5. Employment effects of removal of restrictions on the movement of natural persons in the ASEAN banking sector

The Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) envisions a single market and production base of more than 625 million people. It would be the third largest economy in Asia and the seventh largest worldwide. Despite clear aspirations of “a free flow of skilled labor” (Papademetriou et al. 2015; Almekinders et al. 2015), progress has been slow and uneven. To accelerate this process, understanding current barriers to skilled labor mobility and gathering evidence of the benefits of freer movement of professionals within ASEAN is essential. The banking sector is a good case study. Banking remains the most important channel for providing credit in ASEAN. On aggregate, it accounted for 82% of total financial system assets within ASEAN in 2009 (ADB 2013) and provides mostly national capital flows to all economic sectors. Over the past two decades, ASEAN members have made significant trade reforms in the banking sector to promote greater market access and provide operational flexibility—via both domestic reform and regional and global trade integration. These include the World Trade Organization (WTO) General Agreement on Trade in Services (GATS) commitments, the ASEAN Banking Integration Framework, the AEC Blueprint, and the ASEAN Agreement on the Movement of Natural Persons.1 According to the AEC Blueprint, several ASEAN countries (especially Cambodia, the Lao People’s Democratic Republic, and Viet Nam) committed to removing restrictions on banking services by 2015.2 However, restrictions on labor mobility in banking remain significant. As a skilled-labor intensive sector, banks would benefit from the freer movement of professionals. Increased skills mobility can mitigate the mismatch between supply


INTRODUCTION
The Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) envisions a single market and production base of more than 625 million people.It would be the third largest economy in Asia and the seventh largest worldwide.Despite clear aspirations of "a free flow of skilled labor" (Papademetriou et al. 2015;Almekinders et al. 2015), progress has been slow and uneven.To accelerate this process, understanding current barriers to skilled labor mobility and gathering evidence of the benefits of freer movement of professionals within ASEAN is essential.
The banking sector is a good case study.Banking remains the most important channel for providing credit in ASEAN.On aggregate, it accounted for 82% of total financial system assets within ASEAN in 2009(ADB 2013) and provides mostly national capital flows to all economic sectors.Over the past two decades, ASEAN members have made significant trade reforms in the banking sector to promote greater market access and provide operational flexibility-via both domestic reform and regional and global trade integration.These include the World Trade Organization (WTO) General Agreement on Trade in Services (GATS) commitments, the ASEAN Banking Integration Framework, the AEC Blueprint, and the ASEAN Agreement on the Movement of Natural Persons. 1  According to the AEC Blueprint, several ASEAN countries (especially Cambodia, the Lao People's Democratic Republic, and Viet Nam) committed to removing restrictions on banking services by 2015. 2 However, restrictions on labor mobility in banking remain significant.As a skilled-labor intensive sector, banks would benefit from the freer movement of professionals.Increased skills mobility can mitigate the mismatch between supply and demand for labor.It also reduces the costs of providing skilled labor, thereby encouraging banking sector expansion.Banks have linkages with all other industries-especially export-oriented industries-so expanding the banking sector should have non-trivial flow-on effects from both supply and demand perspectives.On the supply side, banking sector growth would lead to a reduction in the price of financial services, reducing production costs for any industries using financial services as inputs, thereby expanding their supply.On the demand side, growth would raise banking demand for other sectors' products, thus encouraging industrial expansion as well.
This chapter evaluates the economy-wide output and employment effects of removing restrictions on the movement of natural persons in ASEAN's banking sector-a key step in freeing skilled labor.We examine how skilled labor mobility in banking would change employment across ASEAN industries in total employment and employment structure in two settings: (i) when both unskilled and skilled labor rarely shift from one industry to another; and (ii) when only unskilled labor is slow to shift.These simulations enable us to see how labor mobility impacts output and employment.Although banking trade reform here is applied only to skilled labor for foreign direct investment (FDI) financial services providers, its effects are transmitted through price markups and productivity gains (as shown in Section 3), which in turn impact production and the demand for inputsincluding unskilled and skilled labor.In the simulations, we assume variable labor supply for two reasons.First, a significant proportion of ASEAN's labor force is informal, and thus not captured in input-output tables-though from time to time labor transfers from informal to formal markets.The second reason is that ASEAN's population is generally young and growing, thus increasing labor supply.
Section 2 reviews current regulatory barriers to trade in banking services-including restrictions on the movement of natural persons in ASEAN.Section 3 describes the first-round (direct) impact of trade barriers in banking services on bank performance-both conceptually and empirically.Section 4 outlines the methodology for measuring economywide effects of removing restrictions on people mobility.Details of the data for simulation are described in Section 5.The results of the simulations are discussed in Section 6, while Section 7 concludes.

