the interests of its trading partners to further strengthen economic ties with the AEC. This outcome is likely to induce a virtuous circle of competition and accelerate the completion of other regional trade deals.

        In short, the year of 2015 will be a critical juncture for the Asia-Pacific economic integration as a whole. If the above trade initiatives are fully realized as promised, this year will be a historical turning point in the history of Asia-Pacific integration. Then, the question of how to efficiently converge those diverse regional integration initiatives will be a crucial task in the next stage, in which APEC will continue to take a leading role in facilitating discussion and guide a better way to the future.

Following Silk Roads to a Consolidated Asia: Chinese New Diplomatic Strategy

Wayne Chen

      Against the ''APEC Blue'' appeared surprisingly in the clear Beijing sky during the APEC Leaders' Week, by hosting APEC 2014, China demonstrated its rising leadership in the Asia-Pacific and determined actions in consolidating partnership in the neighborhood. From the First Island Chain to the west, China is rapidly transforming into a geopolitical big power dramatically following its ''One Belt, One Road'' strategy, which is continuously advanced by a series of infrastructure investment in developing countries. In an APEC context, China is strengthening regional cooperation from the Pacific Ocean to the Baltic Sea by improving cooperation on physical connectivity among neighbor states. Through the set-up of a network of transportation that connects Eastern, Western and Southern Asia, China is emerging in the center of the continent which plays as a new economic engine.

One Belt, One Road as a Two-Way Blueprint

       One Belt, One Road, the ambitious strategy was revealed for the first time during Xin Jinping's visit in Indonesia before the APEC Leaders' Week in 2013 where he called for the establishment of a new maritime silk road between China and Southeast Asian neighbors, particularly the 10 member Following Silk Roads to a Consolidated Asia: Chinese New Diplomatic Strategy Wayne.Chen states of the Association of Southeast Asian Nations. Xi also proposed to establish the Asian Infrastructure Investment Bank (AIIB) to accelerate the realization of the One Belt, One Road strategy. Borrowing the ancient commercial route: the 21st century maritime silk road (the One Road), through which ancient Chinese merchants transported silk and commodities from other countries, China emphasized the significance of Southeast Asian states as hubs and partners to Chinese economic development and diplomatic policy. While the One Road strategy is strengthening the tie with ASEAN, South Asian and African countries through the sea, the land-based New Silk Road Economic Belt (the One Belt), starts from central China and goes through Central Asia, Iran, Turkey before reaching Moscow and Rotterdam in Europe, aims to engage with neighbor states on the continents.


       At current stage in promoting the One Belt, One Road diplomacy policy, China is working intensively in a wide range of regional and international arenas, namely the APEC, ASEAN++, and Shanghai Cooperation organization (SCO), while the former two involves members in the Road and the later includes economies in the Belt. A series of consolidation started in August when Xi paid a state visit to Mongolia that shares a long border with China and depends greatly on natural resources exports, especially coal and copper. After Xi's visit, 24 Memoranda of Understanding and Agreements were signed and ties between the two countries were upgraded to a comprehensive strategic partnership. These agreements facilitate transport across the Mongolian-Chinese border; increase access to 6 sea ports, including Tianjin, Dalian, and Jinzhou, in China for Mongolian exports, and; provides potential access to Chinese financing, specifically for mineral resource and infrastructure development in Mongolia.


      Soon after in September, Xi attended the 14th Council of Heads of State of SCO in Dushanbe, followed by state visits to Tajikistan, Maldives, Sri Lanka and India. Xi's 9-day trip drove two ''wheels'' of security and economy simultaneously for the development or relations with Eurasian countries, and extended invitation to member states for their active participation in the joint construction of the Silk Road Economic Belt as well as the establishment of an SCO development fund and an SCO development bank.

Fuelling Infrastructure Development with Financial Resources

       A remarkable leap was made on 24th October when 21 Asian countries, including Bangladesh, Brunei, Cambodia, China, India, Kazakhstan, Kuwait, Laos, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, the Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan and Vietnam, signed the Memorandum of Understanding on Establishing AIIB. The Memorandum of Understanding specifies that the authorized capital of AIIB is 100 billion U.S. dollars and the initial subscribed capital is expected to be around 50 billion dollars. Beijing will be the host city for AIIB's headquarters and AIIB will be formally established by the end of 2015.


