Highlights from East Asia Pacific Economic Update

PART II

This report also includes a special section focusing on three key emerging issues: China’s reform agenda; how to further reduce trading costs in East Asia; and how to promote foreign direct investment, particularly in the service sector.

China’s reform roadmap. The Government of China unveiled an ambitious and comprehensive reform agenda in November 2013. It is a significant policy move, indicating a political will to reduce state interventions and address government-led distortions in the economy. This section describes the content and potential impact of the proposed reform package. If implemented, the reforms will have a profound impact on China’s land, labor, and capital markets, and enhance the long-term sustainability of its economic growth. Some reforms are also likely to support growth in the short term. For instance, removing entry barriers, simplifying approval procedures, and reducing regulatory and administrative burdens will enhance incentives for private investment, especially in currently monopolized or concentrated sectors. Likewise, consolidating the business tax with the value-added tax will lower the tax burden and promote investment, in particular in transportation and financial services. Making more land available for commercial activities will also improve the prospects for service sector growth. However,

the reform process is likely to be gradual, with more specific follow-up implementation plans expected as the year goes on.

Trading Costs in East Asia. The World Trade Organization’s new Agreement on Trade Facilitation (ATF) has the potential to significantly reduce East Asia’s trade costs along the entire supply chain. At present, the region’s developing economies suffer from trade costs well above those of the newly industrialized countries and of developed economies, due to the large number of inefficient border and behind-the-border procedures. Countries have been adding to their stock of nontariff measures, which now account for as much as 90 percent of (nontransportation) trade costs. The ATF defines a new reform agenda for East Asia with potentially far-reaching effects on private sector development, especially for small businesses, which need greater transparency and simplification of procedures to enable them to readily access regional and global value chains.

Foreign Direct Investment (FDI) and Foreign Ownership Restrictions in ASEAN. Despite the economic importance of FDI to ASEAN, many ASEAN countries restrict foreign equity, particularly in the service sector. Regional experience indicates that where countries have relaxed foreign ownership restrictions, FDI has increased, yielding significant economic benefits for the receiving country. In Cambodia and Vietnam, foreign investment reforms led to significant growth in FDI, as did financial sector liberalization in the Philippines and Thailand in the 1990s. The ASEAN Economic Community 2015 blueprint brings new challenges and opportunities for ASEAN countries. Countries that relax foreign ownership restrictions in services stand to attract more FDI, which will enhance the competitiveness of producers of both services and goods.