CURRENT RESTRICTIONS LIMITING BANKING SECTOR GROWTH
Despite efforts to better integrate the banking sector, ASEAN bank penetration in the region is slow (Yamanaka 2013).One of the main causes Huong Dinh -9781788116176 Downloaded from PubFactory at 09/21/2023 08:04:32AM via free access is barriers to trade in the banking sector-regulations against the entry and operation of ASEAN banks in other member economies (Yamanaka 2013).Based on Dee and Dinh (2009), this section discusses the restrictions on intra-ASEAN banking services.Following the framework for assessing barriers to trade in banking services developed by McGuire and Schuele (2000), Dinh (2008) and the World Bank (undated), Dee and Dinh (2009) upgraded a questionnaire that evaluates non-prudential regulations restricting ASEAN's banking services-as delivered through the four modes of supply: (i) cross-border; (ii) movement of consumers; (iii) commercial presence; and (iv) movement of individual bank personnel, particularly intra-corporate transferees.Questionnaire responses as supplied by relevant country researchers are quantified from 0 (lowest) to 1 (highest) in terms of restriction severity for each type of regulation.The scores are then aggregated to produce summary trade restrictiveness indexes (TRIs) using the weights produced in Dinh's (2008) study.This is based on the understanding that prudential regulation has a legitimate regulatory purpose and is not the target of an AEC Blueprint liberalization initiative (which is not to say that prudential regulations could not be improved in ASEAN countries).
Figure 5.1 shows the variation in restrictions affecting banking services across ASEAN countries.Except for Singapore, Malaysia, and Indonesia, Figure 5.2 suggests that restrictions on the movement of people in providing services are high.At least 70% of ASEAN countries have nationality and residency requirements for the Board of Directors, restricting their stay in the host country.For example, Brunei Darussalam requires at least half of the Board of Directors of a foreign-owned bank to be nationals.In Cambodia, up to 10% of employees can be foreigners if the entity has more than ten employees.In Viet Nam, nationals must make up at least 20% of the Board of Directors.

FIRST-ROUND IMPACT OF RESTRICTIONS ON THE BANKING SECTOR
This section provides a conceptual framework for measuring first-round (direct) impacts of restrictions on the banking sector-which can be costescalating and/or rent-creating.We also present empirical estimates of the impacts.

Cost-Escalating Impacts
Barriers to trade in banking services can increase banks' real resource costs (Llewellyn 1986;Gowland 1990;Benston and Kaufman 1996).The key to this problem is that regulations can act as barriers, limiting competition between service providers and preventing economies of scale and scope.This can discourage service providers from operating at their lowest possible costs (Warren and Findlay 2000;Dinh 2013;Dee and Dinh 2008).The supply curve shifts upward, increasing the unit cost of service and creating a wedge between costs "with" and "without" restrictions.Figure 5.4 shows the banking market before and after the imposition of cost-escalating restrictions.Without restrictions, the banking market   is in equilibrium at E 0 with price P 0 and output Q 0 .With cost-escalating restrictions, banks need to use more real resources for the same output, shifting the supply curve upward, which increases the price to P 1 and reduces output to Q 1 .The cost-escalating effects create a deadweight loss to society-represented by the shaded area.This loss occurs to both producers and consumers.The producer loss comes from both increased real resource costs and reduced output, whereas the consumer loss results from both increased price and reduced consumption quantity.Interestingly, in this case, there is a rise in price, but banks gain no price markup or economic rents.

Rent-Creating Impacts
Non-prudential regulations can also create rents for banks.They may serve the interests of the regulated banks rather than their customers (Llewellyn 1986(Llewellyn , 1999;;Benston and Kaufman 1996).This is because some restrictions may create more market power for incumbent banks, enabling them to inflate the price of financial services while real resource costs remain unchanged.As a result, banks receive higher price markups-economic rent.This rent is akin to a tax on consumers, which makes the supply curve shift upward, but the revenue flows to the incumbent banks rather than to the government (Dee 2005).A typical example would be an interest rate ceiling that creates an artificial scarcity of credit, encouraging banks to charge borrowers extra fees in addition to interest rates, thereby creating a rent for banks.Figure 5.5 shows the banking market before and after the imposition of rent-creating barriers.Without restrictions, the banking market is in equilibrium at E 0 with price P 0 and output Q 0 .With rent-creating restrictions, banks can charge their customers a higher price at every output level, despite no change in real resource costs.This is also equivalent to an upward shift in the supply curve, resulting in new equilibrium E 1 .At the new equilibrium, the price rises to P 1 and output falls to Q 1 .The rent-creating measures create a deadweight loss to society as represented by the shaded triangular area.The loss also consists of consumer and producer losses.The consumer loss results from both the increased price and reduced consumption quantity, while the producer loss comes only from the reduced output.In this case, the banks gain the entire price markup (P 1 -P 2 )-or economic rent.(2013)