       AIIB functions as a new inter-governmental regional development institute in Asia and thus could be considered as an alternative to the Bretton Woods institutions, the World Bank and the International Monetary Fund, and the Asian Development Bank which is current premier institute on infrastructure development in the East Asia. Nevertheless, AIIB has won China great support of neighbor states. 8th November, 3 days before the APEC Economic Leaders Meeting, China hosted the Dialogue on Strengthening Connectivity Partnership joined by heads of Bangladesh, Cambodia, Laos, Mongolia, Myanmar, Pakistan and Tajikistan, along with representatives of the United Nations Economic and Social Commission for Asia and the Pacific and the SCO. At the Dialogue, Xi announced the creation of the Silk Road Fund and that China would contribute US$40 million as the first input. The fund is expected to scale up to $40 billion for financing construction of infrastructure across Asia linking China with three continents over land and sea, with railroads, pipelines and roadways.


       On the other hand, the Marine Silk Road Bank was also created and would have a minimum in paid-in capital of 5 billion yuan ($816.23 million) funded by the Marine Silk Road Investment Management Fund and ASEAN member countries.

Skepticism and Resistance

       Facing the rapid progress of infrastructure investment along the One Belt, One Road the international community has responded in both appreciation and concern. Some believe the economic belts demonstrates a win-win approach by simply building a transportation corridor, wrapping up economic aid programs in achieving China's goals, and every participant states will benefit from it. Others are cautious that China will use its economic strength to change the geopolitical power situation in Eurasia. Moscow, for example, is watching and at the same time cooperating with China closely considering that the China-led Silk Road may divert the momentum needed by the multi-billion-dollar infrastructure projects in Siberia, including a $47 billion upgrade of the Trans-Siberian Railway and the Baikal-Amur route, and creating a northern sea route over the Arctic. Meanwhile, the United States probably represents the strongest opposition viewing the One Belt, One Road is consolidating allies and foes behind the First Island Chains and can be competitive if not rivalry at all to the ''Rebalancing Asia'' strategy led by the US.

Policy Alternatives to Sustain Long Term Economic Growth

Darson Chiu

        It has been two years, 2012 and 2013, which Taiwan's economic growths laid beneath the averaged world growth rates. Is this turning into an accepted incident? Actually, there's a sign showing that Taiwan's economy might be able to turn the tables on the distinct disadvantage, so we probably do not need to worry about that at least for the short term. What this island actually needs would be policy alternatives to sustain its long term growth.

        One of the optimistic signs would be that the U.S. housing and job markets have been recovering in recent times owing to several rounds of quantitative easing measures. Although said measures taper off, they do help the demand back to an expansion mode. As the U.S. market is the world's largest end products destination, supply value chains in the region of Asia- Pacific have started to be actively revived again. Since 1980s, Taiwan has been playing a key role in regional supply value chains; whereas more than 75% of Taiwan's present exports are categorized as intermediate goods. Therefore, the revitalization of supply chains in the region will certain help pick up Taiwan's exports of this year.

        Taiwan's degree of reliance on exports stood at 70% for the past decade, and the degree has been increasing in recent times. That means a strong exports growth can be considered as a big push for Taiwan's economic growth. The most recent forecasts of 2014 world economic growth rateconducted by global creditable agencies such as World Bank, IMF, OECD, and Global Insight Institute etc standing at 3.0% on average. By comparison, Taiwan's GDP of this year is predicted to grow by 3.28% by the Taiwan Institute of Economic Research. It means there's a chance that Taiwan may outgrow the world economy by a slim margin when the actual numbers are out.

        A potential challenge could be addressed in the short run or foreseeable near future; however, the long term issues hindering Taiwan's growth capacity in the long run still remain. First, Taiwan's status in regional supply value chains has been challenged by the downstream economies, and the challenge mainly coming from mainland China. Second, Taiwan has been continuously losing overseas market shares due to insufficient free trade agreement (FTA) coverage.

        Due to the labor cost hike, Taiwan has been outsourcing its downstream manufacturing and packaging processes mostly to mainland China since early 90s and some to Southeast Asia even earlier. Outsourcing is necessary to better allocate human and other resources among countries that are in economic and trade relations. Both sides of Taiwan Strait had been benefitted from such a business model until global financial crisis triggering the European troubles.

