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---

### Regional overview and risks
- ASEAN-5 comprises Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
- Integration in GVCs has supported living standards and trade-led growth.
- Geo-economic fragmentation defined as policy-driven or policy-induced reversal of global economic integration.
- Literature estimates:
  - A global trade fragmentation could cost up to 12 percent loss in GDP.
  - APD October 2022 REO estimates an average output loss from global trade fragmentation of about 3.2 percent in ASEAN-5 economies through trade fragmentation scenarios.
- Channels of vulnerability: trade (supply-chain disruptions), cross-border capital allocation and financial interconnectedness, technological diffusion, cross-border migration.
- Potential macro-financial effects: misallocation of capital, higher US dollar funding costs, reduced diversification.

### Trade integration: status and recent developments
- Total trade to regional GDP in ASEAN-5 reached 90 percent in 2021.
- Intra-regional trade accounts for about a quarter of total trade (ASEAN-5).
- Tariff liberalization:
  - Average tariffs in Asia fell from more than 50 percent in the 1970s to single digits in the 2000s.
  - As of 2020, ASEAN is virtually tariff-free, with tariffs on 98.6 percent of products fully eliminated under ATIGA.
- GVC participation and non-tariff barriers:
  - Backward linkages have decreased faster in Asia including ASEAN-5 since the global financial crisis.
  - Non-tariff barriers remain prevalent and significant impediments to regional trade.
- Recent shocks accelerating trade restrictions: COVID-19 (export bans accounting for about 90 percent of trade restrictions at the height), war in Ukraine, rising US-China geopolitical tensions.

### Financial integration: status and recent developments
- Financial integration is relatively low across ASEAN-5 except for Singapore.
- Composition of financial flows:
  - FDI accounts for 38 percent of the total financial flows component in ASEAN-5.
  - FDI inflows from Singapore accounted for about 20 percent of total FDI in ASEAN-4 countries in 2021.
- Portfolio flows and banking:
  - Portfolio flows doubled from 12 percent in 2001 to 24 percent in 2021 (share of portfolio flows in total financial flows).
  - Cross-border banking transactions have risen steadily since the global financial crisis.
- Metrics and comparative position:
  - Financial integration (sum of cross-border assets and liability holdings) in ASEAN-4 lags most comparable regions except Latin America.
  - Portfolio intensity also lags, except Singapore.
  - Trade intensity generally exceeds financial integration intensity in ASEAN-5.
- Exposure to global risk-on/risk-off dynamics: episodes with significant outflows include the 2013 Taper tantrum, 2015 Renminbi devaluation, US Election 2016, EM sell-off in 2018, and Covid-19 in 2020.
- Foreign holdings of local currency government bonds declined sharply in Indonesia and Malaysia prior to the pandemic.

### Quantifying potential gains from financial integration — empirical approach
- Data and identification:
  - Firm-level non-financial data (sales) for ASEAN-5 from Thomson WorldScope (2000-2019).
  - IMF Financial Development Index (normalized 0-1).
  - External finance dependence (EFD) à la Rajan and Zingales (1998).
- Estimation:
  - Firm growth equation estimated with interaction (EFD_i × FD_c) using Arellano-Bond GMM to identify δ, the differential impact of financial development across industries by external finance dependence.
  - Simulation of gains by raising country-level financial development to FD* under scenarios and computing δ̂(EFD_i × (FD* − FD_c)).
- Key empirical result:
  - δ>0 and statistically significant across specifications: industries with larger external finance dependence gain more from financial development.
  - Effect particularly strong for SMEs; corporate sector in ASEAN-5 faces financial constraints.
  - Sub-indexes: overall FD and financial markets (FM) show effects; results for financial institutions (FI) less robust except for SMEs.

