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

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIESVIETNAM-NETHERLANDS PROGRAMME FOR MASTER’S DEGREE IN DEVELOPMENT ECONOMICS THE IMPACTS OF EXPORTS ON ECONOMIC GROWTH: THE CASE OF SELEC

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

VIETNAM-NETHERLANDS PROGRAMME FOR MASTER’S DEGREE IN DEVELOPMENT ECONOMICS

THE IMPACTS OF EXPORTS ON ECONOMIC

GROWTH: THE CASE OF SELECTED

SOUTHEAST ASIA COUNTRIES

A thesis presented by Ha Manh Cuong In partial fulfilment of the requirements for obtaining

the degree of MASTER OF ARTS IN ECONOMICS OF DEVELOPMENT

Academic Supervisor

Dr Le Cong Tru

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 otheracademic award;

All the contents of the paper is the outcome of works that I has done; any paid or unpaidmaterial are acknowledged; and ethics standards as well as guidelines have been tightlyfollowed

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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 ChiMinh 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 somuch 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, Iwould like to give my heartfelt thanks to Prof Nguyen Trong Hoai who taught meEconometrics 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 indoing 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

4.1INTRODUCTION 21

4.2SELECTION REASON OF FIVE ASIAN COUNTRIES 21

4.3HIGHLIGHTS 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

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growth 34

4.3.10 Economic growth of Indonesia over the studied period: 36

4.3.11 Export activity of Indonesia 39

4.3.12 Comparison of correlation between Indonesia’s export growth and economic growth 39

4.3.13 Economic growth of Singapore over the studied period 41

4.3.14 Export activity of Singapore 43

4.3.15 Comparison of correlation between Singapore’s export growth and economic growth 44

4.4 SUMMARY 46

CHAPTER 5 48

5.1 INTRODUCTION 48

5.2 DESCRIPTIVE ANALYSIS 48

5.2.1 Correlation Coefficient Matrix 48

5.2.2 Descriptive statistics result 50

5.3 REGRESSION RESULTS AND ANALYSIS 53

5.3.1 Result analysis for Indonesia 55

5.3.2 Result analysis for Malaysia 56

5.3.3 Result analysis for Singapore 56

5.3.4 Result analysis for Thailand 57

5.3.5 Result analysis for Vietnam 57

CHAPTER 6 59

6.1 CONCLUSION 59

6.2 POLICY RECOMMENDATIONS 61

6.2.1 For The Selected Southeast Asia Countries 61

6.2.2 For The Case of Vietnam 62

6.3 LIMITATIONS OF THE THESIS 64

APPENDIX A 68

APPENDIX B 69

APPENDIX C 70

APPENDIX D 72

LIST OF FIGURES

Figure 3-1: Analysis framework for the impact of exports on growth 19

Figure 3-2: Summary of steps used in data analysis 20

Figure 4-1: GDP growth of Vietnam in the period of 1991 - 2010 23

Figure 4-2: Export growth of Vietnam in the period of 1991 - 2010 26

Figure 4-3: GDP growth of Malaysia in the period of 1991 - 2010 27

Figure 4-4: Export growth of Malaysia in the period of 1991 - 2010 29

Figure 4-5: GDP growth of Thailand in the period of 1991 - 2010 32

Figure 4-6: Export growth of Thailand in the period of 1991 - 2010 36

Figure 4-7: GDP growth of Indonesia in the period of 1991 - 2010 38

Figure 4-8: Export growth of Indonesia in the period of 1991 - 2010 40

Figure 4-9: GDP growth of Singapore in the period of 1991 - 2010 42

Figure 4-10: Export growth of Singapore in the period of 1991 - 2010 45

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LIST OF TABLES

Table 2-1: Summary of researches studying on impact of exports on growth 13

Table 3-1: Summary of variables in the model 18

Table 4-1: Vietnam exports by sector, 2010 25

Table 4-2: Malaysia exports by sector, 2010 29

Table 4-3: Thailand exports by sector, 2010 34

Table 4-4: Indonesia exports by sector, 2010 39

Table 4-5: Singapore exports by sector, 2010 44

Table 5-1: Correlation matrix of variables (all countries) 49

Table 5-2: Summary of Descriptive Statistics (All countries) 52

Table 5-3: Regression Results (Fixed Effects Method with Dependent Variable: GDP

growth rate) 53

The Impacts of Exports on

Economic Growth: The Case of Selected Southeast Asia Countries

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The thesis aims to answer the question that how is exports affect on the economic growth inthe five selected Southeast Asia countries, including Indonesia, Malaysia, Singapore, Thailandand Vietnam, during the period of 1991-2010 by using the neoclassical growth modelestablished 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, andEuropean countries, etc… Therefore, determining and examining the impact of exports oneconomic growth are important to help these countries keep their growth sustainable In thispaper, the augmented Solow Growth Model was adopted to find the impact of exports ongrowth Also, the key model employed to run regression is Linear Exports-Growth Modelwith a panel data of the five Southeast Asia countries To capture the different impact ofexports 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 andThailand of which exports have statistically significant positive impacts on economic growth