        Nevertheless, the economic and trade relationship between China and Taiwan has been changing from a cooperative to more of a competing mode. Because the demand of China's biggest exports destination-Europe has been shrinking ever since the outburst of European sovereign debt crisis, China has adopted a policy of import substitution or supply chains localization in response. Instead of purchasing intermediate goods from Taiwan, mainland China has been buying some less costly parts and components from local and other suppliers or making them on their own. The purpose of said Chinese policy would be to reduce production costs, and it has been hurting Taiwan's exports seriously.

        Besides China and Taiwan, East Asian countries including Japan, South Korea, Malaysia, Singapore, and Thailand and many more are all involved in the regional supply value chains. However, the Chinese policy seems to cause more harm on Taiwan's economy than others. The reasons behind would be a) economies such as Japan and South Korea have had sufficient technological advantage to stand firm on their positions and b) other economies especially Southeast Asian countries do not depend on the Chinese market as much as Taiwanese firms do.

        Why can't Taiwanese suppliers hold their positions in supply chains and overcome downstream challenges? If the intermediate goods designed and produced by Taiwanese firms are irreplaceable and critical, China's import substitution acts will pose no threat at all. South Korea's research and development (R&D) expenditures over GDP ratio is around 4.36%, which is the highest ratio among all OECD countries. Japan's R&D over GDP ratio stands at 3.35%. By comparison, Taiwan's R&D over GDP is about 3.06%. Being less dedicated in R&D has made Taiwan more vulnerable to challenges.

        Therefore, the first structural reform that Taiwan needs to secure its long term growth would be to pursue technological improvement through R&D. As over 90% of Taiwanese companies are small and medium sized, and they probably lack of funds to conduct their own R&D. And this is where the government could and should jump in to guide them and lend a helping hand. Japanese and Korean governments' policies to enhance corporate capacity building would be a good reference for the Taiwanese government to refer to.

        The reason why the Taiwan economy has been relying on China and losing market shares at the same time would result from Taiwan's lacking sufficient FTA coverage. Many have been stressed how crucial it is for Taiwan to join the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) so as to effectively enhance Taiwan's FTA coverage. The Ma administration has also issued a special order directing all ministries and government agencies to join forces and pursue both FTA processes simultaneously. It is understandable why Taiwan is in such a rush. The FTA coverage ratios of China, Japan, and South Korea stand at 29.79%, 18.93%, and 36.81% respectively, whereas Taiwan's coverage is only 9.69%. Since Taiwan is way behind the leading group, the government has been striving to pick up the pace and try to catch up. However, a FTA strategy is needed; otherwise the joint efforts will be futile.

        The second step that Taiwan ought to take to sustain its economic growth in the long run would be to prioritize the multilateral FTAs that provide Taiwanese companies most benefits and cause fewer impacts. It is hence suggested to aim for RCEP before TPP. First, RCEP members include Taiwan's number one and number two exports destinations, mainland China and Southeast Asia. TPP on the other hand is all about the US market. Although it's the world largest end products market, Taiwan is basically a supplier of intermediate goods but end products. Second, the averaged tariffs of RCEP are 7.7%, and overall tariffs of TPP are around 4.4%. That means TPP requires more market opening and less protection, which could cause more damages on Taiwan's defenseless industries. In other words, Taiwan needs more time to prepare itself for TPP. Join RCEP first and enhancing industrial resilience while applying for TPP membership would be a more feasible approach for Taiwan to address its long-standing constraints for growth.

Enhancing Structural Reform to Escape from Middle Income Trap

Wayne Chen

          Proposed by China the host economy of APEC 2014, avoiding the Middle Income Trap (MIT) was adopted as one very important issue requiring all APEC economies' attention and action. As illustrated by China at the first Senior Official Meeting that escaping from MIT is crucial to boost economic growth in the Asia-Pacific and initiating structural reform is the inevitable course. In this light, the APEC New Strategy for Structural Reform (ANSSR) can serve well as guidelines to assist APEC economies move forward the development ladder and meanwhile facilitate sharing of best practices and ideas on conquering the MIT. As a result, MIT and ANSSR are highlighted in the agenda of "Promoting Innovative Development, Economic Reform and Growth", a priority area for the APEC 2014.

