APEC has moved closer to its vision of free and open trade and investment. But APEC economies are not realizing their full potential for mutually beneficial economic integration and improved living standards. Impediments to enhancing growth and convergence in the Asia Pacific region lie both at and behind the border.

"There is some evidence of convergence in the region, however progress is patchy and there is a cluster of economies with low initial incomes that are not 'catching up'," says Bob Buckle, chair of APEC's Economic Committee and a member of New Zealand's Treasury.

What it takes to achieve growth at lower income levels may be different than what it takes to sustain growth at higher levels of income and over the long term, explains Buckle. This implies that structural reform will be an ongoing challenge and raises the question of not only how to lift performance in the slower growing economies but also whether the recent impressive growth performances of many economies in the region can be sustained in the future.

Advocates of structural reform point to the dramatic benefits from the sweeping structural reforms undertaken by economies like New Zealand and the United Kingdom throughout the 1980s. Structural reforms help economies maintain macroeconomic stability, bringing into play their comparative advantages and better mobilizing domestic savings, all of which contribute to accelerating economic growth and resiliency.

The 1997-1998 East Asian financial crisis "revealed how weak institutions and poor governance structures can impact on economic growth and stability," says Buckle. "That experience highlighted the importance of moves to enhance risk management and governance in financial markets and systems and to improve transparency and regulatory capabilities in the region."

Evidence suggests that convergence mechanisms may not be operating as well as expected in some economies in APEC due to barriers at and behind the border. So-called "behind-the-border" or structural barriers refer to domestic policies and institutions that impede the efficient operation of markets and the capacity of businesses to operate efficiently. They can take the form of domestic regulatory systems, competition frameworks and governance structures.

Addressing these issues is the challenge of structural policy. The Leaders Agenda to Implement Structural Reform (LAISR) identified five priority areas: regulatory reform, competition policy, public sector management, corporate governance and strengthening economic and legal infrastructure. In 2005, APEC Leaders created the LAISR 2010 "roadmap," which recognizes that structural reform is essential for realizing the full benefits of trade and investment liberalization.

The business environment is likely to impact on how well convergence mechanisms operate. For example, the relative attractiveness of an economy as an investment destination and its ability to absorb new technologies will typically depend on the business and investment environment. Structural reforms can improve business investment in a variety of ways including by lessening the burden of regulations, lowering compliance costs of tax regimes, reducing the difficulties in accessing finance, and making markets operate more efficiently, Buckle points out.

Encouraging greater cross-border trade and investment flows that will level the playing field for international business requires removing preferential policies and regulations that discriminate against foreign investment. Notes Buckle: "This would promote stronger, more resilient, and efficient markets, which would help allocate resources more appropriately across economies and markets in the region and also enable economies to more easily adjust to evolving international comparative advantage."

The ongoing relocation of production processes across borders highlights the importance for economies of making further progress with structural reforms, particularly in corporate and finance sectors and taking other steps to create a good business and investment environment. This is increasingly important in a world where regional and global commerce is no longer dominated by deliveries of commodities or finished manufactured products from one country to another. Trade in services, flows of people and investment and exchanges of information are all growing faster than traditional trade in goods. More and more goods and services are produced in many locations.

Just take the "Barbie Doll" toy as an example which was cited at the APEC Senior Officials' Trade Policy Dialogue in Adelaide, South Australia earlier this year. The doll is designed in California. The oil that is used to make the plastic pellets to produce the doll's body is refined into ethylene in Chinese Taipei; its nylon hair is made in Japan; its wardrobe cloth in China, its moulds in California; it is assembled in Indonesia and Malaysia; and its quality testing and marketing takes place in California.

Sound domestic institutions and well-functioning markets could even make economies more willing to negotiate more comprehensive free trade agreements and advance the trade agenda, Buckle argues. That's because domestic industries in economies where there are good domestic and structural policies will be in a better position to compete and adjust to free trade agreements. "At the moment, some economies may be somewhat reluctant to open their markets because of their concerns over competition," he explains. "So it not only enhances the payoff from trade reform but may well enhance the likelihood of achieving trade reform."

Good structural policies and protection of intellectual property will also make it more desirable to do business. Without a suitable economic and legal infrastructure that has the capacity for the enforcement and implementation of regulation, even well-designed policy will fail. "Intel isn't going to put a billion dollar chip plant in an economy if they don't think the local courts will uphold the sanctity of their contracts," says Andrew Stoler, executive director of the University of Adelaide's Institute for International Trade. Adds Andrew Elek, research associate of the Australian National University and a member of AUSPECC: "All governments realize they need to be serious about protecting IPR. It's impossible to have collaborative research and development projects if other economies don't trust you."

Migration can also help bring about income convergence as workers from low-income economies migrate to higher-income economies to take advantage of higher wage levels, thereby increasing the supply of labor in high-income economies, reducing the supply of labor in low-income economies and income differentials. The World Bank identifies the facilitation of migration within economies as having the potential to contribute to a more flexible business environment and to encourage greater equity within economies.

Stoler of the Institute for International Trade in Adelaide notes that services liberalization within APEC is "much more forthcoming than it is in other parts of the world" and points to countries that are putting in place mutual recognition agreements that enable professionals in fields such as architecture, engineering and nursing to gain qualifications in other countries. "An area where you see a lot of this moving forward is within the ASEAN members of APEC," he notes. "They have a very active program of mutual recognition development."

A number of APEC groups are working on regulatory and structural reform issues. "All the working groups are stressing the importance of having transparent and well-administered rules," notes Elek of Australian National University. "Without that you won't get good governance or good corporate governance."

The Competition Policy and Deregulation Group and the OECD have created a regulatory reform checklist that is a qualitative self-assessment tool that economies may use to voluntarily investigate their own regulatory management systems. Last year the US, Chinese Taipei, and Hong Kong, China undertook self-assessments, the results of which were discussed at a roundtable session at an Economic Committee meeting in 2006.

This year Australia and Korea are undertaking self-assessments using the checklist. The results of the self-assessments will be discussed in June during the second Economic Committee meeting. "We've made pretty good progress," says Buckle, who took over the chair in January. "We've moved fairly quickly...we're lifting the game."