at the levels of significance of 1%, 1% and 10%, respectively Oppositely, Indonesia andVietnam showed a negative impact on economic growth, however, these impacts were notstatistically significant

In addition, to measure and compare the different impacts of exports on growth over theselected countries, the fixed effect regression model is employed The results showed that themore developed the economy is, the stronger impact of exports on economic growth is Morespecifically, the impact levels of exports on growth at the five selected Southeast Asiacountries are ascendingly arranged based on development of the economy as follows:Vietnam (-0.029%), Indonesia (-0.016%), Thailand (0.151%), Malaysia (0.196%) andSingapore (0.495%)

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Chapter 1 INTRODUCTION

Economic growth is often the final goal of the economy To accelerate economic growth, it isvital to know where sources of economic growth come from and this is subject of controversyamongst 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 capitalformulation as significant cause of growth

Trade far ago was an effective way that human being used to exchange products they had andreceived 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 waythat 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 growthsand 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 connectedrecently by a series of theoretical works of other well-known economists Misselden (1623)

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stressed the positive role of international trade as a strong motivation of economic growth, hepointed 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 internationaltrade, as principal cause of accelerating or constraining growth All their findings arefoundations for understanding and analysis of relationship between exports and economicgrowth 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 toconfirm that exports have a positive relationship with economic growth (Sprout, 1993, Vanden Berg, 1994) Successful models of outward-oriented development of East Asian Countriesduring 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 ratefor the economy, if other conditions remain unchanged and/or other prior conditions are notsatisfied There were not less studies that showed the weak role of exports to GDP growth insome countries and group of countries (Dodaro, 1993, Jung, 1985, Salvatore, 1991) Alongwith 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 theserelationships 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 andemerging economies in Southeast Asia However, the fact shows that economic growth of thefive Southeast Asia countries from the support of exports is still not sustainable and containscosts 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 equallydeveloped Therefore, examining the difference in the impact of exports on economic growthamong 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 Asiacountries 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 shouldencourage and have preferential policies to export sectors More importantly, reform of exportsectors with highly comparative advantage should be encouraged to aim at strengtheningexport competition capacity of the economies of these countries Vietnam, one of SoutheastAsia country, is a developing country and not an exception Vietnam Government thereforehas been trying to speed up its economy following the exports-led growth direction Butunfortunately global financial crisis in 2008 happened and has been spreading worldwide, itseriously affected to almost economies on the world, including Vietnam because of its highopenness of the economy As a result, the global economic crisis and its price fluctuation maymake the world’s demand on Vietnamese products to decline, and cause negative effectVietnam export with its important role will cause negative impacts on the economy becauseVietnam economy is heavily relied on exports For this reason, this study aims to assess therole 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 SoutheastAsia countries

(2) To examine the difference in the impact of exports on economic growth cross the selected Southeast Asia countries And,

development of Vietnam

1.3 RESEARCH QUESTIONS

To reach the above objectives the paper has to answer the following questions raised fromthe above objectives:

(2) How different do exports impact on growth across the selected countries?

