PROBLEM STATEMENT
Rapid output growth and low inflation are primary goals of macroeconomic policy, aiming to promote economic stability Governments typically utilize monetary policies, such as adjusting interest rates and controlling the money supply, alongside fiscal policies like taxation and government spending, to stabilize the economy These measures help reduce inflation pressures and foster sustainable growth, as inflation is recognized as a detrimental factor impacting both firms and families.
Many countries prioritize price stability to maintain economic stability, but some researchers argue that moderate inflation can have beneficial effects For example, inflation encourages investors to reallocate portfolios from cash to capital assets, which helps lower real interest rates, stimulates investment, and boosts labor productivity (Tobin, 1965).
In 1972, Tobin argued that a slight amount of inflation can facilitate economic efficiency by aiding labor market adjustments Similarly, Jarret and Selody (1982) suggested that steady demand growth leads to moderate inflation rates, which can enhance productivity rather than hinder it Therefore, pursuing zero inflation may entail short-term pain with potentially greater economic challenges in the future.
In recent years, inflation has become a significant issue worldwide, particularly impacting developing countries in Asia The global economic crisis has led to widespread economic instability, with many nations experiencing rising living costs and financial challenges Developing Asian countries are no exception to these inflationary pressures, which have affected their economies and affected their populations' livelihoods.
Countries experiencing rising commodity prices face significant challenges that impact people's livelihoods, as increased energy and food costs during crises drive inflation Strong domestic demand and rising wages further contribute to inflationary pressures, leading to immediate price increases across all commodities This surge in prices places financial strain on households and businesses, causing escalating living and production costs that hinder economic stability.
Despite governments implementing various fiscal and monetary policies to reduce inflation and stabilize the economy, prices continue to rise unabated This persistent inflation creates severe hardships for families and individuals in low-income countries, exacerbating economic instability and social challenges.
Numerous studies explore the complex relationship between inflation and economic growth, with conflicting findings—some indicating a positive impact of inflation on growth, while others suggest a negative effect Recent research highlights a nonlinear relationship, emphasizing the existence of inflation thresholds that influence growth outcomes However, the evidence remains inconclusive for developing countries, and there is limited consensus on the exact nature of the inflation-growth nexus in different economic contexts.
At the same time, base on many findings, the inflation has the effects on the economic growth that are not similar from the developing countries to the developed countries
Most of the developed economies are usually stable in growth and inflation rates
Developing countries experience higher and often unstable inflation rates, which significantly impact their economies and household living standards Conversely, countries with low inflation rates tend to maintain more stable economic conditions, benefiting overall economic growth and stability High inflation in emerging economies can lead to increased cost of living and reduced purchasing power for households, highlighting the importance of effective inflation management for sustainable development.
This study explores the relationship between economic growth and inflation in key developing Asian countries—China, India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam—during 1990-2010 These nations are selected due to their rapid economic development and significant influence in the region Despite their growth, they have faced challenges from the global economic downturn, including surging inflation rates Additionally, as members of the ASEAN group, these countries share similar economic structures, natural conditions, and growth patterns, with Vietnam being a notable member, which provides a common context for comparison.
RESEARCH OBJECTIVES AND RESEARCH QUESTIONS
This paper examines the impact of inflation on economic growth in selected Asian countries, highlighting how inflation effects differ between developing nations It investigates whether threshold levels exist in the inflation-growth relationship and compares these thresholds across countries Based on the findings, the study offers policy recommendations to promote economic development, with a focus on Vietnam.
There are four questions raised for the study, comprising the following questions:
(1) Does inflation impact the economic growth in the selected Asia countries?
(2) How are inflation effects on growth different from the countries?
(3) Are there thresholds in the nexus between inflation and growth of the countries? And,
The article examines how various countries differ in their threshold levels, highlighting the significance of understanding these differences for policy and research purposes It emphasizes that threshold levels are crucial in assessing regulatory standards across nations, and that variations can impact international cooperation and policy implementation Identifying disparities in threshold levels enables a more comprehensive comparison of national regulations, fostering better alignment with global best practices.
