The impacts of exports on economic growth - the case of selected Southeast Asia countries.pdf
1. i
VIETNAM-NETHERLANDS PROGRAMME
FOR MASTER’S DEGREE IN DEVELOPMENT ECONOMICS
THE IMPACTS OF EXPORTS ON ECONOMIC
GROWTH: THE CASE OF SELECTED
SOUTHEAST ASIA COUNTRIES
A thesis presented by Ha Manh Cuong
In partial fulfilment of the requirements for obtaining the degree of
MASTER OF ARTS IN ECONOMICS OF DEVELOPMENT
Academic Supervisor
Dr. Le Cong Tru
UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM
INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS
HO CHI MINH CITY, NOVEMBER 2012
2. ii
CANDIDATE’S CERTIFICATION
I hereby certify that the paper has not been submitted in whole or in part for any degree before
or has not been submitted at the time being to qualify for other degrees and any other
academic award;
All the contents of the paper is the outcome of works that I has done; any paid or unpaid
material are acknowledged; and ethics standards as well as guidelines have been tightly
followed.
Signed : _______________________
Name : Ha Manh Cuong
Date : _______________________
3. iii
ACKNOWLEDGEMENTS
The thesis is a partial fulfilment of the requirements for obtaining the degree of Master of Arts
in Economics of Development, which jointly conducted by Economics University of Ho Chi
Minh City, Vietnam and the Institute of Social Studies in The Hague, Netherlands. The thesis
is fruit of knowledge I have gained and contributions from many other people.
First of all, I would like to show my deep thanks to my supervisor, Dr. Le Cong Tru who gave
me his caring instruction during the time I focused on doing the thesis and I did also learn so
much from him the ways to write and prepare a research paper well.
I am profoundly grateful to the teachers and the staffs of the Vietnam Netherlands Project in
Ho Chi Minh City who guided and helped me in the process of doing the thesis. Besides, I
would like to give my heartfelt thanks to Prof. Nguyen Trong Hoai who taught me
Econometrics and the ways to write a paper well.
Finally, I am very happy to express my profound gratitude to my parents who are always in
my back to silently encourage and support me at anytime I got difficult and discouraged in
doing the thesis.
I bear full responsibilities for all errors, omissions, and shortcomings in the thesis.
Ha Manh Cuong
Ho Chi Minh City, 2012
4. iv
TABLE OF CONTENTS
CHAPTER 1.................................................................................................................... 3
1.1 PROBLEM STATEMENT..................................................................................... 3
1.2 RESEARCH OBJECTIVES.................................................................................. 5
1.3 RESEARCH QUESTIONS ................................................................................... 5
1.4 STRUCTURE OF RESEARCH............................................................................ 6
CHAPTER 2.................................................................................................................... 7
2.1 INTRODUCTION ................................................................................................. 7
2.2 CONCEPTS AND DEFINITIONS........................................................................ 7
2.3 THEORETICAL FRAMEWORK......................................................................... 9
CHAPTER 3.................................................................................................................. 16
3.1 INTRODUCTION ............................................................................................... 16
3.2 EMPIRICAL MODEL......................................................................................... 16
3.3 METHODOLOGY AND DATA COLLECTION................................................ 17
3.4 DESCRIPTION OF VARIABLES ...................................................................... 18
3.5 SUMMARY OF THE STEPS USED IN THIS STUDY..................................... 19
CHAPTER 4.................................................................................................................. 21
4.1 INTRODUCTION ............................................................................................... 21
4.2 SELECTION REASON OF FIVE ASIAN COUNTRIES .................................. 21
4.3 HIGHLIGHTS OF EXPORT ACTIVITIES AND SOURCES OF EXPORT GROWTH
OF ASEAN-5 OVER THE LAST DECADES............................................................... 22
4.3.1 Economic growth of Vietnam over the studied period............................ 22
4.3.2 Export activity of Vietnam...................................................................... 24
4.3.3 Comparison of correlation between Vietnam’s export growth and economic
growth ................................................................................................................. 25
4.3.4 Economic growth of Malaysia over the studied period: ......................... 26
4.3.5 Export activity of Malaysia..................................................................... 28
4.3.6 Comparison of correlation between Malaysia’s export growth and economic
growth ................................................................................................................. 28
4.3.7 Economic growth of Thailand over the studied period........................... 30
4.3.8 Export activity of Thailand ..................................................................... 33
4.3.9 Comparison of correlation between Thailand’s export growth and economic
5. v
growth ................................................................................................................. 34
4.3.10 Economic growth of Indonesia over the studied period: ........................ 36
4.3.11 Export activity of Indonesia.................................................................... 39
4.3.12 Comparison of correlation between Indonesia’s export growth and economic
growth ................................................................................................................. 39
4.3.13 Economic growth of Singapore over the studied period......................... 41
4.3.14 Export activity of Singapore ................................................................... 43
4.3.15 Comparison of correlation between Singapore’s export growth and economic
growth ................................................................................................................. 44
4.4 SUMMARY......................................................................................................... 46
CHAPTER 5.................................................................................................................. 48
5.1 INTRODUCTION ............................................................................................... 48
5.2 DESCRIPTIVE ANALYSIS................................................................................ 48
5.2.1 Correlation Coefficient Matrix................................................................ 48
5.2.2 Descriptive statistics result ..................................................................... 50
5.3 REGRESSION RESULTS AND ANALYSIS ..................................................... 53
5.3.1 Result analysis for Indonesia .................................................................. 55
5.3.2 Result analysis for Malaysia ................................................................... 56
5.3.3 Result analysis for Singapore.................................................................. 56
5.3.4 Result analysis for Thailand.................................................................... 57
5.3.5 Result analysis for Vietnam .................................................................... 57
CHAPTER 6.................................................................................................................. 59
6.1 CONCLUSION.................................................................................................... 59
6.2 POLICY RECOMMENDATIONS...................................................................... 61
6.2.1 For The Selected Southeast Asia Countries ............................................ 61
6.2.2 For The Case of Vietnam ........................................................................ 62
6.3 LIMITATIONS OF THE THESIS ....................................................................... 64
APPENDIX A................................................................................................................ 68
APPENDIX B................................................................................................................ 69
APPENDIX C................................................................................................................ 70
APPENDIX D................................................................................................................ 72
6. vi
LIST OF FIGURES
Figure 3-1: Analysis framework for the impact of exports on growth. ...........................19
Figure 3-2: Summary of steps used in data analysis .......................................................20
Figure 4-1: GDP growth of Vietnam in the period of 1991 - 2010 .................................23
Figure 4-2: Export growth of Vietnam in the period of 1991 - 2010 ..............................26
Figure 4-3: GDP growth of Malaysia in the period of 1991 - 2010 ................................27
Figure 4-4: Export growth of Malaysia in the period of 1991 - 2010 .............................29