METHODOLOGY OF MEASURING ECONOMY-WIDE IMPACTS OF REMOVING RESTRICTIONS ON THE MOVEMENT OF NATURAL PERSONS
The methodology involves taking the following steps: 1. Calculating banking services trade-restrictiveness indexes.Calculating these indexes for ASEAN and the rest of the word are conducted under (i) current policy settings and (ii) after removing restrictions on the movement of natural persons in the banking sector.It uses the template for measuring trade barriers in banking services and weights (the relative importance of each restriction) produced in Dee and Dinh (2009), Dinh (2011), andDinh (2013).The current trade regime provides the baseline scenario, while the removal of restrictions on the movement of natural persons gives the counterfactual simulation policy change.
Removing restrictions on the movement of natural persons is important to the banking industry as it is skilled-labor intensive.2. Calculating productivity and tax equivalents.This calculation is a crucial step in estimating first-round effects of banking services trade barriers before and after removal of restrictions on the movement of natural persons-using the regression results produced in Dinh (2013).
The productivity equivalent is measured as the percentage change in total cost of bank operations due to cost-escalating barriers to trade in banking services, compared with a scenario with no barriers.The tax equivalent is the percentage change in price markup caused by rent-creating barriers.As found in Dinh (2013), barriers to bank establishment and operation are associated with both higher costs and profits, so are modelled as productivity and tax equivalents.3. Applying the FTAP model.As in Dinh (2012) to change-rather than fixing labor supply, as in the few studies on economy-wide impacts of liberalizing services trade (e.g., Dinh 2012;Verikios and Zhang 2000).The FTAP model is applied as follows.

Model Database Preparation
This chapter uses data mainly from the GTAP 7 Data Base.This dataset provides individual country input-output tables as well as detailed data on bilateral trade, transport, and merchandise trade protection for 113 regions and 57 sectors in 2004 (Narayanan and Walmsley 2008). 3The country input-output tables account for the inter-sectoral linkages within regions, while the other data included show economic linkages between regions.For research purposes and given limited data of sector-specific foreign ownership shares in ASEAN, the GTAP 7 database is aggregated into two regions (ASEAN and the Rest of the World) and 32 sectors (for more details see Appendix Table 5A.1).This baseline data retains restrictions on the movement of natural persons in the ASEAN banking industry.This baseline data will be compared with simulated data to see what impact the policy change has.
The GTAP database aggregates banks with other financial intermediaries, so we treat banking services as universal to the entire financial sector.Given the dominance of banks in ASEAN's financial sector, we expect the results will be reliable.

Injection of Current Barriers Estimates
As the GTAP model does not reflect prevailing trade barriers in banking services, we inject the tax equivalent of ASEAN and Rest of the World banking sectors into the model.The tax equivalent is injected into the model as an implicit output tax-the rents from this tax shock flow to the banking sector rather than to the government.For foreign invested firms, a part of this rent is modelled to be taxed before repatriation.The productivity equivalent does not need to be injected into the model at this stage as it is inherent in bank cost structures.

Simulation
The final step is to simulate the effects of removing all restrictions on the movement of natural persons-the mobility of skilled labor across countries in the region.This trade reform is modelled as a reduction in output tax and a gain in technical change in FDI financial institutions as it is applied only to this service provider group.The simulation is conducted in Huong Dinh -9781788116176 Downloaded from PubFactory at 09/21/2023 08:04:32AM via free access two macroeconomic settings: (i) restricted labor mobility (both unskilled and skilled labor) across industries within a country; and (ii) unrestricted skilled labor mobility across industries within a country.In both settings, capital is assumed to be imperfectly mobile between industries within the region and between regions.The model allows for capital accumulation and international borrowing and lending.

Trade Restrictiveness Indexes
Table 5.1 presents the key data for simulation as generated using the methodology described above.They include trade restrictiveness indexes (TRIs) for establishment and operation for domestic banks and FDI banks in ASEAN before and after each trade reform.The table also shows the corresponding productivity and tax equivalents.