STRUCTURE OF THE PAPER
The rest of this paper is divided into 5 chapters:
The second chapter explores key theories concerning the relationship between inflation and economic growth, highlighting their interdependence It also clearly defines the variables used in the model to ensure clarity and precision Furthermore, the chapter presents empirical studies that provide strong evidence supporting the existence of a significant inflation-growth relationship, reinforcing the theoretical framework with real-world data.
The third chapter analyzes the economic outlooks of selected Asian countries from 1990 to 2010, focusing on key economic indicators such as GDP growth rates and inflation It provides a summarized overview of each nation's economic performance, highlighting contributions from various sectors to overall economic growth The chapter utilizes illustrative figures to reveal each country's economic strengths and vulnerabilities, offering insights into their developmental trajectories during this period.
The fourth chapter focuses on presenting specific theoretical and empirical research models, emphasizing the importance of selecting appropriate models for the study It details the research methodology and data sources utilized for model estimation, providing a comprehensive understanding of the thesis approach.
Chapter five presents the empirical results of the study, beginning with descriptive statistics for each country to provide an overview of the regression predictions The chapter then discusses the regression analysis conducted using Eviews 4.0 software, highlighting the influence of inflation on economic growth and identifying inflation thresholds within the inflation-growth relationship for each country.
The final chapter concludes with a summary of the key findings from the previous analysis and offers policy recommendations aimed at helping countries address their challenges It also discusses the research limitations and suggests directions for future studies to build on the current work.
The thesis also consists of four appendices:
Appendix A presents the regression results of a quadratic model estimated using the fixed-effect panel-data methodology To enhance the robustness of the analysis, the model was treated with Seemingly Unrelated Regression (SUR), effectively addressing potential regression issues and ensuring more reliable parameter estimates.
Appendix B contains the scatter diagrams between two variables comprising squared-inflation and growth of each country The diagrams are showed for supporting to find out thresholds
The results of testing Heteroscedastiscity via White-test approach for each country will be contained in Appendix C
Appendix D features scatter diagrams illustrating the correlations between variables within the models for each country, providing valuable visual insights into the relationships analyzed in the study.
THEORIES RELATED TO INFLATION AND GROWTH
According to Azar’s (2009) quantity theory of money, a negative relationship between output and the price level occurs when there is a movement along the aggregate demand (AD) curve This relationship is derived from the equation of exchange, which explains how changes in the price level impact aggregate output through shifts along the AD curve.
If the money supply (M) remains unchanged and the velocity of money (V) stays constant, an increase in real output (Y) will lead to a decrease in the price level (P), maintaining the equilibrium equation However, shifts in the aggregate demand (AD) curve typically occur only when the aggregate supply (AS) curve shifts, affecting overall economic equilibrium (Azar, 2009).
According to Mishkin (2001), four core factors influence the leftward shift of the aggregate supply (AS) curve, leading to an increase in the overall price level Conversely, a decrease in these factors can cause the AS curve to shift rightward, resulting in a decline in the price level Understanding these factors is essential for analyzing inflationary pressures and macroeconomic stability.
Exceeding the natural output rate creates upward pressure in the labor market, leading to higher wages and increased production costs, which cause the Aggregate Supply (AS) curve to shift left Additionally, when expected inflation is non-neutral and negatively correlated with output, it further impacts supply levels Negative supply shocks, such as rising oil prices or volatility in commodity markets, also trigger a leftward shift of the AS curve, reducing overall production capacity.
This section explores various economic theories related to inflation and growth, including Classical, Neo-classical, Endogenous, Keynesian, Neo-Keynesian, and Monetarist frameworks These theories enhance our understanding of the inflation-growth relationship while also highlighting the influence of additional factors on overall economic growth.