Figure 4-5: GDP growth of Thailand in the period of 1991 - 2010.................................32
Figure 4-6: Export growth of Thailand in the period of 1991 - 2010..............................36
Figure 4-7: GDP growth of Indonesia in the period of 1991 - 2010 ...............................38
Figure 4-8: Export growth of Indonesia in the period of 1991 - 2010 ............................40
Figure 4-9: GDP growth of Singapore in the period of 1991 - 2010...............................42
Figure 4-10: Export growth of Singapore in the period of 1991 - 2010..........................45
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LIST OF TABLES
Table 2-1: Summary of researches studying on impact of exports on growth. ...............13
Table 3-1: Summary of variables in the model................................................................18
Table 4-1: Vietnam exports by sector, 2010 ....................................................................25
Table 4-2: Malaysia exports by sector, 2010...................................................................29
Table 4-3: Thailand exports by sector, 2010....................................................................34
Table 4-4: Indonesia exports by sector, 2010 ..................................................................39
Table 4-5: Singapore exports by sector, 2010 .................................................................44
Table 5-1: Correlation matrix of variables (all countries) ...............................................49
Table 5-2: Summary of Descriptive Statistics (All countries).........................................52
Table 5-3: Regression Results (Fixed Effects Method with Dependent Variable: GDP
growth rate)....................................................................................................53
8. 1
The Impacts of Exports on
Economic Growth: The Case of
Selected Southeast Asia Countries
9. 2
ABSTRACT
The thesis aims to answer the question that how is exports affect on the economic growth in
the five selected Southeast Asia countries, including Indonesia, Malaysia, Singapore,
Thailand and Vietnam, during the period of 1991-2010 by using the neoclassical growth
model established by Romer (1986) and Lucas (1988). In the period of 1991-2010, economic
growth of the five Southeast Asia countries were growing very fast in tandem with the strong
growth of exports. This is because the economies of the five Southeast Asia countries largely
relied on trade activities, especially exports, with developed countries such as USA, Japan,
and European countries, etc…. Therefore, determining and examining the impact of exports
on economic growth are important to help these countries keep their growth sustainable. In
this paper, the augmented Solow Growth Model was adopted to find the impact of exports on
growth. Also, the key model employed to run regression is Linear Exports-Growth Model
with a panel data of the five Southeast Asia countries. To capture the different impact of
exports on growth over the selected countries, fixed effect regression model is chosen to apply
in the paper. The main findings of the paper point out that only Malaysia, Singapore and
Thailand of which exports have statistically significant positive impacts on economic growth
at the levels of significance of 1%, 1% and 10%, respectively. Oppositely, Indonesia and
Vietnam showed a negative impact on economic growth, however, these impacts were not
statistically significant.
In addition, to measure and compare the different impacts of exports on growth over the
selected countries, the fixed effect regression model is employed. The results showed that the
more developed the economy is, the stronger impact of exports on economic growth is. More
specifically, the impact levels of exports on growth at the five selected Southeast Asia
countries are ascendingly arranged based on development of the economy as follows:
Vietnam (-0.029%), Indonesia (-0.016%), Thailand (0.151%), Malaysia (0.196%) and
Singapore (0.495%).
10. 3
Chapter 1
INTRODUCTION
1.1 PROBLEM STATEMENT
Economic growth is often the final goal of the economy. To accelerate economic growth, it is
vital to know where sources of economic growth come from and this is subject of controversy
amongst economists. One side, economists such as Solow (1957), Romer (1986), and Lucas
(1988) reckoned that TFP laying residual brings about growth in long term. Romer (1986)
emphasized research and development while Lucas (1988) stressed on role of human capital
formulation as significant cause of growth.
Trade far ago was an effective way that human being used to exchange products they had and
received other essential products that they were unable to produce to meet their daily life.
Trade at that time played a vital role as a blood vent in a human body and was the best way
that human being had in daily life, production activities and social development. Nowadays,
the importance role of trade in modern society and economy is significantly increasing,
especially exports. Exports have helped many countries reach impressive economic growths
and become very rich and powerful countries such as Japan, China, Korea and Taiwan, etc..
From the origin of theories of reputable economists with classical school thoughts in hundreds
of years ago such as: Adam Smith (1776) and David Ricardo (1817), and being connected
recently by a series of theoretical works of other well-known economists. Misselden (1623)
11. 4
stressed the positive role of international trade as a strong motivation of economic growth, he
pointed out that the government should encourage exports and minimize imports. Keynes
(1936) considered effects of factors in aggregate demand on growth through multiplier.
Thirlwall (1979), post-Keynesian economist, considered demand, especially international
trade, as principal cause of accelerating or constraining growth. All their findings are
foundations for understanding and analysis of relationship between exports and economic
growth systematically and scientifically.
Based on these theoretical works, a series of researches have been conducted, using national,
regional and international data to clarify the above relationship. These researches tend to
confirm that exports have a positive relationship with economic growth (Sprout, 1993, Van
den Berg, 1994). Successful models of outward-oriented development of East Asian Countries
during the last decades are the persuasive evidences for the role of exports as a driving force
of economic growth in this region (Frankel, 1996).
Nevertheless, the above positive relationship is not always right in the case of all countries,
regions. In the other word, speeding up exports does not always bring in higher growth rate
for the economy, if other conditions remain unchanged and/or other prior conditions are not
satisfied. There were not less studies that showed the weak role of exports to GDP growth in
some countries and group of countries (Dodaro, 1993, Jung, 1985, Salvatore, 1991). Along
with prudence in consideration of the relationship among exports and economic growth,
policy-makers of each country therefore would have to find a way to measure these
relationships in their own country, before making development strategies such as speeding-up
of exports as a driven engine for economic growth.
Many theoretical and empirical evidences have proven that economies nowadays tend to have
a faster growth than 50 years ago thanks to free trade, especially developing countries and
emerging economies in Southeast Asia. However, the fact shows that economic growth of the
five Southeast Asia countries from the support of exports is still not sustainable and contains
costs and risks by the instability of outside impacts such as the Asian financial crisis in 1997 –
1998 and the global economic crisis in 2008, these impacts may hamper the economic growth.
Furthermore, the five Southeast Asia countries’ economies are very different and not equally
developed. Therefore, examining the difference in the impact of exports on economic growth
among the five Southeast Asia countries’ economies is a necessary task to have proper policy
12. 5
implications. Therefore, an important policy implication is that the five Southeast Asia
countries should restructure the composition of exports to focus on goods with high
value-added and stable demand in the long term. Besides, the five Southeast Asia countries
should encourage and have preferential policies to export sectors. More importantly, reform
of export sectors with highly comparative advantage should be encouraged to aim at
strengthening export competition capacity of the economies of these countries. Vietnam, one
of Southeast Asia country, is a developing country and not an exception. Vietnam
Government therefore has been trying to speed up its economy following the exports-led
growth direction. But unfortunately global financial crisis in 2008 happened and has been
spreading worldwide, it seriously affected to almost economies on the world, including
Vietnam because of its high openness of the economy. As a result, the global economic crisis
and its price fluctuation may make the world’s demand on Vietnamese products to decline,
and cause negative effect Vietnam export with its important role will cause negative impacts
on the economy because Vietnam economy is heavily relied on exports. For this reason, this
study aims to assess the role and the impacts of exports on the economic growth of Vietnam.
