The need for a second round of ‘look east’ policies in south Asia

Pradumna Rana, Chia Wai Mun 01 April 2013

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The global economy was traditionally dominated by north-north relations with some concern for north-south relations. South-south economic relations were, until recently, of minor import.

In the early 1990s, south Asian countries initiated their ‘look east’ policies to enhance closer relations with east Asia (see Haokip 2011, Ladwig III 2009). India announced its ‘look east’ policy in 1991 and subsequently other countries followed suit. This shift is best thought of as part of their economic reform programs.

Our recent paper argues that these policies have had many positive impacts (Rana and Chia 2013). International trade between south Asia and east Asia has surged, albeit from low bases, and China has become the largest trading partner of India. Foreign direct investment between countries in the two regions has also increased, and Singapore has become the second largest source of foreign direct investment to India. Tourism and travel has also been surging. A number of free trade agreements have been signed between south Asia and east Asia, India holds summit-level dialogues with ASEAN and is a member of the East Asia Summit. India has also started to negotiate the Regional Comprehensive Economic Partnership which is a free trade agreement among ASEAN and its six dialogue partners: Australia, China, India, Japan, Korea, and New Zealand.

Tradition vs a new paradigm of trade

The way goods are now produced and traded around the world has dramatically changed. Under the traditional theory of comparative advantage, developing countries produced labour-intensive goods which they then exchanged for relatively capital- and skill-intensive goods produced by the more advanced countries. This model explains the geographic separation of production and consumption or what Baldwin (2006, 2011) calls globalisation’s ‘first great unbundling’. All separate tasks involved in producing a good were done entirely at home. Under the second unbundling, production is spliced and diced into separate fragments and production of parts and components can be spread around the world1. To explain these developments we need to bring in ‘product fragmentation theory’, pioneered by Jones and Kierzkowski (1990).

Nike is a well-known example of this phenomenon. While research and design of shoes remain in the US, most of Nike’s production is in developing countries. Nike relies on production facilities in around 50 countries, mostly in Asia and Latin America. Another example is the production of the iPhone. iPhones are designed and marketed by Apple in the US. Apart from software and product design within the US, the production of iPhones takes place elsewhere: manufacturing of iPhones involves nine companies located in China, Korea, Japan, Germany (as well as the US). All iPhone components produced by these companies are then shipped to China for assembly, and are then shipped back to the US and other countries (Xing and Detert 2010).

The major catalysts for this ‘product fragmentation’ are the reduction in transport and logistics costs and particular advances in technology that have facilitated such ‘slicing and dicing’. Baldwin (2006, 2011) has emphasised the importance of information, communication, and technology in this ‘second unbundling’. Cheaper communications allow firms to manage supply chains over great distances.

East Asia is dense with production networks. It is estimated that the region accounts for nearly 45% of global production network or supply-chain trade with China and the ASEAN countries in the lead (Wignaraja, Kruger, Tuazon 2013). They argue that such networks have transformed the Asian trade landscape, contributed to deepening regional economic integration, and brought unprecedented prosperity to the region.

Second round of ‘look east’ policies

To benefit from these developments in east Asia, south Asian countries need to embark on the second round of their ‘look east’ policies. This will require south Asian countries to:

  • link themselves to production networks in east Asia, and
  • develop production networks in manufacturing and services within their region.

Such policies would allow both regions of Asia to benefit not only from the static complementarities of the traditional trade theories, but also the dynamic complementarities associated with the new product fragmentation theories (Glass and Saggi 2001)2.

In our paper, we argue that the second round of ‘look east’ policies in south Asia should comprise the following five, sometimes overlapping, policies:

  • First, south Asian countries should complete the economic reform process begun in the 1990s.

In the new trading environment, mobile factors of production, especially foreign investors, can shop around for the most favourable locations for production of parts and components and so it is important for host countries to provide a favourable business environment. After having made significant progress in deregulating industries and reducing tariffs, south Asian contries need to implement the so-called second generation reforms to improve governance systems at various levels – civil service, bureaucracy, and public administration. They also need to improve the environment facing the private sector through regulatory, labour market, and legal reforms. The World Bank’s ‘Doing Business Survey 2012’, shows that in terms of overall ranking, on average south Asia ranks lower than east Asia and Latin American. The only region that fares worse than south Asia is Africa. Furthermore, south Asia’s average ranking deteriorated in 2012 and compared to 2005. India’s ranking in 2012 was 132 similar to that of Cambodia, Indonesia, and the Philippines.

  • Second, south Asian countries should improve their information, communication, and technology systems to coordinate supply chains efficiently.