MIT as a Trap on the Development Ladder

          According to the World Bank, economies with per capita income of US$1,036- US$12,615 are considered in a middle-income status, and MIT refers to the situation in which a middle-income economy fails to leap into high-income status. Aiyar et al. (2013) argue that middle-income economies are disproportionately likely to suffer from growth slowdowns. The relative frequency of economic slowdown period for the middle-income status is significantly higher than the low-income and high-income groups. As a result, only 13 of 101 middle-income economies in 1960s escaped from MIT and entered high-income phase by 2008. In the Asia-Pacific region, 5 economies completed the leap from the middle to the high income stage of the development ladder, namely Japan, Korea, Taiwan, Hong Kong, and Singapore.

          Yiping Huang argues that MIT is a critical issue for APEC where a large number of developing economies fails to overcome MIT and thus undermines social equity and efforts on trade and investment facilitation. On the other hand, MIT also appears as an opportunity to APEC. Firstly, considering APEC member economies are diverse in terms of development ranging from under development to high income status and 5 of them have escaped from MIT. APEC is in a unique position to assist economies transcend the obstacle of development by improving exchange of views and best practice sharing. Furthermore, given that structural reform is a fundamental work in conquering MIT, particularly on industrial structure and manufacturing patterns, ANSSR can contribute substantially to individual economies as well as the Asia-Pacific region as a whole.

Determinants of MIT

          Empirical research demonstrates at least 6 important factors lead to growth slowdown, they are institutions, demography, infrastructure, economic environment and policies, economic structure, and trade structure.

          The existing, completeness and quality of legal institution is essential to attracting FDI and financial liberalization for domestic entrepreneurs. Protection of property rights and contract enforcement, for example, is the foundation to boost economic performance. Age distribution of the population is another factor correlates to economic slowdown, in particular, the demographic dividend. A positive impact of the working age ratio was found on economic growth. The correlation comes from higher production of people of working age compared to labor outside this age group as well as higher saving rates increase domestic resources available for productive investment. Skilled labors are needed and should be cultivated through quality education systems, more importantly the avocational education, and training to continuous support industrial transformation and meet the need of changing manufacturing patterns.

          A wide range of macroeconomic factors are also related to economic growth and slowdown. Encouraging domestic investment, e.g. through mobilizing local savings, is crucial to economic growth considering cross-border capital inflows may be more volatile. Competition policy is considered important to enhance openness and transparency of local market and protection to foreign investors and thus greatly benefits long-term growth and reduces economic shocks. The economic structure refers to formal employment and output in sectors. The World Bank's World Development Indicators demonstrate that employment, output and add-in value expand in the industrial sector while the agricultural sector shrink along the way of economic development. However, this structural change also creates risk of slowdown. For MIT economies, production activities need to transform from exporting natural resources and essential goods to higher add-in value and capital/knowledge intensive industries. Similarly, MIT economies also face further distance and regional integration and are required to learn to deal with external shocks, e.g. economic crisis, in the regional and global sphere.

Structural Reform as a Solution

          The factors illustrated above create needs and challenges facing economies reached middle income status in moving forward to higher grade to which ANSSR aims to contribute. The main objective of ANSSR is to improve openness and transparency of policy environment which is essential to introduce FDI and partners to local business. Given that there is no one size for all remedy for MIT problem, ANSSR serves an open platform upon which APEC economies of a wide range of development are encouraged to exchange experience and best practice for regional prosperity.

          Moreover, APEC growth strategy also plays an indispensable role which illustrates economics need to purse innovative and inclusive growth which is aligned with industrial structural reform of MIT economies. However, at present ANSSR is more focused on policy environment and the connection with growth strategy need to be further forged to contribute to the MIT task in an effective manner.

References

1. Aiyar S., Duval R., Puy D., Wu Yiqun, and Zhang L., 2013, Growth Slowdowns and the Middle-Income Trap , IMF.

2. Huang Y., 2014, the Middle-Income Trap: Policy Implications for the APEC Economies , 2014/SOM2/EC/DIA/002, APEC Policy Dialogue on Middle Income Trap, 10 May, Qingdao, China.

         

         

         

         

         

         

         

         

         

         

Towards Peace, Stability and Sustainable Economic Development in the Asia Pacific Region

Sergey Lavrov

           Recently, we have witnessed deep geopolitical shifts that fundamentally changed the global landscape. Against the backdrop of global transformation processes, the role of Asia Pacific region is rising as a significant factor that is determining now and will most likely determine the mainstream of international developments in the nearest future, becoming an influential player of emerging polycentric world order architecture.