Adam Smith and David Ricardo are renowned economists central to classical economic theory, which posits that the economy is self-regulating and inherently operates at full employment Their perspectives emphasize that market forces naturally restore equilibrium without external intervention Additionally, technological advancements play a crucial role in driving economic growth, significantly impacting long-term prosperity (Mc Taggart et al., 1996).
According to economic theory, three key factors influence economic growth: capital, labor, and technology Capital, primarily represented by investment and savings, plays a crucial role in the inflation-growth relationship When inflation rises, real interest rates decline, leading to reduced savings, which can negatively impact investment—the foundation of economic development Although lower real interest rates may encourage borrowing by investors, limited capital availability can restrict borrowing capacity, thereby hindering growth (Mc Taggart et al., 1996).
Solow (1956) and Swan (1956) are pioneering economists who introduced the foundation of neo-classical growth models Their work significantly advanced the understanding of long-term economic growth by emphasizing the roles of capital accumulation, technological progress, and productivity These models remain fundamental in economic theory and are widely used in analyzing growth dynamics and policy implications.
Mundell (1963) discovered a new mechanism involving the inflation-growth relationship, demonstrating that increased inflation or inflation expectations can lead to a decline in individual wealth (Gokal and Hanif, 2004) The neoclassical growth model, developed by Cass (1965) and Koopmans (1965), incorporates variables such as investment and population growth, showing that economic growth is stimulated by higher investment rates and reduced population growth.
According to New Classical theory, inflation effectively acts as a tax on money balances, especially when government spending aims to promote economic growth Additionally, high inflation is often accompanied by increased inflation variability, which raises costs and risks for capital investment This heightened uncertainty negatively impacts resource allocation, hindering overall economic efficiency (Paul et al., 1997).
The Endogenous Growth Theory, also known as the New Growth Theory, explains the factors that influence varying growth rates across countries It emphasizes that economic growth is driven by internal factors within the production process, such as innovation, human capital, and knowledge spillovers (Todaro, 2000) This theory helps to understand why some nations experience higher and more sustainable growth rates compared to others.
Inflation impacts economic growth primarily through two channels: investment and capital accumulation Endogenous growth models further explain this relationship by highlighting the crucial role of human capital in driving growth The growth rate depends on the return rates of both human capital and physical capital, emphasizing the importance of both forms of investment in sustaining economic development (Gokal and Hanif, 2004).
The Keynesian theory challenges the Classical view by asserting that the economy cannot achieve full employment without active intervention through fiscal and monetary policies As a key component of aggregate demand theories, Keynesian economics emphasizes the importance of government policies in stabilizing the economy and promoting economic growth Unlike the Classical approach, Keynesian theory advocates for proactive measures to address unemployment and economic fluctuations.
Factors influencing aggregate demand growth include consumption, investment, and government expenditures Additionally, economic fluctuations are believed to depend on expectations, referred to as “animal spirits,” which drive changes in aggregate demand.
According to the conventional Keynesian perspective, inflation is seen as a catalyst for short-term economic growth, primarily due to sticky prices and wages that create a short-run Phillips curve (Dornbusch et al., 1996; Mallik and Chowdhury, 2001) This view suggests that moderate inflation can accelerate real economic growth in the short run (Motley, 1998) However, when economic agents fully anticipate price changes, the Phillips curve trade-off may vanish, challenging this relationship These ideas gained prominence primarily in the 1960s and continued to influence economic thought into the 1980s (Bruno et al., 1996) Additionally, Paul et al (1997) argued that, within Keynesian theory, inflation promotes growth by redistributing income from labor to firms with higher saving and investment propensities.
The original of Neo-Keynesian theory is from the perspectives of the Keynesian theory
GROWTH MODELS
Numerous studies indicate that inflation negatively impacts economic growth, particularly through its effects on capital accumulation and technological progress Economic growth models demonstrate that sustained increases in per capita income depend on these factors; however, high and volatile, unanticipated inflation creates uncertainty in the rate of return on capital and investments This uncertainty hampers investment decisions, ultimately hindering long-term economic growth.