Employment Structure before Simulation
Table 5.2 shows the employment payment structure by industry and sector in ASEAN (before simulation) using the GTAP 7 Data Base.In 2004, all 32 aggregated industries paid employees $287 billion-74% for unskilled Note: FDI 5 foreign direct investment; TRI 5 trade restrictiveness index; Productivity equivalent 5 percentage change in productivity due to higher costs from trade barriers; Tax equivalent 5 percentage change in price markup from trade barriers-similar to a tax, but with revenue flowing to banks rather than government.

Linkages between Financial Services and Other Industries
As shown in Table 5.3, financial services are inputs for all industries.Its share in others' total costs ranges from 0.3% to 12.7%.The five industries with the highest share of financial services as inputs are coal, oil and gas mining (12.7%); trade (11.3%); insurance (9.6%); other businesses (9.6%); and communication (9.4%).The five industries using financial services least are petroleum and coal products (0.3%); wearing apparel (1.6%); iron, steel and non-ferrous metals (1.6%); leather products (1.6%); and recreational and other services (1.8%).
The five largest customers of the financial industry (measured by share of financial industry output) are trade (16.5%); other businesses (7.5%); electronic equipment (7.2%); chemical, rubber, plastic products (6.3%); and food and beverages and tobacco manufacture (4.6%).The five customers accounting for the least (less than 0.5% of total industry output) are water; other mining; forestry; petroleum, coal products; and leather products.

RESULTS AND DISCUSSION
This section first discusses how trade reform would impact industry output under two different macroeconomic settings-restricted skilled and unskilled labor mobility, and unrestricted skilled labor mobility.It then examines changes in (i) industry output prices, (ii) factor prices, (iii) industry employment, and (iv) allocation of increased employment.

Projected Output Changes
Trade reform leads to increased output in both domestic and foreigninvested firms in all industries except financial services, where the expansion is only observed in foreign banks (Table 5.4).Foreign-invested institutions increase output most, while domestic counterparts stall (when both labor types are restricted) or contract (when at least one type increases labor mobility).Specifically, when both types of labor are restricted, output growth in domestic and foreign financial institutions are  via free access 20.003% and 5.66%, respectively.When only unskilled labor is restricted, the corresponding figures are 20.77% and 8.4%.This result can be explained by the fact that trade reform in foreigninvested financial institutions reduces output tax and creates productivity gains in these firms.A decline in output tax on foreign-invested financial services reduces their supply price, which is equivalent to the expansion in supply.A productivity gain leads to reduced production costs, which also raises supply.Both shocks expand FDI financial institution output and thus reduce their market price, making their services less costly than domestic counterparts.Financial services from FDI institutions thus substitute those from domestic firms, creating a crowding-out effect (an expansion of FDI institutions comes at the expense of their counterparts).The expansion of FDI institutions raises their demand for labor.When labor mobility is restricted, any increased demand for labor must be met by an increase in labor supply.If labor can move freely, at least part of the increased demand can be filled by attracting labor from domestic institutions-which further increases the crowding-out effects on domestic counterparts.
Expanding FDI financial firms also triggers an expansion of other industries through spill-over effects.As shown in Table 5.3, the financial industry uses the output of all other sectors as inputs-and all industries use financial services as an input in production.The expansion of other industries thus occurs in two ways: (i) FDI financial firms will increase their demand for other industry outputs; and (ii) lower market prices for financial services will reduce production costs for industries using financial services as inputs.When both types of labor are restricted, the industry output growth ranges from 0.06% to 0.48%.The industries with the highest growth are public administration, defense and health; recreational and other services; and transport equipment not elsewhere classified (nec).The least growth occurs in coal, oil, gas mining.When only unskilled labor is restricted, the output growth ranges from 0.05% to 0.43%.Again, the most expansion is in public administration, defense and health; recreational and other services; and transport equipment nec.The least growth occurs in coal, oil, gas mining.

Projected Output Price Changes
In all settings, output prices in financial services decline most in both domestic and foreign-invested institutions (Table 5.5).The price fall of FDI institutions comes from their output expansion, while domestic counterpart prices fall from their contraction due to the crowding-out effect.When both unskilled and skilled labor types lack mobility between industries (and also countries) in the region, the price of financial services falls by 0.94% for domestic institutions and 1.49% for FDI counterparts.
When only skilled labor can move, the reduction is even higher-1.09%and 1.96%, respectively.Trade reform also impacts the output prices of other industries through both the industry's supply and demand.As mentioned above, on the one hand, trade reform raises the demand for other industries' output, which in turn increases their market price.On the other hand, trade reform increases the industry's supply, which reduces the supply price.If the expansion in supply is big enough to outweigh the rise in demand, then the market price will fall, and vice versa.In our simulations, a fall in market price is observed in 20 industries (when movements in both labor types are restricted) and 21 industries (when only unskilled labor is restricted).