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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 ofprevious 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 methodsused

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 illustratedthrough 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 acomparison 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 thischapter 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 economicgrowth from classical and modern economic schools of thought in the world This chapteralso mentions concepts and definitions on exports and economic growth as well assummarizes study results of economic journals, papers, researches concerning to exports andeconomic 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 supportresearch objectives of this paper

2.2 CONCEPTS AND DEFINITIONS

Exports

According to Blanchard (1997), exports are the purchases of domestic goods and services byforeigners 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 aconcept of net exports that may imply more clearly that that net export is calculated by exportvalue of goods and services generated in a country subtract import value of goods andservices of the country produced in other countries It is known as a trade surplus when exportvalue is greater than import value or net exports are a plus; in contrast a trade deficit will beresulted from export value smaller than import value or net exports are smaller than zero

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Economic growth

The financial term “Economic growth” is defined as the growth of an economy This termrefers to an increase in production of goods and services in a country (Gillis, 1996) Given thisproposition, the best way to measure this “increase in production of goods and services in acountry” is the annual percentage growth rate of GDP

More clearly, according to Graeme (2006), economic growth is the term that shows how muchthe economy’s domestically produced product within a year grows, in comparison with that ofprevious 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 annualchange in GDP and its completely difference from the term “economic development” which ismuch more popular than economic growth

In another approach, growth can be defined as the change in total real output or per capita realoutput 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 Actualrate of growth is measured as relative or percentage change of output in a period of time Thenatural rate of growth, firstly introduced by Harrod (1939), refers to the rate of growth ofproductive potential of an economy, or 'social optimum' rate of growth Sachs (1993) definedpotential 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 closelyrelated to economic growth This relationship was mentioned and clarified by many classicaleconomists upon their studies on the role of international trade So far, there are manyresearches focusing on proving and determining the positive contribution of exports as one ofdeterminants of economic growth Far ago, the relationship between exports and economicgrowth was a special interest in classical schools of thought of which typical representativesare the thought schools of Adam Smith (1776) and David Ricardo (1817) According to AdamSmith (1776), his theory showed a strong link of international trade and productivityimprovements by a size expansion of markets so enabling the realization of economies ofscale Afterward, David Ricardo (1817) evidenced that trade among two countries whichspecialize according to their comparative advantages, and then both of them get benefits fromtrade 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 gofurther and persuasively that exports expansion could have good effects on economic growthand 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 andhuman capital, technological progress, and competitive environment as causes of growth.Many ideas of classical economists transmit to neoclassical growth theory Neoclassicaleconomists such as Cass (1965), Koopmans (1965), Solow (1956), Swan (1956), Romer(1990), Grossman and Helpman (1991), and Aghion and Howitt (1992) built their modelsincluding four variables: labor, capital, technology, and output Sources of growth originatefrom these factors although there are opposite opinion amongst them about the magnitude ofeach factor contributing to growth The neoclassical growth model is based on three mainassumptions Firstly, the labor force and labor-saving technical progress grow at a constantexogenous rate Secondly, all saving is invested Thirdly, output is a function of the threevariables, including labor, capital, and technology as above mentioned And the productionfunction exhibits constant returns to scale or diminishing returns Their conclusions are theconvergence of per capita income across the world

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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 externalbenefits from human capital, and they overcome shortcomings of neo-classical economists byconsidering phenomenon under assumption of imperfect competition These factors couldprevent from diminishing returns to the accumulation of capital Moreover, they considerlong-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 todiminishing returns Developing countries, if basing on comparative advantage theory, willspecialize in producing labor-intensive goods that are considered as having diminishingreturns because developing countries are labor-abundant Developed countries otherwisespecialize in producing and export manufactured goods that used capital-intensivetechnologies and have increasing returns because developed countries are capital-abundant Ifthis is so, developing countries will face the Engel's law and developed countries haveeconomies 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 developedcountries Thirdly, the comparative advantage theory appeals to countries for specializationcould lead to narrow excessively range of products and put economy into severe balance-of-payments instability that can demolish development Fourthly, comparative advantage mayvary over time by government policies and intra-industrial trade still takes place due todifferences in consumer's tastes, technologies Furthermore, comparative advantage theorybases on private cost, what happens if social costs exceed private costs because ofexternalities of industrial projects that usually occur in developing countries This is argumentfor protecting industry other than free trade Last but not least, export growth of primarycommodities has little secondary impact on other activities Conversely, expansion ofmanufactured goods strongly affects other activities through backward or forward linkages.Comparative advantage is the keystone for free trade supporters Although disadvantages offree trade for development can appear, it is hard to say that trade liberalization should bestopped despite any arguments, trade liberalization is necessary for economic growth but thequestions 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 growththrough supply side, post-Keynesian economists otherwise emphasize demand side of