### Scenario 1 — Convergence toward the most advanced in-region (Singapore)
- Scenario design: raise financial development in Indonesia, Malaysia, Philippines, and Thailand to Singapore’s level.
- Simulated impacts:
  - ASEAN-5 level: 2 percentage points average growth impact.
  - Indonesia and Philippines: about 3.5 percentage points average growth impact.
  - Thailand and Malaysia: about 1.2 percent additional growth.
- Sectoral variation:
  - Gains range from 0.2 percentage points in sectors with the lowest external finance dependence (Electronics—Instruments, Gauges and Meters) to about 4 percentage points for metal producers.
- Note: Estimates using net sales are slightly larger; convergence to a frictionless market (US benchmark) would yield gains about twice larger.

### Scenario 2 — Improving policy and institutional determinants (policy-driven simulation)
- Method:
  - Regress financial development on determinants (capital account openness, governance quality, market size, trade openness, corporate tax) using a panel of 32 economies (1990-2019) with lagged controls.
  - Compute FD* as predicted FD assuming adoption of highest policy standards in ASEAN-5 and simulate variants:
    - Scenario 2a: capital account openness set to highest in ASEAN-5.
    - Scenario 2b: governance quality set to highest in ASEAN-5.
    - Scenario 2c: both capital account openness and governance set to highest.
    - Scenario 2d: plus trade openness set to highest (2c + trade openness).
- Determinants findings:
  - Capital account openness, trade openness, governance quality, and market size positively correlated with financial development.
  - Capital account openness has larger positive impact in ASEAN-5 specifically.
  - Corporate tax level negatively correlated with FD overall.
- Simulated regional average growth impacts:
  - Scenario 2a (capital account openness): 0.4 percentage point additional growth.
  - Scenario 2b (governance): 0.2 percentage point additional growth.
  - Scenario 2c (capital account openness + governance): 0.5 percentage point additional growth.
  - Scenario 2d (plus trade openness): 1.3 percentage point additional growth.
- Interpretation and prudential caveats:
  - Capital account liberalization accounts for about 64 percent of implied gains on average in the region when excluding trade integration.
  - Countries with largest FD gaps (Philippines, Indonesia) benefit most.
  - Financial integration yields net benefits only if sound institutional and policy frameworks are in place; risks include increased inequality and contagion effects.
  - Strengthen domestic financial systems and macro fundamentals; regional integration can increase resilience because intra-regional flows have been more resilient to global shocks.

### Digitalization: landscape and macro implications
- ICT and automation:
  - ASEAN-5 ICT index higher than Asia & Pacific mean with significant heterogeneity: Singapore highest (above advanced-economies average); Malaysia and Thailand above EMDE average; Indonesia and Philippines around EMDE average.
  - World average robot density in manufacturing: 113 per 10,000 employees.
  - Singapore had the highest robot density in 2019; operational stock of industrial robots has grown markedly, especially in Thailand.
- E-commerce and digital payments:
  - ASEAN-5 average e-commerce revenue about 3 percent of GDP as of 2020.
  - 47 percent of the region’s population using e-commerce as of 2020.
  - E-commerce revenue grew by over 60 percent in the region in 2020.
  - ASEAN is on path to become a US$1 trillion internet economy by 2030.
  - ASEAN E-Commerce Agreement came into effect in December 2021 (signed January 2019).
  - Average digital payment usage around 50 percent.
  - Research finds 61 percent of consumers in Indonesia, Malaysia, Thailand and Singapore prefer real-time payments in 2021 (level with cash at 61 percent).
  - ASEAN central banks planning interoperable cross-border QR-based payment systems; Malaysia, Indonesia and Thailand are connected; Singapore linked to Thailand and seeking more links.
- Digital competitiveness gaps: Singapore ranks very high; Malaysia, Thailand, Indonesia, Philippines have target areas in technology investment, regulatory frameworks, training and talent.