Various indicators published by the International Telecommunication Union suggest that although south Asian countries (especially Maldives and Sri Lanka) perform better than Cambodia, Laos and Myanmar, they are way behind other east Asian countries.

  • Third, south Asian countries should strive to reduce logistics costs. With product fragmentation, efficient logistic service is a key determinant of a country’s competitiveness;

The logistic performance index calculated by the World Bank suggests that on average south Asia lags behind all other developing regions except Africa.

  • Fourth, south Asian countries should support on-going efforts to enhance physical connectivity between two regions as they would reduce trading costs between the two regions;

The dominant mode of freight transport between south Asia and east Asia is ocean transport. However, other modes of transportation may also be viable for more sophisticated supply chains. Two projects to link ASEAN to India, one maritime/road and other a road project, are at early stages of implementation (Kimura and Umezaki 2011). Additional projects to link China, ASEAN, and south Asia and to realise the Nepal’s potential as a ‘land bridge’ between China and India should be considered.

  • Finally, India, the largest economy in south Asia, should actively lobby and negotiate its participation in various on-going efforts to promote regional financial cooperation in east Asia;

These include possible associate membership in the ASEAN+3 finance ministers’ process and pledging resources to the $240 billion crisis fund in East Asia.

Conclusions

The second round of ‘look east’ policies would deepen south Asia’s economic integration with east Asia and lead to a win-win situation for all. In our paper we argue that the second round of ‘Look East’ policies would also reinvigorate economic integration in south Asia, which is among the least integrated region of the world. It will also contribute to the re-emergence of a ‘prosperous and integrated’ Asia which had existed during the first 18 centuries of the ‘post-Christian Era’ (Rana 2012b). Finally, the second round of ‘look east’ policies would poise south Asia and east Asia to benefit from the gradual but encouraging opening of Myanmar, a node between the two regions.

References

Baldwin, R(2006), “Globalization: The Great Unbundlings”, Graduate Institute of International Studies, Geneva.

Baldwin, R (2011), “Trade and Industrialization after Globalization’s Second Unbundling”, NBER Working Paper No. 17716, December.

Glass, A and K Saggi (2001), “Innovation and Wage Effects of International Outsourcing”, European Economic Review 12(1), 78-104.

Haokip, Thongkholal (2011), "India’s Look East Policy", Third Concept – An International Journal of Ideas, 25(291), 7, May.

Jones, RW and H Kierzkowski (1990), “The Role of Services in Production and International Trade: A Theoretical Framework”, in RW Jones and AO Krueger (ed.) The Political Economy of International Trade: Essays on Honor of Robert E Baldwin, Oxford, Basir Blackwell

Kimura, F and S Umezaki (2011), “ASEAN-India Connectivity: The Comprehensive Asia Development Plan, Phase II”, ERIA Research Project Report 2010, No. 7.

Ladwig III, Walter C (2009), “Delhi’s Pacific Ambition: Naval Power, ‘Look East,’ and India’s Emerging Role in the Asia-Pacific,” Asian Security 5(2), June, 93-98.

Rana, PB (2012a), “Reform Strategies in South Asian Countries: A Comparative Analysis”, South Asian Journal of Global Business 1(1), 96-107.

Rana, PB (2012b), Renaissance of Asia: Evolving Economic Relations between South Asia and East Asia, World Scientific Press, Singapore.

Rana, PB and WM Chia (2013), “Strengthening Economic Linkages between South Asia and East Asia: The Case for a Second Round of ‘Look East’ Policies”, RSIS Working Paper No. 253.

Wignaraja G, J Kruger, and AM Tuazon (2013), “Production Networks, Profits, and Innovative Activity: Evidence from Malaysia and Thailand”, ADBI Working Paper No 416.

Xing, Y and N Detert (2010), “How the iPhone widens the US Trade Deficit with the People’s Republic of China”, ADBI Working Paper No 257.


1 Several other terms have also been used to describe this phenomenon such as product fragmentation, production sharing, outsourcing, vertical specialisation, and global value chains.

2 Using firm-level data from Malaysia and Thailand, which are important participants in East Asia’s production network, Wignaraja, Kruger, and Tuazon (2013) have found that participation in production networks raises profits and is also associated with technological upgrading and higher R and D expenditure. Over time, production networks have also deepened and spread from electronics to other sectors such as automobiles, televisions, and cameras.

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Topics:  Development Global economy

Tags:  India, East Asia, look east

Associate Professor at the S, Rajaratnam School of International Studies, Nanyang Technological University, Singapore

Assistant Professor of Economics at Nanyang Technological University

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