Projected Wage and Capital Price Changes
In all simulations, changes in factor prices are the same for domestic and FDI firms within each industry (except in financial services), as they share the same cost structure and are affected equally by trade reform.As discussed, in financial services, trade reform creates a crowding-out effect on domestic firms-price changes are expected to be different between domestic and FDI players when use of factor endowments is restricted.The change in factor price is caused by two competing effects.The expansion raises the demand for endowments, thereby raising the factor price.With endogenous endowments (total variable labor supply and  accumulating capital in this case), excessive demand can be relaxed by a higher endowment supply in the long run, thereby reducing factor prices.When endowments move restrictedly from one industry to another, excessive demand for endowments can only be met by an increase in supply.If the expansion in total supply of endowments is big enough to outweigh the increase in demand, a fall in factor price would occur-or a rise otherwise.As a result, different changes in factor prices can be observed across industries.When endowments are mobile, excessive factor demand can also be met by attracting factors from other industries until the endowment market clears.Consequently, a uniform change in factor price can be observed across industries.

Restricted labor mobility (Table 5.6a)
When both types of labor are restricted and capital is less than perfectly mobile between industries, the price of these endowments changes differently across industries.Except in financial services, a fall in labor price occurs in ten industries (for unskilled labor) and 26 industries (for skilled labor).In domestic financial firms, wages fall 1.75% for unskilled labor and 1.94% for skilled labor-labor demand falls due to the drop in production.By contrast, in FDI counterparts, wages increase 8.76% for unskilled labor and 8.55% for skilled labor-as increased labor demand outweighs increased labor supply.Except in construction and domestic financial institutions, industries face higher prices for capital (ranging from 0.17% to 0.83%) as well as a higher relative price of capital to labor.By contrast, construction and domestic financial institutions see a fall in capital costs and lower relative price of capital to labor.

Unrestricted skilled labor mobility (Table 5.6b)
As unskilled labor mobility is restricted, price changes vary between industries.Except for financial services, nine other industries see lower capital costs.In financial services, the price of capital falls by 2.72% in domestic institutions, while it increases by 10.8% in FDI counterparts-their Table 5.4 (continued) Notes: FDI 5 foreign direct investment; nec 5 not elsewhere classified.
The numbers in the table should be read as a percentage.For example, under the assumption of restricted labor mobility between industries, the removal of restrictions on the movement of natural persons would increase the output of agriculture by 0.17%.
Source: Author's simulation using GTAP 7 Data Base.
Huong Dinh -9781788116176 Downloaded from PubFactory at 09/21/2023 08:04:32AM via free access demand curve moves in the opposite direction.The price of skilled labor drops 0.03% uniformly, as skilled labor can move freely between industries and the increased labor supply is above increased labor demand.The percentage change in the relative price of labor to capital-as measured by the difference in the percentage change in the labor price and that in the capital price-is shown in Table 5.7.Regardless of restrictions on labor mobility across industries, a reduction in the relative price of unskilled labor to capital occurs in only around one-third of the 32 industries, while a drop in the relative price of skilled labor to capital is observed in more than two-thirds of the industries.In other words, the costs of skilled labor become relatively less expensive than capital and unskilled labor if restrictions on the movement of natural persons are removed.Skilled labor becomes more affordable.5.8)

Restricted labor mobility
When labor mobility is restricted between industries, any increased demand for labor driven by trade reform can only be met by an increase in labor supply.There is thus a uniform change in employment growth across industries and domestic and FDI firms, including domestic financial institutions-where a drop in output is observed.The growth in employment in domestic financial institutions comes from the relatively less expensive cost of labor as opposed to capital-so the increased labor supply in this group is fully absorbed and replaces capital.Skilled labor grows more than unskilled labor (0.61% versus 0.36%) as the financial sector trade reform is skilled-labor intensive.