           In the present turbulence of world economy and finance, Asia Pacific states despite the fact that their high growth rates are slightly slowing down will continue to demonstrate the energy of growth and remain the locomotive of global progress. Today the Asia Pacific is a vital center of economic development and progressive political influence as well as an attractive area for cooperation, a cross point for interests of key stakeholders and major multilateral institutions.

           Certainly, Russia being an integral and organic part of the region is also strengthening its presence here. For us this is a matter of principle. Our greater involvement in regional community affairs is a major precondition for securing continued national development as well as social and economic rise of Siberia and the Far East.

           It is our clear commitment to ensure strength, stability, security and prosperity of the Asia Pacific. Intensification of the "Eastern" track policy, development of regional bilateral ties, participation in inter-governmental structures are among Russia's foreign policy priorities. This has been noted in the new edition of the Foreign Policy Concept of the Russian Federation signed by the President of the Russian Federation Vladimir Putin on February 12, 2013.

           Russia's policy in the Asia Pacific is deliberate and focused, aimed at truly stable balance of power and elaboration of cohesive regional agenda. Implementation of these goals is based on the solid foundation of our bilateral relations with regional countries, many of which are filled with time-tested friendship and multifaceted cooperation. Our contacts with China, India and Vietnam have been upgraded to strategic partnership. Ties with ASEAN states, the US, Japan, South Korea, New Zealand, Australia, Canada are also developing on a strong and mutually beneficial basis.

           The increasing engagement of Russia with inter-governmental organizations and dialogue mechanisms – Shanghai Cooperation Organization, BRICS forum, ASEAN Regional Forum, Conference on Interaction and Confidence-Building Measures in Asia, Asia Cooperation Dialogue, Russia-India-China format, East Asia Summit and Asia-Europe dialogue – is of key importance for us. The prospect of developing productive interaction between these structures is an integral part of the long-term task to shape a strong regional and international network of relations.

           The logic of Russia's foreign policy in the Asia Pacific proceeds from the recognition of the fact that creation of an advanced environment of international relations in the region in line with modern realities is of crucial importance. Such a configuration must simultaneously provide broad opportunities for the promotion of multilateral trade, economic and investment cooperation, eliminate existing multi-dimensional security challenges, prevent the emergence of new threats and serve to form an integrated economic and political space.

           Asia Pacific needs a system to ensure equitable cooperation, genuine balance of power and harmony of interests. It is necessary that every country along with other partners could participate in drafting a new agenda for regional relations and in resolving urgent development problems. We advocate a non-discriminatory regional order without any imposition of unilateral approaches, any division into leaders and supporters but with interstate communication based on trust and mutual respect.

           Asia Pacific countries have made an outstanding pace in this direction. The Foreign Ministers of East Asia Summit member-states at their last meeting decided to launch multilateral consultations on regional security. In fact, consensus was reached on the necessity to develop the most reasonable approaches to strengthen security and develop interaction, to seek arrangements on mutually acceptable rules of the game.

           Russia believes that such architecture should be based on the indivisibility of security, peaceful settlement of disputes, non-use of force or threat of force, rejection of confrontation and cooperation directed against third countries and partnership between multilateral organizations.

           In order to achieve these goals we aim to promote and strengthen economic integration with primary accent on the Asia-Pacific Economic Cooperation (APEC) forum.

           In 2012 Russia presided over the APEC forum for the first time, and according to partners' assessments, we coped quite well with this mission. The most important is that our proposed priorities, as one could say, "hit the bull's eye". Let me recall that along with traditional tasks of advancing trade, investment liberalization and regional economic integration we highlighted issues of ensuring food security, improving production and supply chains and encouraging innovative growth in the region. We also promoted cooperation in energy, health care, fight against terrorism and corruption as well as emergency preparedness, which is also important for the region. Relevant Russian proposals are under implementation.

           On the eve of the forthcoming APEC summit scheduled for October 7-8, 2013 in Bali, I believe it is necessary to point out that Indonesia – the present APEC chair – has ensured a proper succession of the forum agenda.

           Support of the multilateral trading system and attaining the Bogor Goals remain the key tasks. Development of a network of free trade agreements forms the essential basis to implement them. Russia closely tracks the dynamics of cooperation in this area which takes place within the Regional Comprehensive Economic Partnership, Trans-Pacific Partnership and other formats. We consider it important that these agreements should cope with the WTO principles and be as open as possible for all. It is counterproductive to develop free trade zones for they ignore the interests of other countries, especially regional neighbors.