economic growth Keynes (1936) criticized classical economists, especially Say's law, bybelieving that supply creates demand Keynes (1936) considered economic growth is caused

by aggregate demand including consumption, investment, government expenditure, and netexport Change of one of these elements will bring about variation of economic growththrough multiplier such as government-purchases multiplier, investment multiplier InKeynes's point of view, components of aggregate demand play equal roles in affectingeconomic growth Other economists consider different importance of each component incontributing to economic growth Thirlwall (2002) stressed on exports in aggregate demand

by three important respects that export can promote other components of aggregate demandand economic growth Firstly, exports are only true component emanating from outside theeconomic system meanwhile others depend on the growth of income Secondly, exportsimpact not only directly on demand but also indirectly through its influence on othercomponents in aggregate demand Imports can be financed by exports and consumption,investment also are partly funded by exports Thirdly, certain intermediary goods that areindispensable for development but expensive to produce domestically can be permitted byexports This argument lies in the supply-side

Recent time, several seminal theoretical works such as Grossman (1991) has given out aframework 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 throughtheir 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 tradeorientation and economic growth Analyses of country experiences in major projects over fewdecades in the past proved that by integration in free international trade, developing countriescould make their welfare and growth better significantly Economic performance in East Asiaover several decades now has showed persuasive evidences that exports are a key of growth inthis region (Balassa, 1978, Blomqvist, 1997, Chow, 1987, Garnaut, 1996) However, it isimportant to notice that in the literature regarding the effect of openness in economic growthsome reservations is still existing, in addition to the causality relationship of exports andeconomic growth For instance, Clarke (1992) estimated the effect in reform of trade policy

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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 werenot clear More specifically, Rodriguez (1999) indicated a number of weaknesses in recentpractical studies that focus on trade liberalization

Besides, there are still some proofs that show threshold effects between exports and economicgrowth Michaely (1977) employs data from 41 under-developed countries for the period1950-1973 and showed that though the correlation between exports and economic growth isproved to be positive and statistically significant, the effects of export performance to growthonly if countries have some minimum achievement of development In a research from 53non-oil under-developed countries, Sheehey (1992) stressed that the growth of exports sharehas significant impact for the industrialized countries

There are also some matters in export composition It has been pointed out that exports fromprimary commodities are much more cyclically sensitive than manufactured productsexported 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 stillinconsiderable (Harrison, 1996) There are a number of empirical studies supporting this view,Greenaway (1994) inclusively, which collected a panel data from 69 countries and concludedthat those under-developed countries that focus on manufactured products were more likely toget benefit from export-led growth than those that concentrated in food as well as otherprimaries

Besides, in the literature of the relationship between exports and economic growth, mostrecently there is a comprehensive research for this literature conducted by Giles (1996) whocollected and classified over one hundred and fifty papers regarding exports and growthpublished during the period of 1963 – 1999 These papers are divided into three groups Thefirst one is based on papers using cross-country coefficients of rank correlation The next oneemploys 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 andabove fifty percent applies Granger causality concept

In the causality direction among exports and economic growth, as exports is a major part ofGDP, 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, forexample: 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, inthe 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 manufacturingmaking 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 endogenousgrowth theory The theory recommended a various number of channels that thanks to aneconomy could reach endogenously steady-state growth The theory mentioned that animprovement 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 growthfrom many other authors and datasets over countries all over the world

