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p. 13 of 77 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the world Overview of economic highlights and prospects Export or domestic demand-led growth in developing Asia? Introduction Export-led growth strategy Definition of domestic demand- and export-led growth strategies Demand-side growth-accounting exercise Decomposition analysis of stances in the private, government, and trade sectors Comparison of expenditure shares of open European countries and selected countries in the Asia-Pacific region Summary and conclusions Endnotes and references II. Economic trends and prospects in developing Asia III. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005 : I. Developing Asia and the world

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Demand-side growth-accounting exercise

In this section, a growth-accounting analysis on the components of demand is performed. As indicated above, the objective of this exercise is to apportion overall growth between domestic demand and net exports. Technical details are shown in Box 1.4.

The five countries chosen--PRC, India, Korea, Philippines, and Thailand--provide a relatively wide spectrum of experiences and results. The first two are the oft-touted Asian success stories of the most recent decade due to their opening up to international trade, and the latter three were countries affected by the Asian financial crisis in 1997-98. Table 1.3 gives the shares of the expenditure components of GDP at constant prices for the five countries. Table 1.4 shows the average annual growth rates of GDP and of demand components over the 10-year intervals of 1973-1983, 1983-1993, and 1993-2003. Table 1.5 provides the growth rates of the expenditure components weighted by their shares in GDP. This gives, in growth rate terms, the contribution of each component to the growth rate of GDP. Finally, Table 1.6 displays, as a percentage, the contribution of each aggregate demand component to overall GDP growth.

People's Republic of China

The tables show that the PRC registered high domestic demand growth in the first two decades, 1973-1993, while its net export position deteriorated and was negative.7 This happened even as the growth of exports posted annual averages of more than 20% (since imports increased more than exports). The last decade, 1993-2003, however, saw not only continuing large growth in domestic demand components, but also a strong shift from negative net exports (or trade deficits) to high positive net export (or trade surplus) positions, as export growth accelerated and import growth decelerated. Thus, the PRC's growth experience during the last decade points to high growth in both the domestic demand components and in the net export component. Domestic demand contributed around 90% to the double-digit GDP growth of the PRC in 1993-2003, while net exports contributed around 10% (Table 1.6). It is also important to point out that, in all three decades, investment growth outpaced consumption growth (Table 1.4), so that the last decade saw a larger contribution of investment than consumption to GDP growth, an increase in the share of capital formation (to more than 40%), and a continuing decline of the share of private consumption. It must be emphasized that in the last decade the share of net exports in GDP grew substantially--reflecting the transition from a negative contributor to growth to a high positive contributor.

India

India registered positive average annual GDP growth during the three decades, but lower than the PRC. The first two decades (1973-1993) were marked by growth in domestic demand as net exports deteriorated. During the last decade, when India opened up to the international market, the country exhibited even higher growth, with higher growth in the domestic demand components, but now the trade deficits improved so that net exports contributed slightly to overall GDP growth. During this decade, the growth rates of exports and imports more than doubled, with exports outpacing imports, leading to the decline in the trade deficits (net exports became a smaller negative number). As in the PRC, investment increased more than consumption in the last decade, with the consequence that the share of capital formation increased, while that of private consumption fell. But the high share of consumption still made this component of demand the largest contributor to growth in the last decade. Finally, the last decade saw an increase in the share of net exports to GDP (actually a decline of its negative share to GDP) and a slight decline in the share of domestic demand to GDP.

Korea

The high-growth decade for Korea was 1973-1983, when it started being touted as an "Asian tiger". During this decade, the domestic demand components of GDP grew very fast. Export growth exceeded 20% annually and surpassed import growth such that the country registered net export growth. At the same time, there was strong domestic demand growth. The trade surplus position reversed during 1983-1993 as the country began exhibiting trade deficits in the early 1990s, even if exports continued growing at a very high rate. The very high GDP growth during this decade, therefore, was due to high growth of domestic demand, with net exports deteriorating and turning negative toward the 1990s. Trade deficits continued until the Asian crisis. The last decade, 1993-2003, reversed the trade deficits, and the country returned to positive net exports starting in 1998, at the height of the Asian crisis. Because of the significant contraction of the economy in 1998, the growth rate of the last decade was lower than those registered during the last two decades, though still respectable. The last decade saw a slower growth of consumption and investment than in the previous decades, with investment actually losing share of GDP (reflecting the investment collapse of 1998). Net exports contributed to GDP growth in this last decade, and increased its share in GDP, while the share of domestic demand fell.

Philippines

Thailand

Thailand registered very high growth in the first two decades, 1973-1983 and 1983-1993, with both investment and consumption growing very fast. This was accompanied by deteriorating net exports in the two decades.⁸ The deterioration of net exports during 1983-1993 was accompanied by spectacular growth rates in both exports and imports. The last decade saw a significant fall in the GDP growth rate, as a consequence of the Asian crisis, which hit Thailand in 1997-98, and resulted in steep GDP and investment declines. Because of this, investment fell during the decade while consumption grew slowly and net exports turned from negative to largely positive. Thailand's GDP growth in 1993-2003 stemmed largely from improvements in net exports, which contributed 71% of the country's overall growth. Thus, Thailand's post-Asian crisis improvement in net exports was the main contributor to growth during the last decade, rather than domestic demand.

Summary of results

Table 1.7 summarizes the results of the growth-accounting exercise. The overall picture that emerges from the analysis of the selected countries indicates that during the first two decades, but more especially during the second, domestic demand was the main driver of growth, as net exports deteriorated. The last decade of 1993-2003, on the other hand, was accompanied by significant improvements in the net exports position of the selected group of countries (with the exception of the Philippines). This is true for countries experiencing continuous growth (PRC and India) and for the countries hit by the Asian crisis (Korea and Thailand). The PRC and India registered high domestic demand growth in the last decade, simultaneously with net export growth (and very high export growth). Korea and Thailand saw net exports swing from negative to highly positive and contribute significantly to growth, as the domestic demand components grew more slowly.

In the Asian tigers such as PRC, Korea, and Thailand, export growth actually decelerated in the last decade relative to the second decade, but export growth was still in double digits. On the other hand, the growth rate of imports decelerated more with the consequence that all three countries saw improvements in their net export positions.

Export growth accelerated very strongly in India during the last decade, much more than imports, leading to the reduction in the country's trade deficit. The Philippines had the slowest growth in exports in the last decade, and was the only country with deteriorating net exports.

The net export share to GDP improved in all five countries. Even countries with negative net exports (or trade deficits) improved their positions. India was able to reduce its trade deficit in terms of magnitude. Trade deficits increased in magnitude in the Philippines, but declined in terms of the share in GDP. Tables 1.3 and 1.6 show that the share of domestic demand and its contribution to growth decreased during the last decade. Conversely, the share of net exports and its contribution to growth increased.

The conclusion is that there is no evidence that the net export position of the selected countries deteriorated during the last decade. And as a consequence, there is no evidence that growth during the last decade was domestic demand-led and at the expense of the net export position.

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