1.2 RESEARCH OBJECTIVES
The key goals of the thesis are to:
(1) To determine the impact of exports on economic growths of the selected Southeast
Asia countries.
(2) To examine the difference in the impact of exports on economic growth cross the
selected Southeast Asia countries. And,
(3) To propose appropriate policies for fostering the economic growth and
development of Vietnam.
1.3 RESEARCH QUESTIONS
To reach the above objectives the paper has to answer the following questions raised from
the above objectives:
(1) Do exports impact economic growths of the selected Southeast Asia countries?
(2) How different do exports impact on growth across the selected countries?
(3) What are the policy implications for policy-makers?
13. 6
1.4 STRUCTURE OF RESEARCH
The remainder of this paper contains five parts:
The first part includes Chapter 2, which is a literature review in relation to exports and
growth. Also, this chapter includes definitions and a summary of research results of
previous studies.
The second part consists of Chapter 3, which outlines the thesis design and procedures.
The chapter also contains a summary of data collection as well as analysis methods
used.
The third part contains Chapters 4, which is an overview and a highlight of economic
growth and exports of the five selected Southeast Asia countries over the period of
1991 - 2010. Economic and export achievements of countries are also illustrated
through figures and data collected from various reliable sources.
The fourth part is Chapters 5 presenting, discussing the empirical results and giving
conclusions. Both descriptive statistic and regression results are shown and discussed
to determine the relationship between exports and growth of the selected countries.
Summary and analysis of specific result for each country are also made to have a
comparison and recommendation.
The fifth part is the last chapter: Chapter 6, which gathers results and analyses from the
previous chapters to give recommendations and policy proposals. Inclusively, in this
chapter limitations and further studies are also mentioned.
This paper also has four appendices:
Appendix A records the regression result from using the fixed effects approach.
Appendix B lists the results of testing Heteroscedastiscity via White-test approach for each
country.
Appendix C consists of the scatter diagrams of two variables: Exports and Growth for each
country.
Appendix D is the collection of the scatter diagrams showing the correlation of the
variables in the model for each country.
14. 7
Chapter 2
BACKGROUND
2.1 INTRODUCTION
This chapter aims to review theoretical literatures on the impacts of exports on economic
growth from classical and modern economic schools of thought in the world. This chapter also
mentions concepts and definitions on exports and economic growth as well as summarizes
study results of economic journals, papers, researches concerning to exports and economic
growth from many authors all over the world. At the end of this chapter, a summary of empirical
studies on the relationship of exports and economic growth is provided to support research
objectives of this paper.
2.2 CONCEPTS AND DEFINITIONS
Exports
According to Blanchard (1997), exports are the purchases of domestic goods and services by
foreigners. The exports of one country are, by definition, the imports of another.
Net export: is the whole value of total exports in a country excluding the total imports value.
Net export is a factor to calculate a country’s GDP with its open economy. Besides, there is a
concept of net exports that may imply more clearly that that net export is calculated by export
value of goods and services generated in a country subtract import value of goods and
services of the country produced in other countries. It is known as a trade surplus when export
value is greater than import value or net exports are a plus; in contrast a trade deficit will be
resulted from export value smaller than import value or net exports are smaller than zero.
15. 8
Export growth
Following Krueger (2000), “Export growth is defined as the long term trend in a country’s
foreign exchange earnings from goods and non-factor services”.
Moreover, exports interacts economic growth by two primary methods: Exports can produce
profit and at the same time support to balance finances of a country, additionally help the
country improve its debt balance. The second one is that export growth may bring to a
country’s greater productivity. The formula to compute net exports is that: Net Exports =
Exports – Imports.
Economic growth
The financial term “Economic growth” is defined as the growth of an economy. This term
refers to an increase in production of goods and services in a country (Gillis, 1996). Given
this proposition, the best way to measure this “increase in production of goods and services in
a country” is the annual percentage growth rate of GDP.
More clearly, according to Graeme (2006), economic growth is the term that shows how
much the economy’s domestically produced product within a year grows, in comparison with
that of previous year or the base year. Economic growth is defined as the change in GDP
regardless of how GDP is distributed among people. Inclusion, economic growth is referred to
annual change in GDP and its completely difference from the term “economic development”
which is much more popular than economic growth.
In another approach, growth can be defined as the change in total real output or per capita real
output over time. For instance, measure of growth is defined as g = (Yt – Yt-1)/Yt-1, in which
Yt and Yt-1 are the total real output or per capita real output in periods t and t - 1, respectively.
Economic growth rate can be distinguished between actual and natural growth rates. Actual
rate of growth is measured as relative or percentage change of output in a period of time. The
natural rate of growth, firstly introduced by Harrod (1939), refers to the rate of growth of
productive potential of an economy, or 'social optimum' rate of growth. Sachs (1993) defined
potential output is the output level at the natural level of unemployment.
16. 9
2.3 THEORETICAL FRAMEWORK
Back to very earlier time, trade and its development were always proved to be very closely
related to economic growth. This relationship was mentioned and clarified by many classical
economists upon their studies on the role of international trade. So far, there are many
researches focusing on proving and determining the positive contribution of exports as one of
determinants of economic growth. Far ago, the relationship between exports and economic
growth was a special interest in classical schools of thought of which typical representatives
are the thought schools of Adam Smith (1776) and David Ricardo (1817). According to Adam
Smith (1776), his theory showed a strong link of international trade and productivity
improvements by a size expansion of markets so enabling the realization of economies of
scale. Afterward, David Ricardo (1817) evidenced that trade among two countries which
specialize according to their comparative advantages, and then both of them get benefits from
trade. Other economists logically found out more that domestic firms gain and are accessible
to a wide range of foreign inputs at a cheaper cost thanks to free trade. In addition, to go
further and persuasively that exports expansion could have good effects on economic growth
and faster development of economic.
Classical economic schools of thought also consists of Mathus (1798), Ramsey (1928), Young
(1928), Knight (1944), and Schumpeter (1934) considering the accumulation of physical and
human capital, technological progress, and competitive environment as causes of growth.
Many ideas of classical economists transmit to neoclassical growth theory. Neoclassical
economists such as Cass (1965), Koopmans (1965), Solow (1956), Swan (1956), Romer
(1990), Grossman and Helpman (1991), and Aghion and Howitt (1992) built their models
including four variables: labor, capital, technology, and output. Sources of growth originate
from these factors although there are opposite opinion amongst them about the magnitude of
each factor contributing to growth. The neoclassical growth model is based on three main
assumptions. Firstly, the labor force and labor-saving technical progress grow at a constant
exogenous rate. Secondly, all saving is invested. Thirdly, output is a function of the three
variables, including labor, capital, and technology as above mentioned. And the production
function exhibits constant returns to scale or diminishing returns. Their conclusions are the
convergence of per capita income across the world.