Table 2-1: Summary of researches studying on impact of exports on growth

countries, 1960-70

Labor growth

Growth

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Study Sample Variables Findings

Labor growth(1991)

GGDP = 0 + 1GCAP + 2GLAB + 3TRADE

in which, GGDP denotes the real GDP; GCAP is the variable of real capital stock, GLABindicates the growth rate of labor force, and TRADE is the international trade This model isrelated to a hypothesis that higher marginal productivities in export production because of thescale impacts as well as externalities combined with export production With the force oflabor 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

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 Theassumptions for this equation is that constant return economy to scale and labor ishomogeneous

However, in reality GK is widely substituted by the investment-to-output ratio, I/Y Trade isreplaced by a proxy: growth of real exports The equation (1) then is re-arranged into thefollowing form:

GGDP = 0 + 1(I/Y) + 2GLAB + 3GEX

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

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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 tochoose out an empirical model that most appropriate for running regression BetweenEquations (1), (2) an (3), the paper approaches to choose Equation (3) because it is unbiasedand available of data of variables

The next is methodology and data collection It will be an introduction of the methodology ofthe 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 arethe 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 preparefor the next chapter

3.2 EMPIRICAL MODEL

The outcomes of researches based on the Feder (1982) and Balassa (1978) approaches are stillbiased 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 withGDP 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 asfollows:

GYit = 1i + 2i(I/Y)it + 3iGRLit + 4iGEXit

3.3 METHODOLOGY AND DATA COLLECTION

Data in quantitative analysis is very important in estimating exactly regression coefficientsand in analyzing reality Although collecting data to complete the thesis is difficult, it is stillcompleted from efforts in collecting data from official sources The data used for estimatingthe model mainly comes from the World Bank website Data used in this study are annualdata and covers the period: 1991 – 2010, that consist of observations for real GDP, realexports, gross capital formation and labor force data of Vietnam, Thailand, Malaysia,Indonesia and Singapore collected from the World Bank website and extracted from othernumerous 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 andpresented for the five different economies of Southeast Asia which relatively fully reflect thenature of the region with developing economies of Vietnam, Indonesia, a transitive economy

of Thailand and developed economies of Malaysia and Singapore These countries have beenalso doing strong reforms in export policies and economic policies with the same purpose ofpursuing export-oriented economy policy and becoming a developed country Although thesample of the survey does not represent for the whole Southeast Asia, it represents enough forexports and development of the Southeast Asia

The thesis will employ both descriptive statistics and regression methods for data analysis tofind out the impact of export growth on economic growth of economies in ASEAN-5

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For descriptive statistics, the paper will observe comparative charts between export growthand 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 ondata of these countries’ exports and GDP growth over time Next, the paper will examinedescriptive statistics of the variables in the model such as Mean, Median, Maximum,Minimum, Standard Deviation, Skewness and analyze correlation among the variablesincluded in the model Results of descriptive statistics and correlation matrix estimate will besummarized under tables form and analyzed as well as explained to have an overallassessment 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 growththe paper will estimate a regression model using a panel data set, with fixed effects and withSUR (Seemingly Unrelated Regression) method The fixed effects method will allow to havespecific regression results for each country Based on that, the paper will analyze and evaluatethe impact of exports and economic growth of each country Finally, the paper will makeconclusion and propose policy implications At the same time, the paper will also test HET fordata 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 independentvariables in the model In addition, the table also shows expected signs of independentvariables in the model

Table 3-1: Summary of variables in the model

Annual GDP growth rate (annual %)

This is the dependent variable

The ratio of investment to GDP

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 dataanalysis 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

Empirical studies Open Export effect

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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 ofI/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 thencalculated 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 ofExports)

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 tocheck the relationship between variables first And then, quantitative econometric methodwith Ordinary Least Square (OLS) regression using Fixed Effects Model is employed for anempirical estimation

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4.2 SELECTION REASON OF FIVE ASIAN COUNTRIES

The following reasons are explainable to why the country selection to study the impact ofexports 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 exportorientation for their economies: Export-Oriented Economy Thanks to exports, these countrieshave been enjoying rapid and stable economic growth and have been or have been becomingnew developed countries

