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Second-generation reform in Asia

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In Brief

In his 2007 paper, ‘Microeconomic Policy Reform: Strategy for Regional Cooperation’, the late Indonesian economist Hadi Soesastro wrote that while first-generation economic reforms in East Asia have gradually opened up the economies in the region by removing border barriers, second-generation economic reforms and deeper regional cooperation are needed.

‘Economic well-being and domestic competitiveness are influenced not only by openness to trade and competition but also by the region's regulatory and structural architecture’.

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‘Second-generation economic reform’ refers to tackling behind-the-border barriers, which include things like protection of sensitive sectors and institutional or regulatory deficiencies resulting from erroneous or misguided policies.

Second-generation economic reform leads to economic benefits both at the level of individual economies in the region and the regional economy as a whole. In the East Asian region, much work towards economic cooperation remains undone despite the urgent need. There are several reasons for this absence of regional cooperation.

First, tackling behind-the-border barriers requires a strong domestic political will that may be politically difficult to bring about, especially if it is impeded by those with vested interests in the status quo. Even though behind-the-border barriers are often the main bottlenecks to domestic competitiveness, reforming them is painful in the beginning and takes a long time to bear fruits, which frequently makes reforms politically unpalatable. This is particularly the case in the developing democracies of the East Asian region where political leaders and policy makers are all too often focussed on short-term popular votes.

A second issue is that political integration in the East Asian region is limited. Europe’s transition from the European Economic Community to the European Union demonstrates that regional economic cooperation can only go so far without political integration. Moving forward on a range of regional economic issues, such as fiscal policy coordination, requires political will to sustain follow-through efforts, and fostering such political will is difficult without a politically integrated environment.

Third, institutional constraints and a lack of national capacity to reform results in an inability to tackle behind-the-border issues, creating a vicious cycle. Institutional reforms need to be comprehensive and not partial or piecemeal since their elements are deeply intertwined. For example, Indonesia’s ‘Grand Design on Bureaucratic Reform’ program needs regulatory reforms to be implemented with the strong commitment and support of the central government — including the removal or revision of some current national laws and presidential regulations — in order to be effective.

In the case of Indonesia, removing bottlenecks and other impediments to infrastructure projects is premised on successful bureaucratic and regulatory reforms such as the enactment of a land acquisition bill and the completion of the provincial spatial planning. Many developing and emerging countries, including Indonesia, lack an independent regulatory body to study, monitor and make recommendations on policies.

Other reasons for the absence of such regional cooperation are that behind-the-border issues  are usually non-transparent and they involve a wide variety of agencies.

The ASEAN Economic Community (AEC) Blueprint promotes trade facilitation to help reduce ‘transactions costs’; custom integration via ASEAN Single Window to help smoothen custom clearances and releases; and streamlining standards and technical barriers to trade including systems of standards, quality assurance, accreditation, and measurement to help harmonise different national standards and conformances. But the AEC Blueprint is limited as it lacks the spirit of second-generation regional cooperation. Looking beyond its 2015 target date, it would be sensible for ASEAN to not only focus on the three aforementioned elements to help tackle non-tariff barriers, but also to seek a deeper economic integration underpinned by a desire to tackle behind-the-border issues more thoroughly.

In the East Asian regional architecture, the APEC Leaders’ Agenda to Implement Structural Reforms (LAISR), now known as APEC New Strategy for Structural Reform (ANSSR), may be the only regional institution that explicitly recognises the need for structural reforms. Its main priorities are: regulatory reforms, bureaucratic and public sector governance reforms, economic and legal structure reform, competition law and corporate governance. Additional priorities, including ease of doing business, have been added under ANSSR. Yet while LAISR/ANSSR recognises the second-generation economic reforms, Soesastro argued that it lacked the second-generation regional cooperative spirit needed. He put forward three recommendations.

First, an arrangement for producing analysis with transparency in reporting and discussion of results. Second, a delivery mechanism to assist in the enhancement of the capacity of member economies with regard to policy development and implementation. Third, a follow-through mechanism to ensure implementation of commitments by member economies.

Pledges on structural reforms must be peer reviewed to be effective. In a country with a lack of capacity to monitor its own reforms, APEC must be able to assist in its capacity building. Peer pressure, when pledges are non-binding, can be another channel to promote compliance.

First-generation economic reforms and regional cooperation must be followed by second-generation economic reforms and regional cooperation to have an impact on domestic competitiveness and people’s wellbeing. Deeper economic integration that provides regional cooperation with the ability to deliver not only macroeconomic reforms but also microeconomic reforms may be the key to stabilising industries which lost markets to foreign goods following economic liberalisation.

Maria Monica Wihardja is a researcher at the Centre for Strategic and International Studies, Jakarta, and a Lecturer at the Department of Economics, University of Indonesia. A version of the article was published here in The Jakarta Post.

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