### Firm-level evidence: digitalization, GVC participation, and export sophistication
- Data and digital measures:
  - World Bank Enterprise Surveys (2015-2016) for Indonesia, Malaysia, Philippines, Thailand.
  - Digitalization proxied by firm website ownership and email communication with clients/vendors.
  - GVC integration proxied by exports as percent of sales plus imports as share of inputs.
- Firm-level associations (examples preserved from source comparisons):
  - Annual sales per employee (Thousands US$): Indonesia non-digital 62.2 vs digital 206.3.
  - Exports (% of Sales): Indonesia non-digital 7.4 vs digital 22.2.
  - Imports (% of Production Inputs): Indonesia non-digital 5.4 vs digital 21.1.
  - Digitalized firms are more likely to hold international quality certification, license foreign technology, spend on R&D, purchase fixed assets, and provide formal training.
- Empirical findings:
  - SMEs are less integrated in GVCs on average, but digitalization mitigates this gap.
  - Having a website significantly benefits SMEs’ GVC participation more than large firms; positive and significant interaction between website ownership and SME status on GVC integration.
  - Innovation (quality certification, foreign technology use), productivity, and training positively associated with GVC participation; product and process innovation enhance GVC participation with stronger impacts for large firms.
- Export sophistication:
  - Export sophistication (EXPY/PRODY framework) positively correlated with labor productivity and total factor productivity.
  - Singapore leads goods export sophistication; Singapore’s distance to the Asian frontier increased from 10 percent in 2013 to around 30 percent in 2020.
  - Distance to the global frontier in 2020: Malaysia ~45 percent shortfall; Indonesia over 90 percent shortfall.
  - Services export sophistication improved less markedly; shortfalls to Asian and global frontiers persist.
- Digitalization econometrics (panel of 76 economies, 1990-2020, system GMM):
  - Measures of digitalization (Internet users, Digital user index, ICT index, log patent applications, log tech patent publications, log robot installations) are positively related to goods export sophistication.
  - FDI inflows and tertiary enrollment are important determinants of goods export sophistication.
  - For services export sophistication, digitalization measures are positive and institutional quality (voice and accountability, government effectiveness, regulatory quality, rule of law, control of corruption, access to finance) plays an important role.
  - Implication: digitalization complements FDI, human capital, and institutions in moving up the value chain; technology diffusion requires absorptive capacity via education and infrastructure.

### Policy-relevant points and recommendations
- Trade policy and regional integration:
  - Reduce non-tariff barriers to revive momentum in trade-in-value-added and GVC participation.
  - Facilitate free trade agreements in line with the ASEAN Integration Work Plan (2021-2025) and eliminate non-tariff barriers.
  - Strengthen GVCs and advance the digital economy to facilitate cross-border e-commerce and financial flows.
- Financial integration strategy:
  - Gradual capital account liberalization, improved governance, and trade openness can raise financial development and yield positive growth effects, especially for Indonesia and the Philippines.
  - Strengthen domestic financial systems and macroeconomic fundamentals to manage risks (contagion, inequality).
  - Promote regional integration (intra-region flows) to enhance resilience to global shocks.
- Digitalization agenda:
  - Enhance digital connectivity, harmonize payment standards and interoperability to facilitate SME integration into digital trade and cross-border e-commerce.
  - Invest in education, training, and digital absorptive capacity to capture productivity and export sophistication gains from digitalization.
  - Leverage FDI attraction policies, rule-of-law improvements, and property-rights protections to maximize knowledge spillovers and export upgrading.
- Payments and settlement infrastructure:
  - Cross-border payment initiatives and an ASEAN interoperable QR Code Framework can reduce cross-border payment frictions and facilitate trade and remittances.
  - Two tripartite cross-border payment agreements under discussion: between Philippines, Malaysia, and Singapore (BancNet) and between Indonesia, Malaysia, and Thailand.
- Sequencing and safeguards:
  - Financial openness should be preceded by strong macroeconomic fundamentals and increased resilience of domestic financial systems via enhanced information sharing, surveillance and crisis management, and a regional safety net.
  - A gradual approach toward regional financial integration is appropriate to harness gains while minimizing risks.

*Source: wpiea2023191-print-pdf - Introduction and Conclusion (IMF Working Paper).*

### Introduction ...........................................................................................................

### wpiea2023191-print-pdf - Introduction ...........................................................................................................