Unrestricted skilled labor mobility
With unskilled labor restricted between industries, there will be uniform growth in unskilled employment across industries (0.39%).But with free skilled labor mobility between industries, increased demand for labor in one Table 5.5 (continued) Notes: FDI 5 foreign direct investment; nec 5 not elsewhere classified.The numbers in the table should be read as a percentage.For example, under the assumption of restricted labor mobility between industries, the removal of restrictions on the movement of natural persons would increase the agriculture output of domestic firms by 0.04%.
Source: Author's simulation using GTAP 7 Data Base.The numbers in the table should be read as a percentage.For example, under the assumption of restricted labor mobility between industries, the removal of restrictions on the movement of natural persons would reduce the price of skilled labor employed by domestic agriculture firms by 1.88%.

Source:
Author's simulation using GTAP 7 Data Base.The numbers in the table should be read as a percentage.For example, under the assumption of unrestricted skilled labor mobility but skilled labor mobility between industries, the removal of restrictions on the movement of natural persons would reduce the price of skilled labor employed by domestic agriculture firms by 0.03%.

Source:
Author's simulation using GTAP 7 Data Base.The numbers in the table should be read as a percentage.For example, under the assumption of restricted labor mobility between industries, the removal of restrictions on the movement of natural persons would reduce the relative price of skilled labor to capital in domestic agriculture firms by 4.31%.

Source:
Author's simulation using GTAP 7 Data Base.
Huong Dinh -9781788116176 Downloaded from PubFactory at 09/21/2023 08:04:32AM via free access The numbers in the table should be read as a percentage.For example, under the assumption of restricted labor mobility between industries, the removal of restrictions on the movement of natural persons would increase the employment of skilled labor in domestic agriculture firms by 0.61%.

Source:
Author's simulation using GTAP 7 Data Base.
Huong Dinh -9781788116176 Downloaded from PubFactory at 09/21/2023 08:04:32AM via free access industry will be met by both an increase in labor supply and the absorption of labor from industries with lower labor costs.This process continues until there is no arbitrage in labor price across industries.As a result, we observe various levels of employment growth in skilled labor across industries.In domestic financial institutions, skilled labor is substituted by unskilled labor-as the price of skilled labor is relatively more expensive than unskilled labor, skilled labor employment drops 3%.By contrast, in FDI counterparts, skilled labor is relatively less expensive than unskilled labor, so skilled labor employment increases 14.26%.In other industries, the highest employment growth for skilled labor is in electricity, gas production and distribution; trade; and insurance, while the least occurs in coal, oil, gas mining; other mining; and agriculture.For ASEAN as a whole, trade reform expands total employment by 0.47%, higher than labor mobility is restricted.

CONCLUSIONS
Using the FTAP-ASEAN model and GTAP 7 Data Base, this chapter shows that removing restrictions on the movement of natural persons in ASEAN's banking sector could have non-trivial impacts on output and employment across industries regardless of labor mobility assumptions.Although removing restrictions on the movement of individual bank personnel crowds out domestic financial institutions, this trade reform would expand production and employment in all industries.The benefits of trade reform would be even higher with unrestricted skilled labor mobility across industries.
Freeing skilled labor mobility by removing restrictions on the movement of natural persons across countries in the region would make skilled labor more accessible and affordable.This trade reform would mostly benefit employment in financial services and industries with the lowest relative price of labor to capital.Services would gain most in terms of job creation and would also absorb most of the increased labor supply-followed by manufacturing and agriculture and mining.
Our results suggest that removing restrictions on the movement of natural persons and facilitating labor mobility will help mobilize a significant proportion of labor in ASEAN's informal market and help absorb the growing labor force as well.The results support policies that will allow freer flows of skilled labor under the ASEAN Economic Community.It makes sense that restrictions on labor mobility in banking should be removed.
Apart from the banking industry, restrictions on labor mobility remain pervasive across services.There is room for further research to compare the impact of freeing up labor mobility across different services sectors.
Given our modelling features, the projected results presented here need to be interpreted with some caveats.First, we assume full employment.
In most ASEAN countries, unemployment remains high and there are transaction costs of moving labor from one sector to another.The employment change due to trade reform is likely smaller in the short term than projected results in the long run.Second, we assume the ratio of skilled to unskilled labor is unchanged before and after restrictions are removed.In the long run, with better technology, education and training, demand for skilled labor will rise faster than unskilled labor demand.Further research that takes into account unemployment and the increasing ratio of skilled to unskilled labor is thus needed.