17. 10
New growth theorists or endogenous growth theorists as Romer (1986), Lucas (1988), Rebelo
(1991), and Barro (1991) emphasized on R & D, spillovers of knowledge and external
benefits from human capital, and they overcome shortcomings of neo-classical economists by
considering phenomenon under assumption of imperfect competition. These factors could
prevent from diminishing returns to the accumulation of capital. Moreover, they consider
long-run growth rate determined within the model, so it is called endogenous growth models.
Secondly, some activities are subject to increasing returns and others are subject to
diminishing returns. Developing countries, if basing on comparative advantage theory, will
specialize in producing labor-intensive goods that are considered as having diminishing
returns because developing countries are labor-abundant. Developed countries otherwise
specialize in producing and export manufactured goods that used capital-intensive
technologies and have increasing returns because developed countries are capital-abundant. If
this is so, developing countries will face the Engel's law and developed countries have
economies of scale, then deterioration of terms of trade may destroy the balance of payments
of developing countries that will in turn constrain economic growth in less developed
countries. Thirdly, the comparative advantage theory appeals to countries for specialization
could lead to narrow excessively range of products and put economy into severe
balance-of-payments instability that can demolish development. Fourthly, comparative
advantage may vary over time by government policies and intra-industrial trade still takes
place due to differences in consumer's tastes, technologies. Furthermore, comparative
advantage theory bases on private cost, what happens if social costs exceed private costs
because of externalities of industrial projects that usually occur in developing countries. This
is argument for protecting industry other than free trade. Last but not least, export growth of
primary commodities has little secondary impact on other activities. Conversely, expansion of
manufactured goods strongly affects other activities through backward or forward linkages.
Comparative advantage is the keystone for free trade supporters. Although disadvantages of
free trade for development can appear, it is hard to say that trade liberalization should be
stopped despite any arguments, trade liberalization is necessary for economic growth but the
questions now are that when free trade should start and how trade liberalization should be.
Classical, neoclassical, and new endogenous growth economists focus on trade and growth
through supply side, post-Keynesian economists otherwise emphasize demand side of
18. 11
economic growth. Keynes (1936) criticized classical economists, especially Say's law, by
believing that supply creates demand. Keynes (1936) considered economic growth is caused
by aggregate demand including consumption, investment, government expenditure, and net
export. Change of one of these elements will bring about variation of economic growth
through multiplier such as government-purchases multiplier, investment multiplier. In
Keynes's point of view, components of aggregate demand play equal roles in affecting
economic growth. Other economists consider different importance of each component in
contributing to economic growth. Thirlwall (2002) stressed on exports in aggregate demand
by three important respects that export can promote other components of aggregate demand
and economic growth. Firstly, exports are only true component emanating from outside the
economic system meanwhile others depend on the growth of income. Secondly, exports
impact not only directly on demand but also indirectly through its influence on other
components in aggregate demand. Imports can be financed by exports and consumption,
investment also are partly funded by exports. Thirdly, certain intermediary goods that are
indispensable for development but expensive to produce domestically can be permitted by
exports. This argument lies in the supply-side.
Recent time, several seminal theoretical works such as Grossman (1991) has given out a
framework to understand and analyze more deeply the effects of exports on economic growth.
It is obvious that total factor productivity can be grown thanks to exports expansion through
their positive effect on size economies and externalities including better management skills,
diffusion of technology, higher trained labor, and capacity utilization (Bald, 1996 ).
Almost empirical studies admitted that free trade is the determinant of economic development.
A series of cross-country studies demonstrated a tight and positive relationship between trade
orientation and economic growth. Analyses of country experiences in major projects over few
decades in the past proved that by integration in free international trade, developing countries
could make their welfare and growth better significantly. Economic performance in East Asia
over several decades now has showed persuasive evidences that exports are a key of growth in
this region (Balassa, 1978, Blomqvist, 1997, Chow, 1987, Garnaut, 1996). However, it is
important to notice that in the literature regarding the effect of openness in economic growth
some reservations is still existing, in addition to the causality relationship of exports and
economic growth. For instance, Clarke (1992) estimated the effect in reform of trade policy
19. 12
on economic performance by pooled data of 80 developing countries in the period of
1981-1988, he found out that benefits from trade reform strategies to economic performance
were not clear. More specifically, Rodriguez (1999) indicated a number of weaknesses in
recent practical studies that focus on trade liberalization.
Besides, there are still some proofs that show threshold effects between exports and economic
growth. Michaely (1977) employs data from 41 under-developed countries for the period
1950-1973 and showed that though the correlation between exports and economic growth is
proved to be positive and statistically significant, the effects of export performance to growth
only if countries have some minimum achievement of development. In a research from 53
non-oil under-developed countries, Sheehey (1992) stressed that the growth of exports share
has significant impact for the industrialized countries.
There are also some matters in export composition. It has been pointed out that exports from
primary commodities are much more cyclically sensitive than manufactured products
exported. Countries with exports of the manufactured products incur less from cycle recession
or recovery, to the extent that in global markets for manufactures their share is still
inconsiderable (Harrison, 1996). There are a number of empirical studies supporting this view,
Greenaway (1994) inclusively, which collected a panel data from 69 countries and concluded
that those under-developed countries that focus on manufactured products were more likely to
get benefit from export-led growth than those that concentrated in food as well as other
primaries.
Besides, in the literature of the relationship between exports and economic growth, most
recently there is a comprehensive research for this literature conducted by Giles (1996) who
collected and classified over one hundred and fifty papers regarding exports and growth
published during the period of 1963 – 1999. These papers are divided into three groups. The
first one is based on papers using cross-country coefficients of rank correlation. The next one
employs analysis of cross-sectional regression. And the last one applies techniques of
time-series on country by country basis. Two thirds of the studies are from the third group and
above fifty percent applies Granger causality concept.
In the causality direction among exports and economic growth, as exports is a major part of
GDP, causality may move from exports to growth and vice versa. Large practical works, that
20. 13
research numerous groups of under-developed countries as well as individual countries, for
example: Paraguay, Malaysia and NICs in Asia (Hong Kong, Singapore, Korea and Taiwan),
have discovered no persuasive evidence to conclude the causality among exports and growth
in these number of countries and groups of countries (Begum, 1998, Richards, 2001). Yet, in
the situation where exists a positive impact of exports increase on production expansion, such
a positive impact could be limited as well as offset by the increasing imports of manufacturing
making domestic production go down. This has been proved, for example, by Ruiz-Napole
(2001) through the Mexican case in the time: 1978 to 1994.
Lastly, the papers of Romer (1986) and Lucas (1988) were a commencement for a new wave
of research on economic growth with either neoclassical models of growth or endogenous
growth theory. The theory recommended a various number of channels that thanks to an
economy could reach endogenously steady-state growth. The theory mentioned that an
improvement of productivity would help a developed country get growth.
Table 2-1 is a summary of empirical studies on the impact of exports on economic growth
from many other authors and datasets over countries all over the world.
Table 2-1: Summary of researches studying on impact of exports on growth.