### Overview
- Structure of the content unit:
  - Introduction (page 4)
  - Trade and Financial Integration in ASEAN-5
    - A. Recent Development in Trade Integration (page 5)
    - B. Recent Developments in Financial Integration (page 6)
  - Quantifying Potential Gains from Financial Integration in ASEAN-5
    - A. The Impact of Financial Development on Growth (page 9)
    - B. Estimating the Impact of Financial Integration on Growth (page 11)
  - Leveraging Digitalization for Greater Integration and Value Creation in ASEAN-5
    - A. The Digital Economy Landscape in ASEAN-5 (page 19)
    - B. Digitalization and Trade integration: Evidence from Firm Level Data in ASEAN-5 (page 22)
    - C. Digitalization and Export Sophistication (page 26)
  - Conclusion (page 31)
  - References (page 39)
- Appendices listed:
  - Appendix 1: Digitalization and Goods Export Sophistication (page 33)
  - Appendix 2: Digitalization and Services Export Sophistication (page 34)
  - Appendix 3: Firm Growth, External Finance Dependence and Financial Development Using Net Sales (page 35)
  - Appendix 4: Firm Level Results Including Singapore in the Sample (page 36)
  - Appendix 5: Firm Level Results – Other Measures of Financial Development (page 37)
  - Appendix 6: Determinants of Financial Development – Including USA and Singapore in the Sample (page 38)

### Trade and Financial Integration in ASEAN-5 (section headings and visual inventory)
- Figures associated with the section:
  - Figure 1. Total of Exports and Imports
  - Figure 2. Trade Composition, 2021
  - Figure 3. Backward Linkages to Exports
  - Figure 4. Non-Tariff Barriers Index
  - Figure 5. Harmful Trade Restrictions
- Financial integration figures:
  - Figure 6. International Investment Position
  - Figure 7. Trade and Portfolio Integration, 2010-2020
  - Figure 8. Inward FDI Flows by Origin Country in 2021
  - Figure 9. Portfolio Investment – Total of Assets and Liabilities
  - Figure 10. Total Claims on Foreign Banks
  - Figure 11. Foreign Holding in Local Currency Government Bonds
  - Figure 12. Non-Resident Portfolio Flows to ASEAN-5 Countries

### Quantifying Potential Gains from Financial Integration
- Empirical and scenario material signaled by figures and tables:
  - Figure 13. ASEAN-4: The Potential Impact of Financial Integration on Growth Under the Scenario of Convergence of Financial Development Toward the Most Advanced in the Region
  - Figure 14. The Potential Impact of Financial Integration on Growth Under the Scenario of Improvement in Policy and Institutional Determinants of Financial Integration
  - Table 1. Firm Growth, External Finance Dependence and Financial Development (page 11)
  - Table 2. Determinants of Financial Development (page 16)

### Leveraging Digitalization for Greater Integration and Value Creation in ASEAN-5
- Digitalization landscape and measures:
  - Figure 15. Trends in ICT Development
  - Figure 16. Digitalization of Production: Robotics
  - Figure 17. Digitalization of Consumption and Finance: E-commerce and Payments
  - Figure 18. IMD World Digital Competitiveness, 2021
- Firm-level evidence and GVC integration:
  - Figure 19. ASEAN-4: Digitalization and Trade Integration
  - Figure 20. Effect of E-Commerce on Global Value Chain Integration
  - Table 3. ASEAN-4 Manufacturing Firm Characteristics (page 23)
  - Table 4. Digitalization and Integration in GVC (page 26)
- Export sophistication and productivity:
  - Figure 21. Export Sophistication and Productivity
  - Figure 22. ASEAN 5 - Goods and Services Export Sophistication
  - Table 5. Digitalization and Goods Export Sophistication (page 29)
  - Table 6. Digitalization and Services Export Sophistication (page 30)

### Appendices and robustness checks (inventory)
- Appendices focus on:
  - Digitalization and export sophistication (Appendices 1–2)
  - Firm growth and external finance dependence measures (Appendix 3)
  - Inclusion of Singapore and alternative samples/measures (Appendices 4–6)

*Source: wpiea2023191-print-pdf - Introduction (IMF working paper table of contents and list of figures/tables).*