           This is the approach Russia, Belarus, and Kazakhstan as member states of the Customs Union are committed to. By now, we have made significant progress in establishing a powerful regional development centre – the Single Economic Space – aiming at creating the Eurasian Economic Union by January 1, 2015 and thereby forging a link between Europe and the Asia Pacific. We believe that interaction between the Customs Union and APEC could serve our common interests.

           Russia is ready to contribute to the discussion on sustainable growth with equity proposed by the Indonesian chairmanship. We consider the course for improving financial, regulatory and other conditions for business development, especially small and medium enterprises, creating new high quality jobs, advancing infrastructure development and investments as a priority.

           An integral part of a new model of sustainable development and equitable growth is fair access for all participants of economic development, all APEC economies to physical and technological resources. Russia is ready for further cooperation in providing food security and promoting mutuallybeneficial scientific, technological and innovation exchanges. We intend to continue our live involvement in this activity.

           Issues of energy security in the Asia Pacific deserve special attention. In the framework of APEC constructive discussion pertaining to their "green" and environmental components continues. It is no doubt important. At the same time we see it is timely to bring up such issues as improving regulatory measures in energy, ensuring transparency and predictability of energy and raw-materials markets. It is necessary to diversify energy balances of regional economies, including through the increase of the share of ecologically clean natural gas and atomic energy.

           We are continuously committed to further cooperation in other areas to ensure secure development in the region, first of all in the framework of the APEC consolidated counter-terrorism and secure trade strategy. It s important to promote interaction in preventing corruption, illegal trade and other types of organized crime. We will actively participate in implementing measures on emergency agencies' personnel and equipment cross-border movement facilitation in order to eliminate consequences of natural disasters and human-made catastrophes. We expect to intensify contacts between national crisis management centers having in mind the prospect of their possible future integration into an efficient regional network.

           Another priority proposed by Indonesia for APEC – strengthening regional connectivity to create a comprehensively integrated Asia-Pacific community – also provides broad cooperation opportunities. Russia considers these tasks timely and reasonable.

           We fully support commitment to adopt practical measures to ensure transparency of economy and improve taxation systems. Russia is ready to make a substantive contribution to the framework of connectivity in the APEC region, also through implementing our initiatives in supply chain area.

           In order to ensure innovative development we are committed to actively participate in coordinating measures to facilitate cross-border movements of students, researchers and education services providers. We are also interested in discussing opportunities for regional tourist exchanges.

           This year, Russia became a full member of the successfully functioning APEC Business Travel Card system specifically set up to facilitate visas procedures. We believe that this would intensify contacts between entrepreneurs and officials responsible for economy-related matters and thus expand trade and Russia's economic cooperation with other APEC membereconomies.

           In short, Russia proposes a transparent policy and economic agenda for the region. Our goal is equal cooperation of all countries with no exception in order to strengthen peace, stability and prosperity in the Asia Pacific.

Promoting Economic Reform to boost Growth in Asia-Pacific

Wayne Chen

           After 13 years host from the last time APEC, China again demonstrates her leadership by hosting series of APEC meetings in 2014. Distinct from 13 years ago, China has passed the taking off phase of economic growth and is implementing necessary economic reform. One of the strong signals was sent by Chinese Premier Li Keqiang that China has set its GDP growth target for 2014 at 7.5%, the same as for 2013, and will keep consumer inflation at 3.5%. GDP growth is no longer the only indicator in pursuing economic prosperity, but a wide range of consideration including social inclusion, innovative growth, balancing development between urban and rural areas are obtaining their significance in economic planning.

           The evolving foci of economic policies are also reflected by the shift of economic paradigms occurred between 1978 and 2013, from Deng Xiaoping to Xi Jinping. In the Initial Senior Official Meeting held in 2013, China elaborated that by learning from China's experience, APEC needs to assist member economies initiate economic reform measures to better deal with challenges ahead. 6 profound economic and social changes were listed to be taken into account in reforming economic growth, namely, the changing model and pattern for development; new energy landscape; demographic change including population growth and aging; environmental pressure; middle class rapidly expanding; and, middle-income trap and increasing wealth gap.

           In this context, economic reform is crucial to mitigate consequences brought about by robust economic growth and reform new growth momentum for regional economic integration. Promoting Innovative Development, Economic Reform and Growth, as a result was adopted as the second priority area in APEC 2014 agenda.