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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 thelast 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 gainedbrilliant economic achievements to have become developed countries and “EconomicDragon”, “Economic Tiger” of the Asia and the world

From the successful case of Singapore and Malaysia, other economies in ASEAN haveappreciated Singapore and Malaysia and considered these two countries as the best economymodel to pursue Government of these countries has promptly implemented export-orientedeconomic policies to expectedly lead their countries from developing economies to developedeconomies, specifically Thailand, Indonesia and Vietnam Below are highlights andachievements which the five countries gained with their own export-oriented economicpolicies:

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 torecover from the ravages of war, the loss of financial support from the old Soviet Bloc, andthe rigidities of a centrally-planned economy After many years of protracted wars, politicalisolation and economic stagnation, Vietnam is now rapidly getting integrated with the globaleconomic and political mainstream Since 1986, Vietnam has embarked upon a policy of “DoiMoi” (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”,

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particularly Resolution No 10 of the Central Committee of the Party on AgriculturalEconomic Management Reform, agricultural production was completely untied, from a foodshortage country Vietnam became one of the top rice exporters on the world andsimultaneously 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 theAsian economic crisis, the growth came down to 5.8% in 1998, 4.7% in 1999, after which itagain started showing up, registering 6.7% in 2000, 7% in 2002, 7.7% in 2004, 8% in 2006and 8.5% in 2007

Vietnam had an average growth in GDP of 7.1% per year from 2000 to 2010 The GDPgrowth 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 wasintended to provide an important boost to Vietnam's economy, to ensure the continuation ofliberalizing reforms and create options for trade expansion However, WTO accession alsobrings serious challenges, requiring Vietnam's economic sectors to open the door to increasedforeign 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 measuresintroduced in its aftermath.

4.3.2 Export activity of Vietnam

Because of being an agricultural production-based country, exports in agricultural productswere 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 ricebut also aquatic products, coffee, rubber, and pepper In recent years, Vietnam agriculturalexports are under increasing difficulties due to fierce competition from competitor countriesincluding Thailand, China and import barriers from main importers such as America and EUcountries The next is crude oil and light industrial products Light industries as textile,footwear, and wood products are considered as labor-intensive industries that directlycontribute to reducing unemployment Their values were ranking behind the value of riceexport in the period of 1990-1996, but they have been growing faster to become keycontributors in recent years This is a crucial change of production structure in the process ofindustrialization

Although changes in export structure are positive but all of them are still low value-addedproducts 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 ofexports was recorded at an impressive growth of US$49.5 billion in 2008 as compared toUS$32.5 billion in 2005

In line with the increase of export value, the ratio of exports to GDP was also positivelyimproved over the past years: 30.8% in 1990, 46.5% in 2000, 61.3% in 2006 and stood at ahigh level of 68% in 2008 (This is higher than many other countries, ranked the fourth in theAsian region, the fifth in Asia and the eighth of the world) (GSO, 2009) Export turnover per

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capita also had a sharp increase from US$36.4 in 1990, US$186.8 in 2000, US$391 in 2005and US$557 in 2008 (GSO, 2009).

There are many reasons to explain the boom of Vietnam exports including the expansion ofexport market, the effective economic reform and the increasing competitive capacity ofVietnam

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'sexports 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

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 ismainly from agricultural products and crude oil accounting for nearly 40% of total exportvalue As such, it is obvious that major export products of Vietnam are still low valueproducts with labor-intensive technology This proves that contribution that exports bring toVietnam’s economy is not high

Figure 4-2 indicates that Vietnam’s export growth had not much impact on its economicgrowth The export growth curve and GDP growth curve do not show any consistency inincrease as well as decrease over the studied period Export growth over the last years washigh of over 10%, but this high growth is still not a driven force for Vietnam’s economicgrowth Vietnam’s economy is still not an export-oriented economy as expected from itspolicy 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 arelatively good transition in modern economic growth over the last decades Malaysia has

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followed the step of the four tiger economies of Asia: Taiwan, South Korea, