Catalog

	Table of Contents
p. 10 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

---

Introduction

Since the Asian financial crisis erupted in 1997, countries in the Asia-Pacific region have been immersed in a search to identify what policies led to the crisis and subsequent recession, and what alternative set of policies would lead them back to a path of sustained and higher growth (Felipe 2003). The majority view has been that the crisis was the consequence of a fundamental flaw in precrisis financial policies, which led to currency overvaluation, overborrowing, and overlending for the domestic economy, and speculative bubbles in the nontradable sectors that eventually burst (for an overview see Jomo 1998, Seguino 2000, and Lim 2004).

As part of the "package of solutions" to reinvigorate these economies, a number of policy makers in the region (some of them more openly, e.g., in Thailand, and some others less so, e.g., in Malaysia) proposed shifting to a "new development paradigm" based on domestic demand-led growth. This way, it is argued, the Asian countries hit by the crisis are making efforts at diversifying their economic base away from overreliance on external trade, the basis of the so-called export-led growth model. During the last 4 years, articles in the press have analyzed and followed this alleged shift.1 Thailand's Prime Minister Thaksin Shinawatra, for example, announced upon taking the helm of government in January 2001 that he was determined to move the country away from mass manufacturing for exports into domestic demand-led growth through a series of policies. The country's policy makers are making big efforts toward shifting economic policy in an attempt to reduce the country's overdependence on external demand and foreign capital. The high growth rates achieved by Thailand in recent years seem to vindicate the new approach. However, Mr. Thaksin's approach is not, strictly speaking, just a transformation from export-led growth into domestic demand-led growth, if by the latter a series of policies to boost domestic demand is meant (this will be properly defined in the section "Definition of domestic demand- and export-led strategies," below).

His policies are based on what has been referred to as a "dual-track" strategy (Lian 2004) of relying on external demand (first track) and simultaneously developing domestic demand and supporting domestic enterprises (second track). Though it is true that his policies emphasize private consumption, they try to boost the demand of domestically produced goods and services (Box 1.3).

Since becoming prime minister in 2001, Mr. Thaksin's objective has been to alter Thailand's production structure with a view to reducing the country's dependence upon exports. The key is to create demand among households and businesses without creating another bubble (i.e., to avoid a household-led spending boom fueled by borrowing such as in the US). Moreover, Mr. Thaksin's strategies aim at boosting domestic demand and strengthening local enterprises as well as developing indigenously owned production capacity.²

Malaysia is also making an effort at diversifying its economic base. The Republic of Korea is reported to have gone into a debt-led consumption binge after the Asian financial crisis, which led to the 2003 crisis of credit card defaults and weak consumption demand that is the cause of low growth.

It is therefore important to analyze whether the empirical evidence indicates that a shift from export-led growth to domestic demand-led growth is indeed taking place across Asia, and the consequences of this shift. In particular, do the data appear to confirm this move toward a domestic demand-led growth strategy? More precisely, this part of ADO 2005 attempts to answer the following three questions:

1. Does the evidence indicate that countries are switching from export-led growth to domestic demand-driven growth?
2. Did the export-led strategies partly contribute to the Asian financial crisis?
3. What lessons can be drawn from the different country experiences?

Structure

In order to address the three questions, this part of ADO 2005 analyzes growth from the point of view of the aggregate demand components. The approach is very simple, based on the analysis of the information provided by the basic demand-side macroeconomic accounting identity, according to which output equals the sum of consumption, investment (i.e., domestic demand), and net exports.

The section after this, "Export-led growth strategy," offers a summary and discussion of the strategy as well as a summary of some recent critiques of it. These have led (at least in the view of some authors) to the theoretical rationale for the alleged need to shift to a domestic demand-led growth approach. The next section, "Definition of domestic demand- and export-led strategies" defines the two types of growth strategies for purposes of the subsequent discussion.

The empirical work is carried out in the form of three complementary analyses (the sections "Demand-side growth-accounting exercise," "Decomposition analysis," and "Comparing expenditure shares"). Since the objective of this part is limited to an ex post, factual, and descriptive analysis of whether a shift to domestic demand-led growth is taking place, the methodology used is very simple. Output (GDP) from the demand side is looked at. This way, the latter is made up of the domestic demand components--consumption and investment--and net exports (exports less imports); and this is seen from the point of view of an accounting identity, i.e., there is no attempt at modeling in the sense of understanding ex ante, causal, or behavioral relationships. The first of these three sections, "Demand-side growth-accounting exercise" presents the results of such an exercise performed on the aggregate demand components of a selected group of Asian countries, namely, People's Republic of China (PRC), India, Korea, Philippines, and Thailand. Growth accounting apportions overall GDP growth to the contribution of each component of demand. Thus, overall growth of output is the sum of the growth rate of each component multiplied by its share in GDP. For example, the contribution of private consumption growth to overall GDP growth is calculated as the product of the growth rate of consumption times the share of consumption in GDP. Expressed as a percentage of the overall growth rate, it is the ratio of this product to the growth rate of GDP. The exercise provides a long-run view of these five countries in terms of the contribution of growth in domestic demand components and net exports to overall growth.

