Regional Economic Integration of Laos †Free Samples to Students

Question: Discuss about the Regional Economic Integration of Laos. Answer: Introduction: The Association of South East Asian Nation (ASEAN) is the name of a regional organization that promotes economic growth through accelerating economic integration among its ten member countries. At times of Asian financial crisis, policies are designed by ASEAN leaders to protect these regions from and external shocks in future. With this objective ASEAN economic community is formed to meet these needs. Since 2010, among 6 of its members including Brunei Darussalam, Malaysia, Thailand, Singapore, Indonesia and Singapore plasticized free trade since 2010. No trade restrictions were applied on these countries (intpolicydigest.org, 2016). With AEC, the newly added members Cambodia, Myanmar, Lao and Vietnam were come under the roof of free trade. The economic community has implication of reducing all the technical barriers towards free trade. The elimination of trade barriers enables countries to enjoy cheaper goods. In the international market producers sell their goods at a low price. The expansion of trade increases job opportunities in the member countries. In order to participate in exports countries needs to expand their production capacity which brings economic growth. The job market expands as job opportunities are not only limited to their home country but is expands to other ASEAN regions as well. The trade expansion and removal of barriers helps business to export their produced goods and import necessary raw materials at a cheaper price. Free trade accelerates competition among nation (giz.de, 2017). In order to remain competitive in the international market countries invest in innovation and technology. This enhances productive efficiency and improves the quality of goods. The increased economic activity such as investment, export, import results in a high growth rate in terms of increased GDP. The economic integration and increased economic activity means a greater inflow of capital in the form of investment, improved infrastructure to support investments, availability of skilled labor and business expansion. All these contribute to foster economic growth trade and bring a better world. For member countries like Laos and Myanmar the benefits of ASEAN economic community comes along with some negative impact. In case of Laos, the potential benefit comes in the form of more opportunities for participating in regional value chains with access to ASEAN market and production base. The opportunities of AEC impose some challenges on Laos public and private sector. For the part of the government it needs to implement some regulation and procedural changes in line with AEC agreement. The business sector has to adjust with trade opens up and increased competition from advanced economies of ASEAN. To completely from ASEAN agreement Laos needs to strengthen its small and medium sized enterprises. In Myanmar, the positive impact of AEC agreement are providing access to a large market of ASEAN region, expansion of investment and trade, opportunities for the country to negotiate on the international market. The country should be prepared to absorb risk in so0cial and economic environment as all the external barriers are now eliminated (eastasiaforum.org, 2017). Some sectors liked agriculture; infrastructure, financial sector and labor standard have sensed an adverse impact because of lack of regulation to protect environment and land. Therefore, for both Myanmar and Laos some adjustment needs to be done to counter the negative impact and enjoy the benefit from the new agreement. Consumption (C) = 5400 + 0.8Y Investment (I) = 2400 Export (X) = 1,700 Import (I) = 1800 + 0.075 National Income (Y) = Consumption + Investment + (Export Import) If export decreases by 200, then export becomes (1700-200) = 1500 If investment decreases by 400, then investment becomes (2400-400) = 2000 Consumption = 5400 + 0.8Y = 5400 + (0.8*28000) = 27800 Import = 1800 + 0.075Y = 1800 + (0.075*28000) = 3900 National Income (Y) = Consumption + Investment + (Export Import) The equilibrium level of national income is determined where actual expenditure matches with planned expenditure (Scarth, 2014). Planned expenditure = Consumption (C) + Investment (I) + Government Expenditure (G) + Net export (NX) Since, there are no government sector planned expenditure is the sum of the consumption, investment and net export. The actual expenditure is the 450 line. The initial equilibrium is E and equilibrium level of national income is 28000 and saving is 200. With a decline in investment and export, the actual expenditure curve shifts to the left and national income reduces to 27400. At the new equilibrium because of decreases in export given the import there is a trade deficit of the amount 2400. The effect of monetary and fiscal policy in a standard macroeconomic environment is described with a Mundell Fleming model. In the model there are three aspects- IS curve that captures the equilibrium in the goods market, LM curve that describes equilibrium in the money market and equilibrium in the foreign exchange market denoted by BP curve. The slope of the BP curve indicates the extent of capital mobility. A horizontal BP curve means perfect capital mobility, a vertical BP curve indicates capital immobility and an upward sloping curve reflects partial or imperfect capital mobility. Impact of fiscal and monetary policy is different under different system of capital mobility (Mankiw, 2014). The adjustment mechanism in response to policy changes is different based on exchange rate regime. The effect a fiscal expansion under fixed exchange rate regime and free capital mobility is described in the above figure. E shows the initial equilibrium model where IS, LM and BP curve meet at the same point. The equilibrium income and interest rate are Y* and R* respectively. Now, an expansionary fiscal policy shifts the IS curve to the right. The IS and LM curve cuts at the point E1. This raises the interest rate from R* to R1. In response to high interest rate, there will be inflow of foreign capital, leading to a surplus in balance of payment. The increased supply of foreign capital will push the interest rate down. Under the fixed exchange rate regime, the central bank purchases the additional foreign currency to keep the interest rate fixed. As a result, the money supply will increase. This shifts the LM curve to the right. The new equilibrium point is E2. At this point, the interest rate is back to its previous level while output increases from Y* to Y1. A monetary contraction taken in the form of reducing supply of money shifts the LM curve leftward from LM to LM1. This raises the interest rate from initial position of R0 to the new high level R1. The high interest rate causes balance of payment surplus resulted from increased supply of foreign currency. This pushes the interest rate down. Under flexible exchange rate system, the exchange rate declines (Uribe Schmitt-Groh, 2017). The appreciated currency encourages more import while reduces export by making export expensive. As a result, net export reduces causing a leftward shift of the IS curve from IS to IS1. The new equilibrium is at E1. At the new equilibrium output decreases from Y0 to Y1. References Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning. Ramirez, B., Pooittiwong, A., Ramirez, B., Pooittiwong, A., Ferguson, D., Koplow, M. et al. (2017).ASEAN Economic Integration: Opportunities and Challenges that Lie Ahead.International Policy Digest. Retrieved 28 October 2017, from https://intpolicydigest.org/2016/01/06/asean-economic-integration-opportunities-and-challenges-that-lie-ahead/ Regional Economic Integration of Laos into ASEAN, Trade and Entrepreneurship Development (RELATED). (2017).Giz.de. Retrieved 28 October 2017, from https://www.giz.de/en/worldwide/17473.html Scarth, W. (2014). Macroeconomics. Edward Elgar Publishing. Uribe, M., Schmitt-Groh, S. (2017).Open economy macroeconomics. Princeton University Press. What the AEC means for Laos. (2017).East Asia Forum. Retrieved 28 October 2017, from https://www.eastasiaforum.org/2016/01/01/what-the-aec-means-for-laos/