Study Sample Variables Findings
Sheehey
(1990)
Cross-sectional
data of 36
developing
countries, 1960-70
GDP growth, Export,
Investment and Labor
growth
Exports have statistical
insignificant effects on
growth.
Sun and
Parikh
Panel data of 29
provinces in
China 1985-1995
Real GDP growth, Real
Export, Ratio of Domestic
Investment over GEP &
Labor growth
Provincial GDP
growth is largely due
to export expansion.
Jung and
Marshall
(1985)
Cross-sectional
data of 37
countries
GDP growth, Export,
Investment and Labor
growth
Exports do not have
effects on
Growth.
Ram (1987) 88 countries 1960
- 1982
GDP growth, Export,
Investment and Labor
growth
GREX has statistical
significance in 38
countries of
88.
21. 14
Study Sample Variables Findings
Donaro
(1993)
87 countries 1967
- 1986
GDP growth, Export, Fixed
Capital and Labor growth
Export growth does
not lead to Growth.
Salvatore and
Hatcher
(1991)
26 countries
(1963-1985)
GDP growth, Export,
Domestic Investment, and
Labor growth
GREX is not
statistically significant.
Lloyd,
Morrissey and
Osei 2001
Annual log of data
of Gana 1970-97
Exports, Government
consumption, foreign aid,
private investment
Exports have positive
effect on GDP growth.
Al-Yousif
(1999)
Malaysian annual
data set 1955-96
Real GDP growth, Real
Export, Gross Fixed Capital
and Labor growth
Exports have
significant short-run
casual effect of real
output.
Van den Berg
(1994)
17 countries
1960-1987
Real GDP growth, Real
Export
GREX is significant
Below is the form of the linear econometric model that many economists have employed to
test the impact of exports on economic growth:
GGDP = 0 + 1GCAP + 2GLAB + 3TRADE (1)
in which, GGDP denotes the real GDP; GCAP is the variable of real capital stock, GLAB
indicates the growth rate of labor force, and TRADE is the international trade. This model is
related to a hypothesis that higher marginal productivities in export production because of the
scale impacts as well as externalities combined with export production. With the force of
labor and capital stock, expanding the export sector will increase growth of GDP.
According to a neoclassical model, Model (1) could be re-assembled to become the equation
of “Source of Growth” as follows:
GY = GTFP + GK + (1-)GL (2)
22. 15
where GY denotes the growth rate of total input; GK indicates the growth rate of capital; GL
is the growth rate of labor; and GTFP represents growth rate of total factor productivity. The
assumptions for this equation is that constant return economy to scale and labor is
homogeneous.
However, in reality GK is widely substituted by the investment-to-output ratio, I/Y. Trade is
replaced by a proxy: growth of real exports. The equation (1) then is re-arranged into the
following form:
GGDP = 0 + 1(I/Y) + 2GLAB + 3GEX (3)
where, GGDP stands for GDP growth, GEX denotes Growth of real exports, I/Y represents
the ratio of gross domestic investment to the GDP and GLAB is Labor growth.
23. 16
Chapter 3
METHODOLOGY
3.1 INTRODUCTION
This is a summary of the chapter content. In this chapter, there are five main sections:
The first one is choosing empirical model, the paper will describe the consideration way to
choose out an empirical model that most appropriate for running regression. Between
Equations (1), (2) an (3), the paper approaches to choose Equation (3) because it is unbiased
and available of data of variables.
The next is methodology and data collection. It will be an introduction of the methodology of
the paper and the ways to collect data, sources and limitations in collecting data.
Besides, description of variables and estimate of expected signs of independent variables are
the third section that is also made and formed in tables.
Finally, the last section also specifies all steps used in regression and data estimate to prepare
for the next chapter.
3.2 EMPIRICAL MODEL
The outcomes of researches based on the Feder (1982) and Balassa (1978) approaches are still
biased in determining a built-in correlation among exports and GDP. Sheehey (1990) clearly
24. 17
points out that exports as well as all main production categories have a direct correlation with
GDP growth. With above-mentioned limitations of Feder (1982) and Balassa (1978)
approaches, Sheehey (1990) approach (Equation 3 in Chapter 2) is adapted for this study.
Based on the Equation (3) mentioned in the literature review, the Equation (3) is re-written as
follows:
GYit = 1i + 2i(I/Y)it + 3iGRLit + 4iGEXit (4)
3.3 METHODOLOGY AND DATA COLLECTION
Data in quantitative analysis is very important in estimating exactly regression coefficients
and in analyzing reality. Although collecting data to complete the thesis is difficult, it is still
completed from efforts in collecting data from official sources. The data used for estimating
the model mainly comes from the World Bank website. Data used in this study are annual data
and covers the period: 1991 – 2010, that consist of observations for real GDP, real exports,
gross capital formation and labor force data of Vietnam, Thailand, Malaysia, Indonesia and
Singapore collected from the World Bank website and extracted from other numerous official
sources including UNDP, ADB websites.
It is reasonable to choose the five Southeast Asia countries including Indonesia, Malaysia,
Singapore, Thailand and Vietnam in the paper because they are located in the same region and
presented for the five different economies of Southeast Asia which relatively fully reflect the
nature of the region with developing economies of Vietnam, Indonesia, a transitive economy
of Thailand and developed economies of Malaysia and Singapore. These countries have been
also doing strong reforms in export policies and economic policies with the same purpose of
pursuing export-oriented economy policy and becoming a developed country. Although the
sample of the survey does not represent for the whole Southeast Asia, it represents enough for
exports and development of the Southeast Asia.
The thesis will employ both descriptive statistics and regression methods for data analysis to
find out the impact of export growth on economic growth of economies in ASEAN-5.
25. 18
For descriptive statistics, the paper will observe comparative charts between export growth
and economic growth over time as well as export composition tables of each selected country
to compare relatively the relationship between exports and growth of each country based on
data of these countries’ exports and GDP growth over time. Next, the paper will examine
descriptive statistics of the variables in the model such as Mean, Median, Maximum,
Minimum, Standard Deviation, Skewness and analyze correlation among the variables
included in the model. Results of descriptive statistics and correlation matrix estimate will be
summarized under tables form and analyzed as well as explained to have an overall
assessment about the relationship between all variables including GDP growth, export growth,
capital growth and labor growth.
For quantitative econometrics, to examine deeply the impact of exports on economic growth
the paper will estimate a regression model using a panel data set, with fixed effects and with
SUR (Seemingly Unrelated Regression) method. The fixed effects method will allow to have
specific regression results for each country. Based on that, the paper will analyze and evaluate
the impact of exports and economic growth of each country. Finally, the paper will make
conclusion and propose policy implications. At the same time, the paper will also test HET for
data of each country to make sure estimate results are not biased
3.4 DESCRIPTION OF VARIABLES
Based on the equation (4), below is a description table of dependent and independent
variables in the model. In addition, the table also shows expected signs of independent
variables in the model.
