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	Table of Contents
p. 12 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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Definition of domestic demand- and export-led growth strategies

The analysis is performed in terms of the macroeconomic accounting identity:

GDP ≡ Y ≡ Cp + Cg + I + X - M           (1)

where GDP stands for gross domestic product, Cp is private consumption, Cg is government consumption, I is gross domestic investments or gross domestic capital formation (GDCF), and X and M are exports and imports, respectively, of goods and services. An export-led growth strategy is referred to as one that results in:
    high export growth, accompanied by high GDP and income growth;
    and
    improvement in net export growth, i.e., higher export growth than import growth.

Conversely, growth is strictly speaking domestic demand-led if domestic demand is growing, accompanied by GDP and income growth.

The share of each component in output is defined as: (Cp/Y) is the share of private consumption, (Cg/Y) is the share of government consumption, (I/Y) is the share of investment, and ((X-M)/Y) is the share of net exports.

A convenient way of categorizing the different possibilities for the two strategies is as follows. The first three terms on the right-hand side of identity (1)--consumption of the private and government sectors plus investments--are the domestic demand components, while (X-M), or net exports, is the other component of aggregate demand. Thus, the following cases can arise:

• Domestic demand is growing and net exports are deteriorating (becoming a smaller positive number or larger negative number). If GDP growth is positive, then growth must be domestic demand-led. This is the only case where one can, strictly speaking, refer to domestic demand-led growth.
• Domestic demand and net exports are growing. Thus, growth is due to both domestic demand and net exports. Which one is contributing more to growth is simply an empirical issue. If domestic demand is growing faster, it can be said that growth is demand led, but weakly speaking.
• Domestic demand is deteriorating and net exports are increasing. If growth is positive (which is often not the case since domestic demand is usually a much larger component of GDP), growth must be net export led. If growth is negative, the recession is due to a decline in domestic demand.
• Both domestic demand and net exports are decreasing. Obviously, there is an economic recession and negative growth rates are due to declines in both domestic demand and net exports.

It must be pointed out that, as GDP is separated into the domestic demand and net export components, the share of domestic demand will be much larger than the net export share, usually constituting more than 90% of GDP when net exports are positive. (When net exports are negative, the share of domestic demand will be more than 100%.) This is because much of the export earnings will go to import purchases, and since net exports track the difference between these two trade variables, the magnitude becomes quite low compared with domestic demand. This is true even in the most successful export-led growth cases where export growth is in double-digits.⁶

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