### Introduction

### Introduction

### Regional overview and risks
- ASEAN-5 comprises Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
- Integration to the world economy and participation in global value chains (GVCs) have supported living standards and trade-led growth.
- Geo-economic fragmentation defined: policy-driven or policy-induced reversal of global economic integration.
- Literature estimates:
  - A global trade fragmentation could cost up to 12 percent loss in GDP.
  - APD October 2022 REO estimates an average output loss from global trade fragmentation of about 3.2 percent in ASEAN-5 economies through trade fragmentation scenarios.
- Channels of vulnerability to fragmentation include trade (supply-chain disruptions), cross-border capital allocation and financial interconnectedness, technological diffusion, and cross-border migration. Potential macro-financial effects include misallocation of capital, higher US dollar funding costs, and reduced diversification.

### Trade integration: recent developments
- Total trade to regional GDP in ASEAN-5 reached 90 percent in 2021.
- Intra-regional trade accounts for about a quarter of total trade (ASEAN-5).
- Tariff liberalization history and current status:
  - Average tariffs in Asia fell from more than 50 percent in the 1970s to single digits in the 2000s.
  - As of 2020, ASEAN is virtually tariff-free, with tariffs on 98.6 percent of products fully eliminated under the ASEAN Trade in Goods Agreement (ATIGA).
- GVC participation and non-tariff barriers:
  - Backward linkages (share of foreign value added in gross exports) have decreased faster in Asia including ASEAN-5 since the global financial crisis.
  - Non-tariff barriers remain prevalent and are a significant impediment to regional trade (Estefania-Flores et al., 2022).
- Recent shocks accelerating trade restrictions:
  - COVID-19 pandemic and associated export restrictions (exports bans accounting for about 90 percent of trade restrictions at the height of the pandemic).
  - War in Ukraine and sanctions causing dislocations in energy and agricultural commodity markets.
  - Rising US-China geopolitical tensions and reconfiguration of supply chains.

### Financial integration: recent developments
- Financial integration is relatively low across ASEAN-5 except for Singapore (a financial center).
- FDI and portfolio investments are main drivers of financial flows:
  - FDI accounts for 38 percent of the total financial flows component in ASEAN-5.
  - FDI inflows from Singapore accounted for about 20 percent of total FDI in ASEAN-4 countries in 2021.
- Portfolio flows and banking:
  - Portfolio flows doubled from 12 percent in 2001 to 24 percent in 2021 (share of portfolio flows in total financial flows).
  - Cross-border banking transactions have risen steadily since the global financial crisis.
- Financial integration metrics:
  - Financial integration (sum of cross-border assets and liability holdings) in ASEAN-4 lags most comparable regions except Latin America.
  - Portfolio intensity (share in world’s portfolio assets and liabilities relative to GDP) also lags, except Singapore.
  - Trade intensity generally exceeds financial integration intensity in ASEAN-5.
- Exposure to global risk-on/risk-off dynamics:
  - ASEAN-5 experienced significant capital outflows in episodes including the 2013 Taper tantrum, Renminbi devaluation in 2015, US Election 2016, EM sell-off in 2018, and Covid-19 pandemic in 2020.
  - Recent outflows driven by non-resident deposit and interbank lending, and portfolio investments.
  - Foreign holdings of local currency government bonds declined sharply in Indonesia and Malaysia prior to the pandemic.

### Quantifying potential gains from financial integration
- Empirical approach:
  - Use firm-level non-financial data (sales) for ASEAN-5 from Thomson WorldScope (2000-2019), IMF Financial Development Index (normalized 0-1), and external finance dependence (EFD) à la Rajan and Zingales (1998).
  - Estimate firm growth equation with interaction (EFD_i × FD_c) using Arellano-Bond GMM to identify δ, the differential impact of financial development across industries by external finance dependence.
  - Simulate gains from financial integration by raising country-level financial development to FD* implied under scenarios and computing δ̂(EFD_i × (FD* − FD_c)).
- Key empirical findings on financial development and firm growth:
  - δ>0 and statistically significant across specifications: industries with larger external finance dependence gain more from financial development.
  - Effect particularly strong for SMEs; implications that corporate sector in ASEAN-5 faces financial constraints.
  - Sub-indexes: overall FD and financial markets (FM) show effects; results for financial institutions (FI) less robust except SMEs.