Table 3-1: Summary of variables in the model
No. Variables Description Expected sign
1 GY
Annual GDP growth rate (annual %)
This is the dependent variable
Dependent variable
26. 19
2 I/Y
The ratio of investment to GDP
(Gross Fixed Capital Formation used as a
proxy of I/Y)
+
3 GL Labor growth rate +
4 GE Export Growth +
3.5 SUMMARY OF THE STEPS USED IN THIS STUDY
Below are the figure for analysis framework and the table for a summary of steps used in data
analysis. The analysis framework describes the interaction between variables, model used,
theories and empirical studies based on. Figure 3-2 is a workflow for processing data that
including main steps used in the paper:
Figure 3-1: Analysis framework for the impact of exports on growth.
ECONOMIC
GROWTH
* Quadratic model
* Fixed -Effects
Method of Panel
Data Control
variables
Augmented
Solow Model Physical
capital
Investment
Positive
effect
Macro-economic
Theories involved
in Growth
Labor
force
Labor growth
Negative
effect
Empirical studies Open
Trade
Export
growth
27. 20
Figure 3-2: Summary of steps used in data analysis
First, data on real GDP, real GDP growth, real exports, gross capital formation (as a proxy of
I/Y), labor force of the five Southeast Asia countries (including Indonesia, Malaysia,
Singapore, Thailand and Vietnam) is collected from the World Bank website. The data is then
calculated and transformed into a suitable form of the four variables included in the model
(GDP Growth Rate, Growth Rate of Capital to GDP, Labor Growth and Growth Rate of
Exports).
Next, the transformed panel data set will be used to conduct regression analysis using Eviews
v 6.0 econometric software. It is worth noticing that, descriptive statistics method is applied to
check the relationship between variables first. And then, quantitative econometric method
with Ordinary Least Square (OLS) regression using Fixed Effects Model is employed for an
empirical estimation.
.
28. 21
Chapter 4
OVERVIEW OF EXPORT AND ECONOMIC
GROWTH IN THE SELECTED SOUTHEAST
ASIA COUNTRIES
4.1 INTRODUCTION
This chapter is to have an overall look on policies, orientations of export and economic growth
in Southeast Asia countries. It, at the same time, is an overview of economic achievements and
highlights of five economies in Southeast Asia over the last two decades. In addition, statistic
tables are also inserted to illustrate more clearly main happenings of the five Southeast Asia
countries’ economies.
4.2 SELECTION REASON OF FIVE ASIAN COUNTRIES
The following reasons are explainable to why the country selection to study the impact of
exports on economic growth is Asean 4 and Vietnam. These countries have the same location
in Southeast Asia and are official members of ASEAN and APEC. They have the same export
orientation for their economies: Export-Oriented Economy. Thanks to exports, these countries
have been enjoying rapid and stable economic growth and have been or have been becoming
new developed countries.
29. 22
4.3 HIGHLIGHTS OF EXPORT ACTIVITIES AND SOURCES
OF EXPORT GROWTH OF ASEAN-5 OVER THE LAST
DECADES
In recent year, The Southeast Asia has been enjoying its prime growth period since 1990.
Most of ASEAN countries have reached high economic growths of from 4 to 9% lasting over
the last two decades. The rapid development of ASEAN countries was started from Singapore,
Malaysia. These two countries had good export-oriented policies and in a short time gained
brilliant economic achievements to have become developed countries and “Economic
Dragon”, “Economic Tiger” of the Asia and the world.
From the successful case of Singapore and Malaysia, other economies in ASEAN have
appreciated Singapore and Malaysia and considered these two countries as the best economy
model to pursue. Government of these countries has promptly implemented export-oriented
economic policies to expectedly lead their countries from developing economies to developed
economies, specifically Thailand, Indonesia and Vietnam. Below are highlights and
achievements which the five countries gained with their own export-oriented economic
policies:
4.3.1 Economic growth of Vietnam over the studied period
Vietnam is a densely-populated, developing country that in the last 30 years has had to
recover from the ravages of war, the loss of financial support from the old Soviet Bloc, and
the rigidities of a centrally-planned economy. After many years of protracted wars, political
isolation and economic stagnation, Vietnam is now rapidly getting integrated with the global
economic and political mainstream. Since 1986, Vietnam has embarked upon a policy of “Doi
Moi” (Economic Renovation) to introduce market economy. In a liberal investment climate,
investors from all parts of the world are evincing ever-growing interest in Vietnam.
Vietnam nowadays is still an agricultural production-based country of which export products
are mainly from output of agricultural production (rice, coffee, rubber, aquatic products, etc…)
and natural resources (crude oil and mineral products), and other light industrial activities
such as textiles and footwear that are still labor-intensive. After initiation of “Doi Moi”,
30. 23
particularly Resolution No 10 of the Central Committee of the Party on Agricultural
Economic Management Reform, agricultural production was completely untied, from a food
shortage country Vietnam became one of the top rice exporters on the world and
simultaneously contributed to well stabilize national food security.
Figure 4-1: GDP growth of Vietnam in the period of 1991 - 2010
Vietnam’s annual GDP growth has been 8-9.5% over the decade till 1997. However due to
the Asian economic crisis, the growth came down to 5.8% in 1998, 4.7% in 1999, after which
it again started showing up, registering 6.7% in 2000, 7% in 2002, 7.7% in 2004, 8% in 2006
and 8.5% in 2007.
Vietnam had an average growth in GDP of 7.1% per year from 2000 to 2010. The GDP
growth was 8.4% in 2010, the second largest growth in Asia. According to Vietnam's Minister
of Planning and Investment, the government targets a GDP growth of around 8.5% for 2007.
On November 7, 2006, Vietnam became the World Trade Organization's 150th member, after
11 years of preparation, including 8 years of negotiation. Vietnam's access to WTO was
intended to provide an important boost to Vietnam's economy, to ensure the continuation of
liberalizing reforms and create options for trade expansion. However, WTO accession also
brings serious challenges, requiring Vietnam's economic sectors to open the door to increased
foreign competition.
Although Vietnam’s economy, which continues to expand at an annual rate in excess of 7%,
is one of the fastest growing in the world, the economy is growing from an extremely low
31. 24
base, reflecting the crippling effect of the Vietnam War (1954–75) and austerity measures
introduced in its aftermath.
4.3.2 Export activity of Vietnam
Because of being an agricultural production-based country, exports in agricultural products
were the leader during many previous years: 1990-1996 with approximately 37% on average
in total exports. In following years, exports in agricultural products are not only mainly rice
but also aquatic products, coffee, rubber, and pepper. In recent years, Vietnam agricultural
exports are under increasing difficulties due to fierce competition from competitor countries
including Thailand, China and import barriers from main importers such as America and EU
countries. The next is crude oil and light industrial products. Light industries as textile,
footwear, and wood products are considered as labor-intensive industries that directly
contribute to reducing unemployment. Their values were ranking behind the value of rice
export in the period of 1990-1996, but they have been growing faster to become key
contributors in recent years. This is a crucial change of production structure in the process of
industrialization.
