Handout 2: Answers Exercise 1 A part of the answer can be found in Markusen J. R., Melvin J. R., Kaempfer W. H., Maskus K. E., (1995), International Trade: Theory and Evidence. Subsidia is a small open economy lying in the South Pacific. It produces two good Y, which is capital intensive and X, which is labor intensive. The close economy general equilibrium of Subsidia is represented as point
Femr08 - rei.pdf
PACIFIC ISLANDS FORUM SECRETARIAT
FORUM ECONOMIC MINISTERS MEETING
SESSION 3 PAPER
ECONOMIC ISSUES IN REGIONAL INTEGRATION The attached paper, by the Forum Secretariat, brings together issues associated with regional integration as a response to globalisation. It touches upon relevant Ministerial outcomes, liberalisation of trade in services, and economic, fiscal and social policy settings to enhance the benefits arising from regional integration. For Ministerial discussion. PACIFIC ISLANDS FORUM SECRETARIAT FORUM ECONOMIC MINISTERS MEETING
ECONOMIC ISSUES IN REGIONAL INTEGRATION This paper highlights, for the information of Ministers, issues associated with regional integration as a response to globalisation. This covers relevant Ministerial
outcomes; liberalisation of trade in services, and discusses regional economic and
fiscal policy settings to enhance the benefits arising from globalisation.
Globalisation is an inevitable process, driven by developments in technology, markets and corporate structures. The WTO, IMF, World Bank or G-7 meetings are not drivers of this process – indeed they often tend to modify or shape globalisation pressure, albeit developed countries are more adept at using these institutions to shape the forces of globalisation to their own advantage than developing countries have been to date. 3. Globalisation faces the Pacific region with a number of challenges, more • countries within the region are able to recognise and capitalise on their strengths; • business is placed to look beyond national and regional boundaries to expand and grow and to compete with foreign businesses which will enter their domestic markets; • the potential gains from globalisation are shared globally and that small states, in • the potential gains from globalisation are also shared at a national level and act to One positive response to globalisation is increased regional integration. The major benefits of well-managed regional integration are considered to be: increased trade opportunities, both intra- and extra-regionally; lowered prices and increased choice for consumers; Ensuring these benefits are achieved is a task for government and regulatory bodies with assistance from regional and international organisations. Regional organisations can assist through building capacity in members to address the issues globalisation raises; promoting information flows; and ensuring members have a voice that is heard on the international stage. In the globalised world countries need to respond fast, and think in new and innovative ways to allow full participation and maximisation of benefits. 6. In the Pacific the concept of a free trade area or economic union dates back to the formation of the Forum and the establishment of the South Pacific Bureau of Economic Cooperation (SPEC) in 1972 and was recognised in the Forum Agreement in 1971. At the First South Pacific Forum Meeting, held in Wellington, New Zealand in 1971 the final communiqué noted: “The Forum made a close examination of South Pacific trade, and particularly that between the Island States themselves and with Australia and New Zealand….The Forum resolved accordingly that a meeting of senior officials…be held.to… with a view to making recommendations about the possibility of establishing an economic union for the area.” Most recently the Eminent Persons’ Group Review of the Pacific Islands There is growing evidence, however, that current levels of cooperation are not a strong enough force to address the challenges now facing the Pacific. Globalisation and the uncertainties of the international security environment present major challenges. … Given that a weakness in one country is, in terms of our Vision, a weakness for us all, there is no doubt in our minds that the future prosperity of the region will depend on our acknowledging our inter-connectedness, and finding new and creative means of harnessing our collective capacities. New thinking on the relationships between sovereign states may be required. Where practical and appropriate, the pooling of regional resources in a range of areas of governance would offer improved efficiencies in the delivery of services and economic development. … … We propose to Leaders the endorsement of the Pacific Plan to create stronger and deeper links between the countries of the region. The Plan should identify existing areas of inter-country cooperation, including their strengths and weakness. It should then seek to provide clear recommendations to Leaders on a sequence and priorities for intensified regional cooperation. It should identify the sectors and shared concerns where the region might make the most useful gains from sharing resources and aligning policies. Above all, the Plan should be a vehicle for placing the “big idea” of Pacific inter-dependence squarely at the front of the regional political agenda. … … We hope that Leaders will be prepared to go further, to consider regional integration that runs deeper than that established already under regional trade arrangements. We suggest that it would be timely for Leaders to consider options for future economic and political integration – possibly to develop a model that is unique for the Pacific. … … there is little doubt that transport is a prime candidate for prompt action under the Plan. … Other areas that would benefit from greater shared effort and the pooling of resources include standards and conformance, quarantine services and customs, increased trade facilitation, judicial and public administration, security and financial systems, processes for meeting international legal demands, regional law enforcement aimed at trans-national crime, and regional representation at international meetings. It might be possible to consider introducing a regional panel of judges, a common list of Pacific prosecutors, a regional shipping registry, a regional financial intelligence unit and intensified training courses for regional managers, administrators and parliamentarians. … …The Forum Economic Ministers’ Meeting (FEMM) has an important role to play in spearheading economic reform and regional integration. It is vital that it focus on practical measures to enhance economic governance and development, especially through regional cooperation. … In the context of FEMM the most recent integration mandates arose out the FEMM 1998 Action Plan. which recommended that a Forum for Trade Ministers should be convened to consider the FEMM’s recommendations relating to regional trade integration. Following this the Forum Trade Ministers met in 1999, 2001, 2003 and 2004, to consider and put forward to Forum Leaders a framework for a free trade agreement (FTA) among FICs and other important related issues. 