Economic Reform, Innovation and Sustainable Growth

           According to the first senior official meeting held in Ninbo, APEC 2014 will promote economic reform by advancing current works on 4 domains:

1. APEC New Strategy for Structural Reform (ANSSR)

2. Innovative Growth through cooperation on science and technology, ICT, Internet Economy and Urbanization.

3. Inclusive Development including Human Resources, Food Security, SMEs, Anti-corruption, Women and Health.

4. Green Growth including Sustainable Energy, Environment, Forestry, Mining, Ocean-related issues and Disaster Management.

           ANSSR was adopted by Leaders in the Yokohama meeting in 2010. It was drafted following other related APEC programs, such as the Leaders' Agenda to Implement Structural Reform (LAISR). Structural reform cuts across variety of issues and many APEC member economies have long dealt with structural reform issues both within the APEC context as well as independently. Considering that APEC economies are very distinct in terms of economic development, and some are even considered world leaders, APEC is in a unique position to facilitate member economies to exchange experience on structural reform and narrow developmental gaps within and between economies. As a result, ANSSR calls on individual member economies to identify structural reform priorities subject to their own local context, as well as objectives, policies, and approaches to measure progress over the 2011-2015 time frame. In 2013, a mid-term progress review was conducted to facilitate knowledge exchange and information sharing. In 2014, ANSSR was even more highlighted to assist member economies ease tense occurred in the pursuit of economic growth, particularly the Middle- Income Trap.

           The Middle-Income Trap refers to the slowing economic growth, the experience of stagnation at the middle-income level before graduating to upper-income status. According to the Word Bank statistics 13 out of 101 economies enter the middle-income stage (economies with per-capita income of US $1,036-12,615) in the 1960s has only made to the high-income club 50 years later. To avoid the Middle-Income Trap and regain momentum after reaching a certain level of GDP, reform is an inevitable task for developing economies enjoying accelerating economic growth today. However, given that institutional and political contexts vary greatly from one economy to another, it is not possible to be prescriptive about what policies should be put in place. At least, there are three features of successful reform programs should be implemented as suggested by ANSSR. One is that institutional structures need to be transformed to be relatively transparent. Secondly, economies should carry out economic cost-benefit analysis, often through Regulatory Impact Assessment (RIA) extensively and continuously. Furthermore, successful structural reform institutions also refer to strong commitment to a general equilibrium point of view which means that they consider the interests of the whole economy when making structural reform recommendations, and do not become focused on the interests of producers in just one sector.

           On the other hand, to construct robust economic growth, Innovative Growth, Inclusive Development and Green Growth, the 3 attributes of APEC Growth Strategy endorsed by APEC Leaders in 2010, were highlighted as essential tasks to boost regional economic growth. In 2013, Indonesia identified that social inclusion and equality were essential for the economic integration in the APEC region. Woman economy and SMEs, in particular, were addressed intensively to empower youth, women and people in rural areas as well as foster their potentials entering the business community. In 2014, China continues the work on inclusive growth by focusing on food security and health, e.g. the 3rd APEC Food Security Ministers Meeting will be held in Beijing in September to implement the Food Security Road Map towards 2020.

           Meanwhile, innovation, as stated in the Chinese 12th 5-year plan, was long considered as crucial foundation for economic transformation from labor intensive to knowledge based growth. Such radical and necessary shift of economic pattern should be primarily fuelled by the development of science and technology. By following APEC Leaders' instruction, APEC will continue to implement the APEC Innovation and Trade Implementation Practices to provide APEC economies with a constructive roadmap for how they can advance non-discriminatory and market driven innovation policy and support APEC's agenda on next generation trade and investment. Moreover, APEC officials will also designate PPSTI to implement related projects and initiatives to materialize concrete deliverables by the end of this year.

           Considering environmental sustainability was greatly undermined in the process of industrialization, China also called for cooperation on green growth which is composed of several on-going issues, including EGS, energy security initiative, natural resource management and so on. Ministerial meetings will also be held on Mining, Energy and Ocean respectively this year.

           For the second priority area of APEC, economic reform is newly added moved from the traditional connectivity priority. Comparatively, innovative, inclusive and sustainable growth was "old" tasks involved in the APEC growth strategy. How the economic reform will link and contribute to the growth strategy need to be elaborated further and supported by more focused initiative. Similarly, cooperation between Economic Committee that is responsible for economic reform and SCE sub-fora should be strengthened to advance this priority area in a comprehensive and cohesive manner.