### Scenario 1 — Convergence toward the most advanced in-region (Singapore)
- Scenario design: raise financial development in Indonesia, Malaysia, Philippines, and Thailand to Singapore’s level.
- Regional and country growth impacts (using coefficients from regressions):
  - ASEAN-5 level: 2 percentage points average growth impact.
  - Indonesia and Philippines: about 3.5 percentage points average growth impact.
  - Thailand and Malaysia: about 1.2 percent additional growth.
- Sectoral variation:
  - Gains range from 0.2 percentage points in sectors with the lowest external finance dependence (Electronics—Instruments, Gauges and Meters) to about 4 percentage points for metal producers.
- Note: Estimates using net sales are slightly larger; scenario convergence to a frictionless market (US benchmark) would yield gains about twice larger, but convergence to Singapore is deemed more plausible.

### Scenario 2 — Improving policy and institutional determinants (policy-driven simulation)
- Approach:
  - Regress financial development on determinants (capital account openness, governance quality, market size, trade openness, corporate tax) using a panel of 32 economies (1990-2019) and lagged controls to mitigate endogeneity.
  - Compute FD* as predicted FD assuming adoption of highest policy standards in ASEAN-5 (benchmarks found in Singapore) and simulate variants:
    - Scenario 2a: set capital account openness to highest in ASEAN-5.
    - Scenario 2b: set governance quality to highest in ASEAN-5.
    - Scenario 2c: set both capital account openness and governance to highest.
    - Scenario 2d: set trade openness to highest in addition to 2c (i.e., capital account openness, governance, and trade openness raised to regional best).
- Determinants and regional specifics:
  - Capital account openness, trade openness, governance quality, and market size positively correlated with financial development.
  - Capital account openness has larger positive impact in ASEAN-5 specifically; restrictions on capital flows impede integration.
  - Corporate tax level negatively correlated with FD overall, but differential implications for ASEAN-5 are limited.
- Simulated growth impacts (ASEAN-5 regional averages):
  - Scenario 2a (capital account openness): 0.4 percentage point additional growth.
  - Scenario 2b (governance): 0.2 percentage point additional growth.
  - Scenario 2c (capital account openness + governance): 0.5 percentage point additional growth.
  - Scenario 2d (plus trade openness): 1.3 percentage point additional growth.
- Interpretation:
  - Capital account liberalization accounts for about 64 percent of implied gains on average in the region when excluding trade integration.
  - Countries with largest FD gaps (Philippines, Indonesia) benefit most.
  - Sectoral distribution similar to Scenario 1 but smaller in magnitude.
- Prudential considerations:
  - Financial integration can yield net benefits only if sound institutional and policy frameworks are in place.
  - Risks include increased inequality and contagion effects; strengthening domestic financial systems and macro fundamentals is necessary.
  - Regional financial integration can increase resilience because intra-regional flows have been more resilient to global shocks.

### Digitalization: landscape and role in integration/value creation
- Digital economy indicators and heterogeneity:
  - ASEAN-5 ICT index is higher than Asia & Pacific mean; significant heterogeneity within ASEAN-5:
    - Singapore’s ICT index higher than the average for advanced economies.
    - Malaysia and Thailand higher than EMDE average.
    - Indonesia and the Philippines around the EMDE average.
  - Industrial robots:
    - World average robot density in manufacturing: 113 per 10,000 employees.
    - Singapore had the highest robot density in 2019; operational stock of industrial robots has grown markedly, especially in Thailand.
- E-commerce and digital payments:
  - E-commerce:
    - ASEAN-5 average e-commerce revenue about 3 percent of GDP as of 2020.
    - 47 percent of the region’s population using e-commerce as of 2020.
    - E-commerce revenue grew by over 60 percent in the region in 2020 (pandemic acceleration).
    - ASEAN is on path to become a US$1 trillion internet economy by 2030.
    - ASEAN E-Commerce Agreement came into effect in December 2021 (signed January 2019).
  - Digital payments:
    - Average digital payment usage around 50 percent.
    - Real-time payments are prominent; research finds 61 percent of consumers in Indonesia, Malaysia, Thailand and Singapore prefer real-time payments in 2021 (level with cash at 61 percent).
    - ASEAN central banks planning interoperable cross-border QR-based payment systems; Malaysia, Indonesia and Thailand are connected; Singapore linked to Thailand and seeking more links.
- Digital competitiveness gaps:
  - Singapore ranks very high; Malaysia, Thailand, Indonesia, Philippines have target areas (technology investment, regulatory frameworks, training and education, IT integration, talent).