The second of these three sections, "Decomposition analysis of stances in the private, government, and trade sectors," broadens the analysis of the five countries by looking at the expansionary versus nonexpansionary (or even contractionary) stances or positions of the private sector, government or fiscal sector, and external trade sector over the last 20 years, in terms of aggregate demand "injections" (private investment, government spending, and exports) versus "leakages" (private savings, taxes, and imports) of the three sectors. Over the last three decades, there have been substantial changes in demand-side parameters, such as import coefficients, tax efforts, and savings rates, along with jumps in flows such as annual exports, investments, and government spending. The analysis in this section looks at how output has responded to these shifts, using a simple decomposition of demand injections versus leakages. The discussion helps identify whether the component of demand in question has an expansionary or nonexpansionary contribution to aggregate demand (naturally, ex post, total injections must equal total leakages).

It should be pointed out that, while the growth-accounting exercise provides a long-run picture over three decades (1973-1983, 1983-1993, and 1993-2003) in terms of the growth contribution of each demand component to overall growth, the stances provide an annual graphical picture over 20 years of the different phases of growth of the five countries by identifying expansionary and nonexpansionary factors (private, government, and external sectors) in effective demand.

The last of these three sections, "Comparing expenditure shares," completes the empirical analysis with a comparison of the shares of aggregate demand components for a large number of Asia-Pacific countries--classified according to three income groups--with the shares of a group of small open European economies. Since it is impossible to carry out the growth-accounting and stance analyses for all Asia-Pacific countries, the analysis of the demand shares provides an overall picture.

The last section of this part of ADO 2005 provides a summary and some conclusions.

Methodology

Some words on methodology are important. First, the demand-side growth-accounting and stance exercises are not, strictly speaking, an economic model in itself (nor based on a model), so no causal inferences should be drawn. The former is simply a device to split and apportion, ex post, the growth of output from the demand side. The latter also provides an ex post classification of how the private, government, and trade sectors contribute to expansions or contractions in output, where, by definition, the sum of the three is zero. Second, the analysis does not take into account any supply-side considerations (e.g., the relationship between exports and technology upgrading, often brought up in the discussions of the benefits of export-led growth). Third, although the analysis is an exercise in positive economics, it leads naturally to the normative observation that the problem being considered should not be an either/or choice between domestic demand-led growth and export-led growth, but a need to actually give both domestic demand growth and net export growth due importance and proper balance. This is especially crucial since developing countries need precious foreign exchange for their economic development, which net export earnings provide. Finally, it is virtually impossible to clearly discern a structural change from export-led growth into domestic demand-led growth with 3-year data. If this is happening, it will take years, perhaps a decade, for the data to show. Hence, the analysis covers three decades and unveil episodes of the two strategies mentioned.

Synopsis of conclusions

The analysis leads to the conclusion that the more successful phase of development of the selected countries has been associated with significant investment increases and capital accumulation, as well as with significant export growth that brought about trade surpluses or reductions in trade deficits. For the countries badly hit by the Asian crisis in 1997-98, the instabilities were preceded by unbalanced growth in demand components, with domestic demand highly expansionary, and increasing trade deficits. This was the result of currency overvaluations, overborrowing and overlending in the domestic private sector, and rise of speculative bubbles that most economists agree triggered the loss of confidence, substantial currency depreciation, and capital flight during the crisis. The harsh adjustments during the crisis resulted in the collapse of domestic demand (especially investments) as net exports recovered sharply. Thus, it was not the export-led strategy that contributed to the crisis--it was the promotion of debt-financed domestic demand growth at the expense of net exports that precipitated it.

The analysis suggests that the best periods seem to be those when both domestic demand and net exports exhibit significant and continuous growth or improvements, as in the case of the PRC and India today, or in postcrisis Thailand. This was also the case of the post-Plaza Accord period of the second half of the 1980s in Korea and Thailand, when the reputation of the "Asian miracle" reached its peak. Periods when domestic demand was highly expansionary at the same time that net exports deteriorated signaled an ensuing crisis, as the experiences of Korea, Philippines, and Thailand show.

The comparisons between the upper-medium and low-income Asia-Pacific countries show that, during the last decade, 1993-2003, the high-performing Asian countries outpaced the European countries in terms of growth in both exports and net exports. The Asia-Pacific middle-level and low-income countries, on average, improved their trade deficits during the last decade. However, the low-income countries still have very high trade deficits that need to be reduced (or, alternatively, the gap between aggregate domestic demand and domestic production has to be narrowed). But there is no evidence that countries in the Asia-Pacific region have recently been exhibiting growing domestic demand shares at the expense of net exports.

Inasmuch as the analysis suggests that healthy growth for developing countries should be the result of growth in both domestic demand and net exports, the last section includes a general discussion about how the international trade system should be more responsive to the needs of poorer countries with a view to allowing them to benefit from international trade. It is proposed that, to provide developing countries with the proper environment in which to achieve improvements in their net exports, the international trade system should provide them with mechanisms to reduce their large trade deficits. This requires: (i) a more open international trade system--richer and trade-surplus countries can contribute by opening up their agriculture, industry, and services markets to the developing world; and (ii) use of price and non-price mechanisms by poorer and deficit-ridden countries to improve their productivity and competitiveness in the world market.

Back Export or domestic demand-led growth in developing Asia?	Next Export-led growth strategy