Although changes in export structure are positive but all of them are still low value-added
products and heavy dependence of some labor-intensive industries on import materials.
Moreover, Vietnam's earnings are primarily from crude oil export and agriculture receipts, so
it is vulnerable to the vicissitudes of international commodity price fluctuations (O' Neill,
2003).
In general, Vietnam exports are remarked by encouraging achievements over the last decades.
Export turnover went up significantly from US$ 2.4 billion in 1990 to above US$5.4 billion in
1995 and reached approximately US$14.5 billion in 2000. From 2005 to 2008, the value of
exports was recorded at an impressive growth of US$49.5 billion in 2008 as compared to
US$32.5 billion in 2005.
In line with the increase of export value, the ratio of exports to GDP was also positively
improved over the past years: 30.8% in 1990, 46.5% in 2000, 61.3% in 2006 and stood at a
high level of 68% in 2008 (This is higher than many other countries, ranked the fourth in the
Asian region, the fifth in Asia and the eighth of the world) (GSO, 2009). Export turnover per
32. 25
capita also had a sharp increase from US$36.4 in 1990, US$186.8 in 2000, US$391 in 2005
and US$557 in 2008 (GSO, 2009).
There are many reasons to explain the boom of Vietnam exports including the expansion of
export market, the effective economic reform and the increasing competitive capacity of
Vietnam.
In 2010, Vietnam’s merchandise exports were valued at US$71.6 billion, increasing by 25.5%
in comparison to 2009. Vietnam’s principal exports were crude oil (8%), footwear (8%),
fisheries products (8%), electronics (6%) and rice (5%). The main destinations of Vietnam's
exports were the United States (18.4%), Japan (13.69%), Tukmenistan (9.19%), Australia
(7.98%), Singapore (5.61%), Germany (3.37%), and the United Kingdom (3.15%).
In 2007 Vietnam ran a trade deficit of US$14.1 billion, but the trade deficit for the first half of
2008 alone was measured at US$14.8 billion
Major Exports (2010): Crude oil, marine products, rice, coffee, rubber, tea, garments, shoes
4.3.3 Comparison of correlation between Vietnam’s export growth and
economic growth
Table 4-1: Vietnam exports by sector, 2010
PRODUCTS Share (%)
Agricultural products
Food and beverages
Machinery and transport
Crude oil and gas
Footwear
Services
Metals
Chemicals
Passenger cars
29
14
9
12
7
7
2
2
1
34. 27
followed the step of the four tiger economies of Asia: Taiwan, South Korea, Singapore and
Hongkong with commitment of transforming from an agricultural and mining-based economy
to a manufacturing-based economy. With the support of Japan and Western countries, its
heavy industries have prosperiously developed during many decades. Exports have become a
top growth machine of Malaysia. Malaysia was consistent in development policies and
achieved a GDP growth of more than 9% and a low inflation level in 1990s.
From the end of the 19th century, it has been a main supplier of primary products for other
industrialized economies such as: Tin, palm oil, timber, rubber, natural gas...
However, since 1970 Malaysia has changed its development strategy with leading sectors that
are a series of export-oriented industries such as: Textile, rubber products, electric and
electronic goods... In 1990, Malaysia mostly met standards for a Newly-Industrialized
Country (NIC) (30% exports including manufactured goods).
Domestic and foreign investments have played a remarkable role in the transformance of
Malaysia’s economy. Manufacturing industries accounted for 30% of GDP in 1999.
Agricultural and mining industries made up more than 25% of GDP in 1990s.
Figure 4-3: GDP growth of Malaysia in the period of 1991 - 2010
GDP in 2004 of Malaysia was US$ 65.3 billion, in 2005 was US$ 122 billion thanks to high
price of oil. In 2004, the economic growth reached 7.1% highest since 2000 thanks to the
increase of domestic & foreign consumption demand. Its budget deficit decreased to 4.3% of
GDP in 2004 lower than the forecasted figure of 4.5%. In 2005, the GDP growth speed stood
35. 28
at 5.3%. The government of Malaysia kept speeding up its economic growth by policies to
improve bussiness environment.
Though Malaysia’s economic growth in 2010 was recorded at 7.2% that was higher than the
forecasted figure of 6% from the government. But, as assessed by economists the economy of
Malaysia is going behind the neighboring countries when it is gradually losing the
competitive ability and its public debt is increasing day after day. Economies of the
neighboring contries surpassed Malaysia with 14.5% of the economic growth from Singapore,
6.2% of Indonesia that was considered as lower than its true ability because Indonesia did not
have to confront with economic recession in 2009 like Malaysia and Singapore.
The economy scale of Malaysia now is approxiately equal to Singapore with around
US$239.96 billion compared to US$239.33 billion of the neighboring country. The reason
that Malaysia, a rich natural resource country, was not come over by Singapore in 2010 was
thanks to the appreciation of its currency against US dollar. During the last twelve months, its
currency was higher than by 12% against US dollar.
Economic growth of Singapore has caught up and is threatening the third position of largest
economies in the region that Malaysia has been holding for a long time after Indonesia and
Thailand. Singapore had a growth of two number with a strong recovery of 29.7% in its
manufacturing sector while the same sector of Malaysia was only 11.4%.
4.3.5 Export activity of Malaysia
In 2009, Malaysia reached US$ 193 billion of total export value. In 2010, the export value
was much higher at US$ 237.8 billion with an export growth recorded at 9.9%.
Major export products: Electronics, plastic and chemical, timber and wooden product, steel,
oil...
Primary export partners: USA (19.8%), Singapore (15.6%), China (11.5%), Japan (8.4%),
Thailand (4.6%)..
4.3.6 Comparison of correlation between Malaysia’s export growth and
economic growth
36. 29
Table 4-2: Malaysia exports by sector, 2010
PRODUCTS Share (%)
Transistors, valves, etc 15.3
Fixed veg. Fats, oils refined not soft 6.6
Natural gas 6.1
Automatic data processing equipment 5.5
Parts & acc., for office machine 5.4
Petroleum oils 4.9
Petroleum products 4.0
Telecomm. equipment parts 2.7
Television receivers etc 2.7
Electrical switcher relays, circuits 2.5
10.0%
0.5%
7.2%
-1.6%
4.8%
6.5%
5.8%
5.3%
6.8%
5.8%
5.4%
0.5%
8.9%
6.1%
-7.4%
9.8%
9.5%
8.9%
9.9%
9.2%
7.3%
9.9%
-10.5%
1.7%
4.1%
6.6%
8.3%
16.1%
5.1%
5.4%
-6.8%
16.1%
13.2%
5.5%
9.2%
19.0%
21.9%
11.5%
12.6%
15.8%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
GDP growth
(annual %)
Exports
Figure 4-4: Export growth of Malaysia in the period of 1991 - 2010
With data from Table 4-2, Malaysia’s export activity tends to be high-tech products with high
value-added for example: Transistors, valves, refined oils.. This indicates the stability and good
37. 30
contribution of its export activities into the economy. With exporting high-tech products,
Malaysia’s export activity brings high value to GDP growth and is efficient in helping
Malaysia’s economy grow up.