NOTES
* The author would like to thank Ha Pham for his constructive comments and suggestions.
1.The Movement of National Persons is one of four modes of services trade identified by the WTO GTAS.For example, a foreign national provides a service within economy A as an independent supplier (such as a consultant or health worker) or employee of a service supplier (like consultancy firms, hospitals, or construction companies).2. Cambodia, the Lao People's Democratic Republic and Viet Nam committed to remove restrictions on (i) acceptance of deposits and other repayable funds from the public; (ii) all types of lending; (iii) financial leasing; (iv) payment and money transmission services; and (v) guarantees and commitments.Myanmar also committed itself to removing the last restriction.3. Compared to GTAP 9 Data Base, GTAP 7 has 37 fewer regions but is sufficient for this study.

APPENDIX 5A.1 THE FTAP MODEL
In order to measure the economy-wide effects of removing restrictions on the movement of natural persons in the ASEAN banking sector, it is important to use a model capable of tracing flow-on effects of each policy change to all other sectors within and across countries.One available model is the Global Trade Analysis Project (GTAP) model-a multi-regional and multi-sectoral computable general equilibrium model.However, the GTAP model does not reflect prevailing trade barriers in banking services, preventing an impact assessment of trade liberalization.The static version of this model also does not include a treatment of foreign ownership, making it impossible to differentiate the flow-on effects of liberalizing restrictions on domestic banks from those on foreign banks.
The FTAP model deals with these limitations.Following Hanslow et al. (2000), this appendix describes the structure of the FTAP model-a comparative static, computable general equilibrium model of the world economy that was developed in stages from the GTAP model.The key contribution of FTAP is that it includes a treatment of foreign direct investment (FDI) on a bilateral basis.In addition, FTAP has extra coding to facilitate analyzing trade liberalization in services.For example, it allows the revenue from the tax equivalents of services trade barriers to flow to the private sector rather than to the government.It incorporates increasing returns to scale and large-group monopolistic competition in all sectors.And it allows for capital accumulation and international borrowing and lending.
In FTAP, agents demand commodities based upon location and ownership of individual firms as shown in Figure 5A.1.End-user agentshouseholds and governments-choose among final goods and services, while firms choose among intermediate inputs, investment goods, and primary factors (land, skilled and unskilled labor, capital, and natural resources).Agents in FTAP are assumed to make choices first among commodities from domestic and foreign locations as in GTAP, but with a different Constant Elasticity of Substitution (CES) elasticity of 5.The import of goods or services is then selected among foreign locations with a CES elasticity of 10.FTAP then assumes that agents make choices among products or services by ownership with a CES elasticity of 10, after making a decision regarding location.Finally, agents make choices among individual firms within a particular location and ownership with a CES elasticity of 15.These higher elasticities in FTAP compared with those in GTAP accord better with the notion of firm-level product differentiation associated with large-group monopolistic competition (Francois et al. 1995).They are also more consistent with engineering studies of the extent of economies of scale, and hence product differentiation.Following Petri (1997), choices for allocating wealth in FTAP are first made across types of asset-bonds, land, natural resources, and capital-with a Constant Elasticity of Transformation (CET) elasticity of 1.As land and natural resources are fixed and perfectly immobile between regions, the choice of wealth is really between bonds and capital.In FTAP, the choice of bonds does not depend on who issues them, implying perfectly arbitrage in the rate of return on bonds.The choice of capital is first made among sectors (various primary, secondary, and tertiary sectors) with a CET of 1.2.The choice is then made among locations with a CET of 1.3.When a foreign location is chosen, the choice is finally made among specific foreign regions with a CET of 1.4.This nested structure of capital choice reflects the assumption of imperfect capital mobility between regions and between sectors within each region.Although values of the chosen CET parameters at each "node" of the nesting structure seem to be small, there is a great degree of flexibility in the way that choices at the final level are made.The semi-elasticity of transformation between foreign locations can easily reach 20-and even up to 60 (Hanslow et al. 2000).The variation across regions in the implied elasticity comes from both the number of nests and the different initial shares of assets in various regional portfolios.
In FTAP, it is assumed that the current period investment, which is formed from savings, can be added up to the next period capital stock, allowing capital stocks to accumulate over time.It is also assumed that net bond holdings of each region can adjust to finance the expansion of capital that cannot be financed by domestic savings.This treatment of capital enables FTAP to provide a long-term snapshot view of the economy-wide effects of trade liberalization ten years after the reform has occurred.This treatment of international capital mobility was developed by McDougall (1993) and incorporated into GTAP by Verikios and Hanslow (1999).The structure of preferences for investors is depicted in Figure 5A.2.With a treatment of ownership in the model, FTAP is able to control for many benefits of FDI that GTAP cannot.For example, FTAP reflects how FDI can relax domestic constraints on capital.It also captures how FDI contributes to product diversification as well as product specialization, where a particular industry has a comparative advantage.However, the current FTAP model has yet to capture the transfer of skills, technology, and management know-how from FDI to local firms.It is also important to note some assumptions about factors of production in FTAP.Skilled and unskilled workers are perfectly mobile between industries.Consequently, prices of each type of labor are uniform across industries within each economy.Because of the behavior of asset holders, capital is less than perfectly transformable between industries, thus allowing rental prices to differ across industries.Land is supplied with a transformation elasticity of 1, as this factor is used only in the agricultural sector.The elasticity of transformation of natural resources between industries is so small that the supply of this factor to each industry is essentially fixed.(Natural resources are inputs in agriculture; forestry, coal, oil, and gas mining; and other mining.)This assumption comes from the fact that natural resources are irrecoverable; when it is already used in this industry, it cannot be transferred to another industry.Consequently, the rental prices of land and natural resources can vary from industry to industry.This chapter uses the FTAP model, Version 2_7a by Dee (2010) to measure the economy-wide output and employment effects of trade liberalization in the ASEAN banking sector.