9. Over the course of these meetings Trade Ministers (and subsequently Forum • endorsed the “Pacific Agreement on Closer Economic Relations” (PACER1) as the basis for trade and economic cooperation amongst Forum members; • endorsed the “Pacific Island Countries Trade Agreement” (PICTA2) as the basis for establishing the free trade area amongst the Forum Island Countries; and • agreed that further work should be undertaken on a range of issues including: - the effects of extending the free trade area to French and US Pacific Island - the effects of extending the agreement to services trade and liberalisation among seven services sectors (Air Services, Shipping services, Financial Services, Telecommunication Services, Health Services, Education Services and Tourism Services) initially, with countries making commitments in a minimum of four sectors; and - market access issues between Forum island countries and the USA and Japan. There have also been a number of other Forum decisions which have acted to promote regional integration and the benefits of which could be further enhanced by increased national level support: • the establishment of the Pacific Air Safety Office (PASO) in Port Vila in August 2002 which sees the consolidation of Pacific ability to monitor and react to aviation security issues; • the endorsement of the Pacific Islands Air Services Agreement (PIASA3) at the 2003 Forum which, when it comes into full force will allow for the free movement 1 PACER entered into force on 2 October 2002 and now been ratified by eleven parties (Australia, Cook Islands, Fiji, Kiribati, Nauru, New Zealand, Niue, Papua New Guinea, Samoa, Solomon Islands and Tonga). 2 PICTA entered into force on 13 April 2003 and there are currently nine Parties to PICTA, these are the same as the nine island parties to PACER. 3 To date four FICs – the Cook Islands, Nauru, Tonga and Vanuatu - are signatories to PIASA, two more are required for PIASA to come into force. of air passengers and cargo between signatory FICs; and • the decision of Pacific ACP Leaders that negotiations with the European Union for an Economic Partnership Agreement should go beyond market access and be billed as a development agreement incorporating trade facilitation, trade cooperation and trade related technical assistance to address the trade and economic development agenda of the Pacific ACP countries. • the development of regional policies including the Pacific Islands Information and Communication Technologies Policy and Strategic Plan (April 2002), the Pacific Islands Energy Policy and Plan (October 2002), and the Pacific Islands Regional Ocean Policy (2003). • the development of the Pacific Regional Initiative for Basic Education provides regional support to lift educational standards. • the branding of the South Pacific region for tourism purposes and the use of joint trade and investment missions again presenting a united regional front to the world. In the Forum region there has been a number of issues arising from the increasing regional integration that are highlighted below for Ministerial discussion.
Maximising the positive outcomes of regional integration to date
The ongoing work to promote regional integration in the Forum area requires active member support if the full benefits are to be received: • A regional trade facilitation program, including financial and technical assistance, addressing Pacific priorities is being implemented over five years by various agencies - Oceania Customs Organisation (Customs), SPC (Quarantine) and PIFS (Food and Standards) – in support of PACER. The program will promote cooperation in trade facilitation and promotion, capacity building and structural adjustment including fiscal reform measures. • The immediate focus for parties to PICTA are tariff notification requirements, the adoption of the scheduled tariff reduction obligations into domestic legislation, fiscal reform and Rules of Origin issues. • The Secretariat is coordinating work to develop a monitoring framework for social impact assessment arising from PICTA. A regional workshop will be convened on this and member countries are encouraged to begin work, as appropriate with Non-Governmental Organisations and others, on establishing a monitoring framework within their country. One of the main adjustments associated with adopting free trade is the introduction of accompanying fiscal measures to replace tariff revenue losses resulting from tariff reduction and elimination. Studies by Scollay (1998), Filmer and Lawson (1999) and Narsey (2003) show that tariff losses on FIC imports are expected to be small, around 0-4% of total revenue for most FICs given that intra-regional trade account for only 2-3% of total trade. The adoption of a broader consumption tax, the conversion of customs taxes to excise taxes as well as a marked improvement in tax and customs administrations stand in the forefront of fiscal reform measures. Some FICs (Cook Islands, Fiji, Papua New Guinea, Samoa and Vanuatu) have already introduced a Value Added Tax (VAT) whilst others such as Tonga, Kiribati and Federated States of Micronesia are either contemplating VAT or a similar broad-sales tax. The improvement in customs and tax administrations is an ongoing exercise for many members, nationally or at a bilateral level and this will be further assisted through PACER’s regional trade facilitation program. Fiscal reforms undertaken at an early rather than at a later stage would facilitate a smoother and gradual adjustment to PICTA and certainly to any future FTA that may include developed trading partners. 15. There is extensive assistance available from various development partners to support fiscal and related institutional reforms to FICs. Indeed many of these partners
have been assisting various FICs in these areas over the years. These include the
Pacific Financial Technical Assistance Center, the Asian Development Bank and
through bilateral assistance from Australia and New Zealand. With assistance from
the European Development Fund (EDF8 and 9), PIFS will continue to provide
assistance for these reforms thus complementing the work that is being undertaken
by other donors.
