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p. 16 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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Summary and conclusions

In brief, the main conclusions of the growth-accounting and stance analyses are as follows:

1. There is no evidence that the 1993-2003 decade was marked by domestic demand-led growth at the expense of net exports. On the contrary, the countries hit by the Asian financial crisis, such as Korea and Thailand, lessened domestic demand expansion and strengthened net export growth. Domestic demand and net exports have been growing in countries not hit by the crisis, such as the PRC and India.
2. In general, the Asia-Pacific countries were able to reduce their trade deficits during the 1993-2003 decade, so that the share of net exports increased vis-à-vis that of domestic demand.
3. There is no evidence that the export-led strategy contributed to the Asian crisis. On the contrary, the export-led strategy, as defined in this discussion, was not implemented during the period right before the crisis. This period was marked more by overexpansion in domestic demand, and deterioration of net exports.
4. Periods when domestic demand was highly expansionary at the same time that net exports deteriorated signaled an ensuing crisis. The periods when the countries analyzed performed the best were those when both domestic demand and net exports exhibited impressive growth. This corresponds to what was defined above as domestic demand-led growth weakly speaking.
   Two more conclusions, of a normative nature, may be added.
5. There should be no conflict between growth in exports and in domestic demand: successful and sustained growth requires growth in both domestic demand and net exports.

The demand-side growth-accounting exercise and the decomposition analysis of stances from the private, government, and trade sectors provide some useful lessons for appraising the discussion of domestic demand-led versus export-led growth.

Growth of successful countries such as the PRC, and to a lesser extent India, is based on a combination of both domestic demand components--especially GDCF--and exports. It is clear that developing countries should have adequate investment levels in order to grow and develop. There also has to be appropriate growth in consumption so that the population's welfare improves. These can be achieved at the same time that the country succeeds in developing and improving its export sector. In fact, in terms of technology deepening and "learning by doing," growth in both sectors will be complementary and mutually reinforcing.

It is when one strategy is overemphasized at the expense of the other that the growth strategy becomes unstable. Clearly, the growth strategies of Korea, Philippines, and Thailand in the 1990s (before the Asian crisis) overemphasized expansionary tendencies in domestic private sector demand at the expense of net exports. This is reflected in the frequently discussed roots of the Asian crisis: currency overvaluation as well as overlending or overborrowing--spurred by inflows of short-term speculative capital--that brought high growth to the domestic and nontradable sectors, and deterioration in the net export positions.

Conversely, the harsh adjustments undertaken by the three countries during and after the Asian crisis saw recessions and a collapse of gross investment as net export positions improved. There are prominent economists (e.g., Stiglitz 2002) who believe that the adjustments and policies imposed on the Asian countries hit by the crisis were overly harsh, especially on domestic demand, and contractionary. Whatever side one takes, it is clear that the sacrificed growth and resulting decline in the growth of productive capacity in the crisis-affected countries constitute a harmful consequence of the strategy that they followed (currency overvaluation, overlending, and overborrowing), which reversed the healthy balance and the desirable progression that both domestic demand (and the capital goods sector) and the tradable sectors achieved during the second half of the 1980s.

6. Countries with high trade deficits, mostly low-income countries, will benefit from a more open international trading system, and from promotion of their exports through price and non-price competitiveness.

Now, finally, is addressed the question posed by Palley (2002), Blecker (2002, 2003), and those who contend that not all developing countries can achieve successful export-led growth, inasmuch as positive net exports and trade surpluses correspond to trade deficits in other countries, and as the markets of the weaker countries (mostly in industrial countries) are gobbled up by the richer, high-performance countries.

It must be pointed out that Figure 1.25 shows that even if the LA countries had high negative net exports in 2003, this position had not, on average, deteriorated from that in 1993, despite the high export growth of countries such as the PRC, India, and other large countries that strengthened their export sectors in the 1990s. This is one encouraging sign, at least in the Asia-Pacific region. It must be added, however, that the net export position of many countries may not have deteriorated very much due to the very large and growing trade deficits of the US. Expected adjustments, especially through the depreciating US dollar, may correct this situation in the medium term.

There are some other encouraging signs. The fast growth and expansion of the PRC has quickly opened up a potentially large export market for other developing economies. This will benefit many Asian economies, and has already benefited Korea; Malaysia; Taipei,China; and Thailand. The task now is to extend the benefits to the middle- and low-income countries in Asia-Pacific. India is another country that has been growing fast in the last decade. Its opening up to the world trade market has also opened a large export market.

The conclusion is that, for an export-led development strategy to cover as many countries as possible, a more balanced and equitable growth in exports and imports across the world is required.¹² This in turn requires the following two main "pushes":

• all countries, including richer and trade-surplus nations, must open up their markets to poorer countries; and
• the poorer and latecomer countries need to make extra efforts both to promote their export sector via price and non-price competition, and to develop the necessary technological, physical, and human infrastructure to be competitive.

The first obviously requires the cooperation and participation of rich and trade-surplus countries so that developing countries can access the large world markets and reduce their trade deficits with the surplus countries. Trade liberalization of poor and trade-deficit countries alone (without the opening of the markets of the first group of countries) will obviously lead to perverse results. The second requires twin growth in the domestic demand and tradable sectors inasmuch as a high level of this infrastructure building will be part of domestic demand.

A more balanced and equitable international arrangement in world trade should therefore lead to smaller trade surpluses and smaller trade deficits across countries in the world, since more developing countries will be able to share in the benefits of international trade.

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