Nonetheless, even inflation is totally anticipated, also it may reduce the rate of return of capital (Bruno and Easterly (1998), Pindyck and Solimano(1993))
Inflation negatively impacts human capital and investment in research and development, thereby hindering long-term economic growth The most significant effect of inflation occurs through the efficiency channel, where it depreciates total factor productivity (TFP), leading to a decline in macroeconomic performance over the long run This indirect effect on productivity makes it challenging to incorporate into theoretical models, but its influence is crucial in understanding inflation's overall detrimental impact on market economies.
The monetary channel plays a crucial role in transmitting inflationary pressures to economic growth, making it essential to consider when analyzing the impact of inflation on economic performance Ignoring this channel could lead to inaccurate assessments of how inflation influences growth rates, as it significantly affects the transmission mechanism between inflation and economic activity Therefore, the channel cannot be disregarded in models estimating the effects of inflation on economic growth, highlighting its importance in understanding the broader economic implications.
This section reviews key economic growth models, including the basic growth model and the Solow growth model, providing an in-depth understanding of their mechanisms and implications for long-term economic development.
This article explores the augmented Solow growth models, which coherently describe how different determinants influence economic growth According to growth theory, expansion relies on three core processes: the accumulation of assets such as capital, labor, and land; enhancing the productivity of these assets through saving and investment; and technological progress The primary goal is to identify key factors affecting GDP growth beyond inflation, with one of these models serving as the foundational framework for this analysis.
Economic growth models fundamentally rely on a few key equations that connect saving, investment, and population growth to the size of the workforce and capital stock These models illustrate how these factors influence the aggregate production of goods, providing essential insights into the drivers of economic development.
These models initially focus on the levels of investment, labour, productivity, and output (Todaro, 2000)
The aggregate production function is central to all economic growth models, as it defines the relationship between factors of production—capital and labor—and total output Different forms of this function reflect varying assumptions about how these factors combine to drive economic growth At the national level, production functions illustrate how the size of the labor force and the capital stock influence the country's total output, highlighting their crucial roles in economic development (Todaro, 2000).
The Solow model addresses the limitations of the Harrod-Domar model by replacing the fixed-coefficients production function with a more flexible neoclassical production function, allowing for easier substitution between capital and labor Unlike the Harrod-Domar model, the capital-output and capital-labor ratios in the Solow model are not fixed but vary depending on the relative endowments of capital and labor within the economy This adaptability enables a more realistic representation of economic growth, reflecting how these ratios adjust in response to changing factor supplies and technological progress.
The Solow model is fundamental in understanding economic growth, as it features a production function characterized by diminishing returns to capital This model plays a crucial role in many economic theories and has significant influence, particularly in developing countries (Todaro, 2000).
In the Solow model, the assumption of decreasing marginal returns to capital is fundamental to understanding economic growth This leads economies to reach a steady state where output per capita, capital stock, and consumption grow at the same rate, aligned with the exogenously determined rate of technological progress, ensuring sustainable long-term growth.
Based on Solow’s model, economic growth is analyzed through decreasing returns to capital in a standard neoclassical production function He emphasizes that saving rates and population growth are exogenous factors that determine the steady state level of income per capita The Solow model offers simple, testable predictions about how higher saving rates can lead to increased income per capita, while higher population growth rates tend to reduce a country's wealth over time (Mankiw et al., 1992).
Nevertheless, the Solow model’s assumptions are not completely right; the model has no accurate prediction about the magnitudes of the saving rates and population growth
As a consequence, the augmented Solow model is suggested in order to help us understand clearly the relationship between saving, population growth and income
The Solow model emphasizes the importance of both human and physical capital accumulation in determining economic growth Omitting human capital from the model explains why savings rates and population growth significantly impact income levels The augmented Solow model further confirms that the buildup of human capital is closely linked to these factors, and neglecting it can lead to biased estimates of the effects of savings and population growth, as highlighted by Mankiw et al (1992).