### Firm-level evidence: digitalization, GVC participation, and export sophistication
- Data and measures:
  - World Bank Enterprise Surveys (2015-2016) for Indonesia, Malaysia, Philippines, Thailand.
  - Digitalization proxied by firm website ownership and email communication with clients/vendors.
  - GVC integration proxied by exports as percent of sales plus imports as share of inputs.
- Associations at firm level:
  - Digitalized firms (website, email) are more innovative, invest more in human capital, and are more integrated with international markets.
  - Table highlights (examples, averages preserved as presented):
    - Annual sales per employee (in Thousands US$): non-digital firms vs digital firms vary by country (e.g., Indonesia 62.2 vs 206.3).
    - Exports (% of Sales): non-digital vs digital (e.g., Indonesia 7.4 vs 22.2).
    - Imports (% of Production Inputs): non-digital vs digital (e.g., Indonesia 5.4 vs 21.1).
    - International quality certification, foreign tech licensing, R&D spending, fixed asset purchases, and formal training are markedly higher for digital firms.
- Empirical findings:
  - SMEs are, on average, less integrated in GVCs, but digitalization mitigates this gap:
    - Having a website significantly benefits SMEs’ GVC participation more than large firms.
    - Regression results show positive and significant interaction between website ownership and SME status on GVC integration (robust to firm controls).
  - Innovation (quality certification, use of foreign technology), productivity, and training are positively associated with GVC participation.
  - Product and process innovation enhance GVC participation, with stronger impacts for large firms.
- Export sophistication:
  - Export sophistication (EXPY/PRODY framework) positively correlated with labor productivity and total factor productivity.
  - Goods export sophistication trends:
    - Singapore leads; other ASEAN-5 countries have room to catch up.
    - Singapore’s distance to the Asian frontier increased from 10 percent in 2013 to around 30 percent in 2020.
    - Distance to the global frontier in 2020: Malaysia ~45 percent shortfall; Indonesia over 90 percent shortfall.
  - Services export sophistication improved but less markedly; shortfalls to Asian and global frontiers persist.
- Digitalization and export sophistication econometrics:
  - Panel of 76 economies, 1990-2020, system GMM estimation:
    - Measures of digitalization (Internet users, Digital user index, ICT index, log patent applications, log tech patent publications, log robot installations) are positively related to goods export sophistication.
    - FDI inflows and tertiary enrollment are important determinants of goods export sophistication.
    - For services export sophistication, digitalization measures are positive and institutional quality (voice and accountability, government effectiveness, regulatory quality, rule of law, control of corruption, access to finance) plays an important role.
  - Implication: digitalization complements FDI, human capital, and institutions in moving up the value chain; technology diffusion requires absorptive capacity via education and infrastructure.

### Policy-relevant points and implications (synthesized from analysis)
- Trade policy and regional integration:
  - Reduce non-tariff barriers to revive momentum in trade-in-value-added and GVC participation.
  - Trade integration complements financial integration and amplifies gains from policy reforms.
- Financial integration strategy:
  - Gradual capital account liberalization, improved governance, and trade openness can raise financial development and yield positive growth effects, especially for countries with large financial development gaps (Indonesia, Philippines).
  - Strengthen domestic financial systems and macroeconomic fundamentals to manage risks (contagion, inequality).
  - Promote regional integration (intra-region flows) to enhance resilience to global shocks.
- Digitalization agenda:
  - Enhance digital connectivity, harmonize payment standards and interoperability to facilitate SME integration into digital trade and cross-border e-commerce.
  - Invest in education, training, and digital absorptive capacity to capture productivity and export sophistication gains from digitalization.
  - Leverage FDI attraction policies, rule-of-law improvements, and property-rights protections to maximize knowledge spillovers and export upgrading.

