The impacts of exports on economic growth the case of selected southeast asia countries

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

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

HO CHI MINH CITY, NOVEMBER 2012

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 : _

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

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

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

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

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

The Impacts of Exports on

Economic Growth: The Case of Selected Southeast Asia Countries

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%)

Chapter 1 INTRODUCTION

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)

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

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

1.4 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

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

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

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

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

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

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

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

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

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

Study Sample Variables Findings

Hatcher

(1991)

26 countries (1963-1985)

GDP growth, Export, Domestic Investment, and Labor growth

GREX is not statistically significant

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)

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

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

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

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

Annual GDP growth rate (annual %) This is the dependent variable

Dependent variable

2 I/Y

The ratio of investment to GDP (Gross Fixed Capital Formation used as a proxy of I/Y)

+

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

Positive effect

Negative effect

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

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

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”,

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

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

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

Agricultural products

Food and beverages

Machinery and transport

Crude oil and gas

Figure 4-2: Export growth of Vietnam in the period of 1991 - 2010

In term of export merchandises by product, in Table 4-1 Vietnam’s export composition is mainly from agricultural products and crude oil accounting for nearly 40% of total export value As such, it is obvious that major export products of Vietnam are still low value products with labor-intensive technology This proves that contribution that exports bring to Vietnam’s economy is not high

Figure 4-2 indicates that Vietnam’s export growth had not much impact on its economic growth The export growth curve and GDP growth curve do not show any consistency in increase as well as decrease over the studied period Export growth over the last years was high of over 10%, but this high growth is still not a driven force for Vietnam’s economic growth Vietnam’s economy is still not an export-oriented economy as expected from its policy makers

4.3.4 Economic growth of Malaysia over the studied period:

Malaysia is considered as one of the most successful non-western countries that has reached a relatively good transition in modern economic growth over the last decades Malaysia has

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

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

Table 4-2: Malaysia exports by sector, 2010

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

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

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

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

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