The augmented Solow model adding human-capital accumulation to the textbook Solow model (Mankiw et al., 1992) is given as follows:
Where: Y denotes for the total output, K is the physical capital, H is the stock of human capital, A is technology level and L represents for labour force.
VARIABLE DEFINITION
Gross Domestic Product (GDP), as defined by Blanchard (1997), is a key measure of aggregate output in national income accounts Understanding the growth rate involves evaluating GDP from different perspectives; Blanchard highlights three distinct ways to interpret an economy’s GDP, which are essential for analyzing economic performance and growth trends.
Gross Domestic Product (GDP) is the total value of all final goods and services produced within an economy during a specific period, making it a key indicator of economic activity It can also be measured as the sum of value added created by all producers within the economy during that period Additionally, GDP represents the total income earned by residents and businesses in the economy over a given timeframe, providing a comprehensive view of economic performance Understanding these different approaches to calculating GDP helps in assessing the overall health and growth of an economy.
Economic growth in macroeconomic theory is represented by an outward shift of the production possibilities frontier (PPF), indicating increased potential output According to Mc Taggart et al (1996), real gross domestic product (GDP) serves as the key indicator for measuring this growth, reflecting improvements in a country’s overall economic performance.
There are two primary methods to determine GDP, with the first focusing on total expenditure on goods and services This approach explains that real GDP demanded (Y) is calculated as the sum of household consumption expenditures (C), real investments by firms (I), government spending (G), and net exports (X-M), according to Mc Taggart et al (1996).
The basic macroeconomic identity Y = C + I + G + X – M represents the total output of an economy, where Y is the GDP, C is consumer spending, I is investment, G is government expenditure, X is exports, and M is imports Additionally, total income earned through producing goods and services, known as real GDP, reflects the overall economic activity and factors such as wages and interest Understanding these components is essential for analyzing economic growth and income distribution.
16 rent and profit which are paid for production (Mc Taggart et al., 1996) While the real GDP supplied is measured by the aggregate production function as follows:
Y = F (L, K, T) Where: L is labour, K denotes for capital, and T stands for technology
Inflation rate is the percentage change in a price index, such as the Consumer Price Index (CPI), over a year, reflecting the increase in the average level of prices It measures how much prices for goods and services rise annually, impacting purchasing power and economic stability Tracking inflation is essential for understanding cost-of-living changes and making informed financial decisions.
Inflation is a process of rising prices and measures as the percentage change in the average level of prices and the price level Thirlwall (1974) defines that inflation as a
“rise in the general price level whatever its cause” According to the view of Mishkin
Inflation is generally defined as a continual increase in the price level, signifying a persistent rise in overall prices According to Dornbusch et al (1999), inflation specifically refers to the rate of change in prices over time While there are various definitions of inflation, they all share a common focus on changes in prices, highlighting its core impact on the economy.
The Consumer Price Index (CPI) is a key indicator used to measure the overall price level by tracking changes in the average prices of goods and services purchased by households over time (Gerber, 1999) It serves two main purposes: assessing fluctuations in the cost of living and evaluating the changing value of money Calculating the inflation rate, which reflects these economic shifts, is essential for understanding price movements, and it is determined using a specific formula to quantify inflation accurately.
Apart from the Consumer Price Index (CPI), two alternative measures are commonly used to assess inflation: the Producer Price Index (PPI), which tracks changes in input prices purchased by producers, and the GDP deflator, which is calculated by dividing nominal GDP by real GDP for a specific year These indicators provide comprehensive insights into inflation from different economic perspectives.
The Consumer Price Index (CPI) offers several advantages and is more widely used compared to the Producer Price Index (PPI) and GDP deflator Numerous studies indicate that CPI is essential for assessing inflation and managing economic stability Its popularity stems from its ability to accurately reflect changes in the cost of living for consumers, making it a vital tool in economic analysis and policy formulation.