*Source: wpiea2023191-print-pdf - Introduction (IMF Working Paper excerpt).*

### Conclusion

### Conclusion

### Trade integration: status and policy options
- The paper assesses recent developments in trade and financial integration in the ASEAN-5 region in the context of rising geoeconomic fragmentation.
- Recent ratification of the Regional Comprehensive Economic Partnership (RCEP) will open the way for further trade integration.
- Scope for additional policy initiatives to strengthen regional trade integration:
  - Reduce non-tariff barriers in line with the Non-Tariff Measures (NTM) Guidelines, including improved notification and stronger discipline in simplifying and harmonizing rules and regulations impacting trade.
  - Facilitate free trade agreements in line with the initiative for ASEAN Integration Work Plan (2021-2025).
  - Eliminate non-tariff barriers.
  - Strengthen global value chains (GVCs) in the region.
  - Further advance progress on the digital economy, including to facilitate cross-border e-commerce and financial flows.

### Digitalization and export sophistication
- Digitalization can support regional integration by helping firms better integrate with GVCs, with benefits stronger for small and medium sized enterprises.
- Digitalization can help countries move up the value chain by producing more sophisticated products.
- ASEAN-5 economies have made considerable strides in various aspects of digitalization, but there is significant heterogeneity and sizeable room to further advance digitalization in many countries.
- Digitalization needs to be complemented by other policies:
  - Investment in physical and human capital.
  - Reducing regulatory barriers.
  - Increasing FDI liberalization.

### Financial integration: potential gains and complementarities
- Financial integration lags trade integration in ASEAN-5; most ASEAN-5 economies have significant room to advance regional financial integration.
- Financial integration could be a pillar for financial development and generate sizeable growth gains for the ASEAN-5 region (firm-level analysis).
- The magnitude of gains varies across countries and sectors depending on the degree of financial development and financial constraints.
- Complementary reforms that would strengthen gains from financial integration:
  - Trade liberalization through regional trade integration.
  - Improving regulatory and institutional quality.
  - Reducing restrictions on capital flows.

### Payments and settlement infrastructure
- Appropriate financial infrastructures such as payments and settlement systems are recognized under the ASEAN Economic Community (AEC) Blueprint 2025 as important for financial integration.
- Cross-border payment initiatives could enhance financial flows across borders and regional interconnectivity, reducing cross-border payment frictions (such as remittances), and facilitating cross-border trade and e-commerce.
- Most initiatives are being undertaken bilaterally by linking domestic instant payment systems.
- Two tripartite cross-border payment agreements have been under discussion for upcoming implementation:
  - Between Philippines, Malaysia, and Singapore through BancNet, a Philippines-based interbank network connecting the ATM networks of local and offshore banks.
  - Between Indonesia, Malaysia, and Thailand.
- Development of an ASEAN interoperable Quick Response (QR) Code Framework is ongoing to simplify retail payment across the region once implemented.

### Risks, sequencing, and policy recommendations
- Financial integration may present risks to financial stability; ASEAN economies should proceed carefully to contain such risks.
- Efforts toward more financial openness should be preceded by:
  - Strong macroeconomic fundamentals.
  - Increased resilience of domestic financial systems through enhanced information sharing, surveillance and crisis management, and a regional safety net.
- A gradual approach toward promoting more regional financial integration is appropriate to harness gains while minimizing risks.
- Pursuing greater integration within the ASEAN-5 region could help build a layer of resilience useful in a shock-prone global economy facing heightened geoeconomic fragmentation risks.

*Source: wpiea2023191-print-pdf - Conclusion (https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023191-print-pdf.pdf)*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023191-print-pdf.pdf_