Costs and Benefits of Economic Integration in

The recent global financial crisis caused alarming concerns that the world would move toward protectionism and isolationism. One fear was that tariffs and other barriers to international trade would increase, thereby reducing exports and imports of goods and services. Another was that restrictions on international financial flows might grow, thereby lowering cross-border asset holdings and amounts of foreign direct investment. Increased protectionism clearly poses threats to Asian economies, which rely heavily on external demand as an impetus to growth and are closely linked to global financial markets. To study these and related issues, this volume brings together essays that deal with time patterns in trade barriers, volumes of trade, cross-border asset holdings and flows, foreign direct investment, currency regimes, and production structures between countries. The essays emphasize developments in Asia since the early 1990s, but parts of the analysis relate to longer-term Asian history. Also, by looking back to the 1997-98 Asian financial crisis and subsequent reactions, even if it was more localized, the book provides useful information about likely responses in Asia and elsewhere to the recent crisis. Costs and Benefits of Economic Integration in Asia is an essential reference on current consensus and controversy in the debate on economic integration, particularly as applied to Asia. It is geared not only towards academics, but government officials and other policy makers, as well, as it is an authoritative analysis of important initiatives that seek to promote regional economic integration in Asia.

Robert J. Barro is Paul M. Warburg Professor of Economics at Harvard University, a senior fellow of the Hoover Institution of Stanford University, and a research associate of the National Bureau of Economic Research. His recent books include Macroeconomics: A Modern Approach, Economic Growth, Nothing Is Sacred: Economic Ideas for the New Millennium, and Determinants of Economic Growth.

Jong-Wha Lee is former Chief Economist and Head of the Office of Regional Economic Integration of the Asian Development Bank, and currently Professor at the Economics Department of Korea University. He has worked as an economist at the International Monetary Fund, taught at Harvard University as a visiting professor, and served as a consultant to various institutions such as the Harvard Institute for International Development, the Inter-American Development Bank, the United Nations Development Programme, and the World Bank.

Foreword	p. ix
Acknowledgments	p. xi
Contributors	p. xiii
Acronyms and Abbreviations	p. xv
Introduction	p. 3
East Asian Currency Union	p. 10
Introduction	p. 10
The Benefits and Costs of an East Asian Currency Union	p. 13
Benefits and Costs of Currency Unions	p. 13
Optimum Currency Area (OCA) Criteria	p. 13
Which Currency Union for East Asia?	p. 16
Data for East Asia Monetary Union Analysis	p. 17
Is East Asia an OCA?	p. 30
Welfare Effects of East Asian Currency Unions	p. 33
The Effects of Currency Unions on Growth and Volatility	p. 34
Rare Disasters and Currency Unions	p. 37
Estimation of Welfare Effects of East Asian Currency Unions: An Illustration	p. 39
Conclusion	p. 44
Asian Financial Integration: Trends and Interruptions	p. 53
Introduction	p. 53
Convergence in Interest Rates and Equity Premia	p. 55
Portfolio Holdings and Home Bias	p. 61
Portfolio Holdings: Summary Statistics	p. 61
Portfolio Holdings: Gravity Model Estimates	p. 65
Home Bias	p. 70
Risk Sharing and Financial Stability	p. 75
Risk Sharing	p. 75
Financial Integration and Crises	p. 77
Local vs. Foreign Investors: Recent Studies	p. 79
Investor Behavior during the Subprime Crisis: Evidence from Brazil	p. 81
Conclusions	p. 84
Understanding Business Cycle Synchronization: Is Inflation Targeting Paving the Way to Asian Monetary Union?	p. 89
Motivation and Introduction	p. 89
The Effect of Trade on Business Cycle Synchronization	p. 90
Inflation Targeting and Business Cycle Synchronization: Theory and Literature	p. 94
The Data Set	p. 96
Decoupling	p. 99
Business Cycle Synchronization and Inflation Targeting	p. 102
Regression Analysis	p. 105
Estimating Treatment Effects via Matching	p. 108
Why?	p. 115
Summary and Conclusion	p. 116
Appendix	p. 124
Trading Silver for Gold: Nineteenth-Century Asian Exports and the Political Economy of Currency Unions	p. 126
Introduction	p. 126
Data	p. 134
Method and Results	p. 135
Multilateral Resistance	p. 138
Results for Subperiods	p. 141
Discussion	p. 141
Identifying the Effects of Currency Choice	p. 143
The Political Economy of Currency Arrangements	p. 144
Conclusion	p. 148
The ASEAN Free Trade Agreement: Impact on Trade Flows and External Trade Barriers	p. 157
Introduction	p. 157
Trade Creation, Trade Diversion, and Import Barriers on Outsiders	p. 160
The ASEAN Free Trade Agreement	p. 163
Data	p. 164
Tariffs	p. 165
Aggregate Trade	p. 165
The Effect of Tariffs on Trade in ASEAN	p. 171
Preferences and External Tariffs in ASEAN	p. 176
Conclusion	p. 181
Economic Integration in Remote Resource-Rich Regions	p. 187
Introduction	p. 187
Regional Characteristics	p. 188
Trade Policy for Remote-Rich Economies	p. 192
Low Supply Response of External Exports	p. 192
The Distribution of Natural Resources	p. 192
Regionally and Globally Traded Goods	p. 194
A Benchmark Model	p. 195
Trade Liberalizations	p. 198
Trade Policy and the Intra-Regional Terms of Trade	p. 198
Trade Policy: General Equilibrium Outcomes	p. 200
Non-Resource Income and Within-Country Income Distribution	p. 202
Trade Creation and Trade Diversion	p. 204
Policy Implications	p. 205
Conclusion	p. 206
Regional Trade Integration and Multinational Firm Strategies	p. 208
Introduction	p. 208
A First Look at the Data	p. 212
Theoretical Framework	p. 218
A Simple Model of FDI	p. 219
Analysis	p. 221
Effects of a Regional Trade Agreement	p. 223
Econometric Evidence	p. 225
Conclusion	p. 234
Appendix	p. 235
A World Factory in Global Production Chains: Estimating Imported Value-Added in Exports by the People's Republic of China	p. 241
Introduction	p. 241
Conceptual Framework and Estimation Method	p. 246
When Special Features of Processing Exports Are Not Taken into Account	p. 246
Domestic Content in Exports When Processing Trade Is Prevalent	p. 248
Estimation Issues	p. 251
Estimation Results on Domestic and Foreign Content in Exports of the PRC	p. 252
Data	p. 252
Domestic and Foreign Contents in Total Exports	p. 252
Slicing Up the Value Chains along Multiple Countries: Methodology	p. 254
When a World Input-Output Table (That Covers All Countries) Is Available	p. 256
Working with an Interregional Input-Output Table (for a Subset of Countries)	p. 261
Empirical Estimates on Value-Added along Production Chains	p. 262
Data Source	p. 262
Comparing the PRC with Other Asian Economies in Production Chain	p. 263
Slicing Up Production Chains across Countries	p. 265
Multinational Value-Added Chains in the PRC for Disaggregated Export Categories	p. 268
Conclusion	p. 273
Index	p. 277
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Costs and Benefits of Economic Integration in Asia

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