Inflation impacts economic growth, but it is not the primary cause of growth variations Moreover, the Consumer Price Index (CPI) is a more reliable measure for analyzing inflation compared to GDP deflators, as growth rates are negatively correlated with changes in GDP deflators (Gerber, 1999).
While theoretical models on the long-term impacts of inflation are limited, numerous researchers have explored its associated costs, emphasizing that inflation is harmful to economic growth Inflation creates uncertainty for economic agents by making fluctuations in relative prices unpredictable, which hampers accurate decision-making (Harberger, 1998) Additionally, Feldstein (1982) identified significant costs of inflation, such as distorted relative prices that negatively affect investment decisions and resource allocation, ultimately hindering economic growth.
Inflation diminishes the benefits of tax reductions for depreciation and raises the cost of capital, which hampers capital accumulation and slows down production growth (Clark, 1982) According to Friedman (1977), higher inflation rates increase inflation volatility, negatively impacting economic growth The expectations-augmented Phillips curve indicates that in the long run, expected inflation equals actual inflation, and the unemployment rate remains at its natural level, implying that nominal variables like inflation do not influence real variables such as unemployment or growth over time However, other nominal variables can adversely affect real economic outcomes.
Inflation significantly impacts the economy by causing forecast errors through biased market prices and increasing the costs associated with gathering information, known as menu costs and shoe-leather costs These costs arise as economic agents must spend more time and resources to collect accurate data in a distorted price environment Consequently, inflation prompts economic agents to seek effective measures to detect and counteract these deteriorations, highlighting its pervasive influence on decision-making and resource allocation in the market.
2 At a high level of inflation gives rise to a gradual change in prices is costly for companies
Consumers' cash holdings tend to decrease in efficiency, leading to reduced liquidity management effectiveness This decline can impact overall financial stability and investment capabilities Optimizing cash management strategies is essential for improving the efficiency of cash reserves.
Economic Outlook of Indonesia
From 1990 to 2010, Indonesia's GDP growth and inflation rates remained relatively stable compared to Malaysia, which experienced significant volatility during the Asian financial crisis of 1998, with inflation reaching nearly 60% and economic growth plunging below -10% Post-crisis, Indonesia’s economy showed slow but steady recovery, maintaining stable levels of inflation and growth through 2010 Overall, Indonesia's economic indicators during this period reflect resilience and steadiness despite global financial shocks.
In 2010, rapid economic growth was driven by both increased investment and private consumption, resulting in a 6.1% rise in GDP compared to the previous year However, key challenges included rising inflation rates and the need to manage increased capital inflows effectively (Ginting and Aji, 2011).
For private consumption, supported by a strong employment market and acceleration in prices of agricultural products, grew up by 4.6% and added to GDP by 2.7%
In 2010, fixed capital investment increased by 8.5%, primarily driven by investment in machinery and equipment rather than in buildings, contributing just 2 percentage points to growth A strong economic recovery depends on enhanced domestic and global investment confidence, supported by currency appreciation and eased credit conditions Additionally, a rebound in export demand significantly boosted economic growth, while an expanding services sector contributed up to 3.8 percentage points, collectively driving robust overall economic performance.
In 2010, the industrial sector experienced modest growth of only 4.7%, reflecting a sluggish economic expansion Meanwhile, agriculture saw its lowest increase in five years at just 2.9%, primarily due to adverse weather conditions and infrastructure weaknesses This decline in agricultural productivity led to a reduced food supply, causing food prices to rise significantly The surge in food prices contributed to an increase in inflation rates from 4.8% in 2009 to 7.0% in 2010, exceeding the central bank’s target range of 4.0% to 6.0%.