Whole of government approach
It is important that, at the national level, it is recognised that PICTA has much wider implications than just trade and there is a strong need for the active involvement of Ministries of Finance, Taxation/Revenue, Customs and others, as appropriate. This must include these Ministries and Departments making use of the range of assistance available from regional organisations for the policy changes and reforms necessary to support PICTA. 17. Further to this, during the consideration of the modality for a Regional Agreement on Trade in Services as an extension to the PICTA there needs to be whole of government involvement. Recognising the comprehensive nature of the services sector and the complex issues relating to the scheduling of liberalisation commitments, the modes of supply and the regulatory disciplines, there will need to be consideration in more detail at the national level. National consultations will be carried out by PIFS officials in the Forum Island Countries in 2004. As well as Trade and Finance/Treasury officials these consultations need to involve representatives of the line ministries responsible for the particular services and also state-owned enterprises and non-state actors with an interest in these sectors. 18. Similarly in national consideration of benefits of becoming party to PIASA there needs to be wider involvement than just Ministries of Transport – indeed the
tourism and aviation industries are vital stakeholders.
The Eminent Persons Group Review of the Forum noted that: … there is a strong view that the Forum needs to better connect with Pacific communities that currently do not have a voice in the Forum process. The key omissions are the French and US Pacific territories…Observer status at the Forum for these entities would be a useful step towards enhanced regional inclusiveness and cooperation. … There have already been some steps taken towards recognising the wider inter-connectedness of the Pacific region through: • The extension of the PICTA and PACER to include the American and French Territories is being pursued with the Governments of France and the United States so that a FIC Sub-Committee will be able to begin its consultations in the near future. • PIASA allows for extension of the single aviation market to other States as agreed • There is already considerable interaction at the technical level given the variations in membership of regional organisations, for example the French and United States territories are members of SPC, Tokelau is a member of FFA. • New Caledonia has made use of the opportunity to observe at FEMM (and a number of PIFS workshops) on several occasions.
Furthering integration through economic policy
Fiscal reform aside, there are a number of economic policy issues which are gaining prominence through current regional integration efforts. While to some degree these have been considered by FEMM they have not been fully analysed as part of a broader move to increased regional integration. These issues could benefit from greater regional and government focus. 22. Labour market reform and mobility is one area which has not received much attention in the Pacific. Yet the peoples of the Pacific have proved to be highly mobile, moving within countries, between Forum countries and even outside the region in search of educational opportunities, employment and economic security. The flexibility of the labour market is key to the successful extension of PICTA to trade in services, as people are the primary input to services. This issue could benefit from more concerted regional attention. 23. Regulatory reform has been slow in the Pacific, with a tendency towards industry specific regulation at the national level. The benefits to be gained from regional level regulation (in terms of building capacity and reducing the financial cost of regulation) could be explored for key sectors, such as telecommunications and the financial sector. 24. Competition has been a difficult issue with which the Pacific has had to contend, especially in the small island states where internal competitive forces are hard to generate and external competitive forces can appear overwhelming. Several FICs are developing competition policies to promote the productivity and efficiency gains that can be realised in a competitive environment. 25. The legal framework in which the economy operates, particularly as it relates to business operations, has a strong influence on the ease of regional integration. FEMM has already initiated work on the modernisation of commercial law (being implemented through an ADB RETA), but an ongoing focus on harmonisation in key areas of law could be beneficial in encouraging regional investment and trade. 26. The recommendation for further work in this area (27(d)) takes into account the potential role of FEMM for the future, including in relation to the formulation of the Pacific Plan (see also paper (PIFS(04)FEMR.10). Pacific Islands Forum Secretariat, Rotorua 10 June 2004
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