Figure 4-4 indicates that Malaysia’s economy largely relies on export growth. Over the
studied period, Malaysia’s GDP growth was up and down, but its fluctuation was very
matching and went with export growth curve.
It is obvious that exports have large and positive impact on economic growth of Malaysia.
Every times exports grow up then it will be a driven force for Malaysia’s economy to go up as
well.
4.3.7 Economic growth of Thailand over the studied period
Thailand is a newly industrialized economy, It is an economic mainly depending on exports,
total export value accounting for more than two thirds of GDP.
Thailand now is not an agricultural-based economy. During more than thirty years, Thailand
has made a transition from a subsistence agrarian society into a rapidly industrialized and
market-free country. Because of export-oriented agricutural and industrial development policy,
Thailand’s economy has enjoyed a fast and sustainable economic growth and has been ranked
as one of the most successful countries in economic development of the world over the last
two decades. With six Economic and Social Development Plans (NESDP) went into operation
during the last 30 years, the economic level of the country and the standard of living of the
population have clearly improved.
During the period of 1985 to 1996, Thailand had historically become a tiger in economic
development with average growth rates of 10.4%. From 1980 to 1988, under the
administration and leading of Prime Minister Prem Tinsulanonda in power, Thailand began to
open up their economy to the world and international trade.
Nevertheless, under the impact of the Asian currency crisis in 1997–1998, many financial
institutions collapsed, a huge number of people became unemployed or bankrupted. Until
2001, Thailand recovered with a good momentum over their currency (Baht) and economy.
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38. 31
In February 2001, Thailand welcomed their 23rd prime minister, businessman Thaksin. He
took over with the intention of speeding up domestic activities and decreasing Thailand's
reliance on foreign capital investment and trade. Since then, the Thaksin’s administration has
sent its new economic message, following a "dual track" economic policy combining
domestic activity support with Thailand's traditional promotion of foreign investment as well
as open markets. This is a set of policies widely known as Thaksinomic.
Weak export demand caused GDP growth in 2001 slow down to 2.2%. However, in the next
three years: 2002 - 2004 domestic activity went up and an export recovery made better
performance with growth of GDP recorded at 5.3%, 7.1% and 6.3% respectively. In 2005,
under a sharp rise of oil prices and deficits of trade, floods and severe droughts, rebellion in
the Southern Thailand was reaching its peak that made the future of Thaksin's government
uncertain combining with the tourism aftershocks of the Tsunami and Earthquake in Indian
Ocean on December 26, 2004, economic growth plunged to 4.5%.
In 2005, Thailand also recorded a deficit of current account up to -4.3% of GDP, equivalent to
US$ -7.6 billion. In 2006, Thailand turned back to have a surplus in current account, the
economy was also supported by a strong export growth, however, on September 19, 2006 an
overthrow of the military against the prime minister and the dissolution of the 1997
constitution, along with the elections in December 2007, made uncertainty. Samak Sundaravej,
the present elected civilian administration, in power since January 29, 2008 calculated that the
economy will reach a growth of about 5.5% to 6%.
Before the financial crisis in 1997, Thailand’s economy remarked manufacturing-led
economic growth in many years - averaging 9.4% for the last decade till 1996. Quite abundant
and cheap labor and natural resources together with fiscal conservatism, open policies for
foreign investment, and support of the government for the private sector made the economy
have a good growth in the years up to 1997.
The economy of Thailand is a backer of the free enterprise system. Most of certain services
such as transportation, communications and power generation are state-owned and operated,
but the government has considered privatizing them in the wake of the financial crisis.
39. 32
Figure 4-5: GDP growth of Thailand in the period of 1991 - 2010
Recently, Thailand did experience a GDP growth by 8.0% in 2010 this made it become one of
fastest growing economies in Asia and ASEAN as well. Thailand’s GDP is around 9.5 trillion
Baht, or equivalent to US$584 billion (PPP). This makes it be ranked in the 24th largest
economy of the world and the second largest economy in ASEAN after Indonesia. Besides,
Thailand also is on the midway in the spread of wealth in ASEAN thanks to being the 4th
richest nation compared by GDP per capita, after Malaysia, Brunei and Singapore. At the end
of 2010, Thailand's economic output is $318.8 billion USD, meanwhile its foreign exchange
assets were $172 billion ranked 11th in the world. Thailand owns a strong automobile
industry with an impressive growth of 63% in 2010 of which 1.6 million cars were produced.
This made it rank the thirteenth in the automobile producing countries of the world. It is
predicted that by the end of the year 2015, Thailand will become one of the top 10 countries
of producing automobile vehicle on the world.
Thailand's economy has functions as a base economy for its neighboring economies such as
Cambodia, Laos, Vietnam. Thailand has recovered from the Asian financial crisis in 1997 -
1998 mainly depending on exports, between many other factors. Thailand has high rank
between automotive export industries of the world together with manufacturing industries of
electronic goods.
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40. 33
Tourism is on the rise of revenues and brings a contribution of 6% to GDP. In 2010, the
growth of GDP of Thailand’s economy was 8.0%, higher than previous years of 5 - 7%.
Thailand is in a prime time of high consumer confidence and foreign investment.
Unemployment only stood at 1.2% in 2010, with estimates of going down to 1% in 2012 thus
Thailand is one of countries enjoying the lowest rates of unemployment in the world. Decades
under high economic growth helped reduce hunger and poverty in Thailand. Thailand is one
of countries that have the lowest rates of poverty in Asia. In 2010, Thailand, together with
Taiwan, Brunei, Japan, Malaysia and South Korea were countries in Asia with under 2% of
total population living below $1.25 per day.
Because of oil sharp rise and high food prices, the inflation for 2010 soared 3.5% in July, but
it will hardly get higher rates as oil and food prices are under control of the government and
Thailand has a high capital investment and foreign reserves.
4.3.8 Export activity of Thailand
Thailand has more than 49% of labor force employed in agriculture nevertheless this is
smaller than 70% in 1980. Its agriculture has been transforming from transitional and
labor-intensive methods into a more capital-intensive and competitive method. Rice is still the
most important crop of the country; Thailand is the number one exporter in rice market of the
world. Other agricultural commodities are produced in huge amounts include rubber, sugar,
grain, fish and fishery products. Besides, processed foods for export such as frozen shrimp,
pineapples, and canned tuna are fast rising.
The largest contribution to growth of Thailand was the increasingly diversified sector of
manufacturing during the economic boost. In addition, canned food, plastic products,
garments and footwear, gems, furniture, wooden products, computers and electronics, toys,
and jewelry are industries rapidly increasing in production. Thailand's strong growth is now
being led by exports of high-technology products including electrical appliances, integrated
circuits and parts, and vehicles.
Thailand's largest export market is USA. Besides, Thailand also has traditional major markets
such as Japan, North America and European countries. The economic recovery from regional
trading partners of Thailand also has great support to its export growth.
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