Growth rate of GDP (% per year) Inflation rate (% per year)
Figure 0-4: A comparison between inflation and economic growth of Indonesia from 1990-2010
In 2010, Indonesia's economy achieved significant milestones, supported by increased exports which contributed to a trade surplus The central bank implemented measures such as raising reserve requirements and interest rates after a period of stability, reflecting efforts to strengthen monetary policy Capital and financial inflows from portfolio investments and FDI grew, indicating a positive investment climate that attracted global investors These economic improvements led to a decrease in unemployment through the creation of new jobs and a notable reduction in poverty rates, highlighting successful socio-economic progress Additionally, Indonesia's effective fiscal consolidation was recognized as one of the most impressive outcomes of its economic policy measures.
The new government has planned a five-year strategy focused on effective expenditure management by the Ministry of Finance and aims for a 6% growth in real GDP To achieve these economic objectives, attracting both foreign and domestic investments is essential This approach underscores the importance of creating a conducive environment for investment to foster sustainable economic growth (Ginting and Aji, 2011).
Despite ongoing challenges, Indonesia maintains a remarkable position in economic growth, aiming for a 6.4% GDP increase in 2011 The country's gross national income per capita has shown steady growth, rising from $2,200 in 2000 This positive economic trajectory underscores Indonesia's resilience and potential for continued development.
$3,720 in 2009 For macroeconomic stability, the country has attempted to achieve the fiscal targets, consisting of dramatically reducing debt ratio to GDP from 61% in
From 2003 to 2009, Indonesia’s budget deficit decreased from a higher percentage to 27.5%, with plans to reduce it further to just 0.4% of GDP by 2011 The country has outlined a long-term development plan spanning from 2005 to 2025, segmented into five-year periods with distinct strategies The recent period from 2009 to 2014 focuses on improving human resource quality, advancing science and technology, and enhancing economic competitiveness (Ginting and Aji, 2011).
Economic Outlook of Thailand
Thailand, similar to other Asian countries, experienced a robust economic recovery in 2010 following the global recession, driven by substantial growth in private consumption and investment However, this momentum is expected to slow down in 2011 as the economic growth moderates.
2012 as a result of reducing external demand and suffering from a base effect The forecast of inflation will increase in 2011, immediately the central bank responds to keeping a tightened monetary policy
Between 1990 and 2010, Thailand’s GDP growth and inflation rates experienced notable fluctuations, as shown in the benchmark figure Unlike Indonesia, Thailand faced several economic movements, particularly during the crises of 1998 and 2009, when both inflation and growth rates declined into negative territories Despite these setbacks, Thailand demonstrated economic resilience, quickly recovering after each crisis Throughout this period, inflation consistently played a more dominant role compared to economic growth, highlighting its significant influence on Thailand’s economic stability.
In 2009, a decline in GDP growth led to a 7.8% recovery in 2010, driven by a surge in export demand that boosted manufacturing and heightened consumer and business confidence However, political tensions in mid-2010 constrained economic recovery efforts Despite these challenges, a revival in investments contributed to overall economic momentum.
43 became an enormous contributor on the demand side, added to GDP growth by 5.2%
In 2010, export-oriented manufacturing experienced a significant growth of 13.8%, primarily driven by increasing export ratios This surge led to higher utilization capacity in industries such as automobiles and electrical machinery, reaching around 14.7% Private consumption, after declining in 2009, rebounded with a 4.8% increase in 2010, contributing 2.5% to GDP growth, supported by a robust labor market and rising produce prices in the agricultural sector (Attapich, 2011).
Growth rate of GDP (% per year)
Figure 0-5: A benchmark between inflation and growth of Thailand in the years of 1990-2010
The Thai government implemented fiscal stimulus packages starting in 2009, which significantly contributed to economic growth through increased public consumption spending Despite a decrease in the public fixed investment ratio—mainly due to reduced investments in state-owned enterprises—the government launched the "Strong Thailand" infrastructure program in late 2009 to support economic development Income inequality remains high in Thailand, with a Gini coefficient of 0.51, prompting the government to boost investments in transport infrastructure to create jobs and facilitate business expansion.