Figure 5 . 3
Figure 5.3 Share of ASEAN countries restricting domestic banks, by restriction category

Figure 5
Figure 5.4 Cost-escalating effects of trade barriers in banking services or volume-of financial services Price (P) for fee-based financial services Note: S 5 supply; D 5 demand; E 0 5 Equilibrium without trade barriers; E 1 5 Equilibrium with trade barriers; M 5 the point to identify the supply price at quantity Q 1 when there are no trade barriers.Source: Dinh (2011).

Figure 5 .
Figure 5.5 Rent-creating impact of trade barriers in banking services Dinh (2008)ver 0.20.The ASEAN TRI average is 0.33-0.1,which is above the 2006 average of 36 countries as calculated inDinh (2008).The two least restrictive countries are Singapore and Malaysia, with TRIs just above 0.1.Figure5.1 also indicates that Myanmar and Viet Nam are the two most restrictive countries, with TRIs averaging more than 4.5 times those of Singapore and Malaysia.Figures 5.2 and 5.3 present the prevalence of restrictions affecting FDI and domestic banks.Cross-border banking services are restricted in most ASEAN countries, while those supplied through consumer movement are limited in just a few countries.The figures indicate that broader banking services are also generally limited.Limits on operation expansion and ownership of non-financial firms are relatively common.
Dee and Dinh (2009) (2009).Figure 5.1 Level of restrictions on banking services Huong Dinh -9781788116176 Downloaded from PubFactory at 09/21/2023 08:04:32AM via free access all ASEAN countries examines whether barriers to trade in banking services create rents and/or raise real costs.The study uses panel accounting

Table 5
.1 Key data for simulation

Table 5 .
3 Linkages between financial services and other industries inASEAN, 2004

Table 5 .
5 Change in market price of industry output (%)

Table 5 .
6a Projected change in price of labor and capital, restricted labor mobility(%)

Table 5 .
6b Projected change in price of labor and capital, unrestricted skilled labor mobility(%)

Table 5 .
7 Projected change in relative price of labor to capital(%)

Table 5A .
1 List of aggregated sectors for simulation and similar forage products, whether or not in the form of pellets, plants and parts of plants used primarily in perfumery, in pharmacy, or for insecticidal, fungicidal or similar purposes, sugar beet seed and seeds of forage plants, other raw vegetable materials.Cattle: cattle, sheep, goats, horses, asses, mules, and hinnies; and semen thereof.Other Animal Products: swine, poultry and other live animals; eggs, in shell (fresh or cooked), natural honey, snails (fresh or preserved) except sea snails; frogs' legs, edible products of animal origin nec, hides, skins and furskins, raw hides and skins, insect waxes and spermaceti, whether or not refined or colored.Raw milk.Wool: wool, silk, and other raw animal materials used in textile.Fishing: hunting, trapping and game propagation including related service activities, fishing, fish farms; service activities incidental to fishing 2 Forestry Forestry: forestry, logging and related service activities 3 Coal, oil, gas mining Coal: mining and agglomeration of hard coal, lignite and peat.Oil: extraction of crude petroleum and natural gas (part), service activities incidental to oil and gas extraction excluding surveying (part).Gas: extraction of crude petroleum and natural gas (part), service activities incidental to oil and gas extraction excluding surveying Cattle Meat: fresh or chilled meat and edible offal of cattle, sheep, goats, horses, asses, mules, and hinnies.Raw fats or grease from any animal or bird.Other Meat: pig meat and offal.Preserves and preparations of meat,