Industry got many contributions to the growth and added 6.0% points to GDP growth
In 2010, manufacturing production experienced an 8% increase, contributing 5.4 percentage points to the overall economic growth The services sector also saw a modest rise, adding 2.0 percentage points to total output Despite broad recovery and robust growth across most sectors, agriculture faced a 2.2% decline primarily due to adverse weather conditions negatively impacting agricultural productivity (Attapich, 2011).
Economic Outlook of China
Between 1990 and 2010, China's GDP growth rate consistently outpaced its inflation rate, reflecting a robust economic expansion compared to many other countries Despite experiencing economic crises in 1992 and 2008 that led to sharp increases in inflation, China's growth rate remained relatively resilient In contrast to Thailand, which faced different economic challenges, China maintained a higher growth rate than inflation during this period, underscoring its steady economic development over two decades.
2010, China has signal of recovery and increase again in growth rate and inflation rate, but the output growth rate still gains a high rate
China's per capita income was at its lowest in 1980, but experienced rapid growth of 8.2% annually between 1981 and 2007, transforming from an economically weaker nation to a leading global economy (Barro and Lee, 1994) This remarkable economic development has propelled China into a top growth country, with projections indicating a real GDP growth rate of 9.3% in 2011 and 8.7% in 2012.
Despite ongoing pressures from inflation and the real estate market, maintaining macroeconomic stability is essential for continuous economic growth According to Ardo Hansson, a Lead Economist of China, strong corporate investment and a robust labor market are results of adjustments in macroeconomic policies, influenced by inflation rates and a slight slowdown in global growth.
China’s macroeconomic stability policy during the global crisis involved the implementation of significant stimulus packages supported by both fiscal and monetary measures While consumption growth slowed in early 2011, these policies played a crucial role in boosting domestic economic activity and maintaining stability.
45 demand remained stable as a whole owing to a strong increase in investment growth
Property investment remained resilient due to effective strategies in housing price management Additionally, a key policy focus is on reducing the inflation rate, which increased to 5.4%, primarily driven by higher food prices (Lommen and Zhuang, 2011).
Growth rate of GDP (% per year) Inflation rate (% per year)
Figure 0-6: A comparison between inflation and growth rate of China from 1990-2010
China has transitioned from a centrally planned economy to a market-oriented system since the late 1970s, leading to remarkable economic growth By 2010, China became the world's largest exporter, significantly boosting its global economic presence The government has strategically maintained state-owned sectors related to "economic security" and supports global competition for domestic champions In mid-2005, China's currency was devalued by 2.1% against the US dollar and is now pegged to a basket of currencies, rather than solely following the US dollar Since 1978, China's GDP has increased more than tenfold, primarily driven by comprehensive economic restructuring and reforms As of 2010, accounting for purchasing power parity (PPP) and price differences, China ranked as the second-largest economy globally after the United States, surpassing Japan.
In 2009, the global economic downturn led to a decline in foreign demand for Chinese exports for the first time in many years However, China swiftly recovered and demonstrated remarkable economic resilience, outperforming all other major economies in 2010 with an impressive GDP growth rate of approximately 10.5%.
The economy is projected to maintain strong growth in 2011, reinforcing the effectiveness of the stimulus measures implemented during the global financial crisis According to China's 12th Five-Year Plan adopted in March 2011, the government is committed to ongoing economic reforms and aims to boost domestic consumption to reduce reliance on exports for future GDP growth This strategic focus aims to create a more balanced and sustainable economic development model.
In 2011, China is expected to make only marginal progress toward its rebalancing goals The country faces significant economic challenges, including inflation that exceeded the government's 3% target in late 2010, and rising local government debt resulting from stimulus policies This debt is largely off-the-books and may be of low quality, posing potential risks to economic stability.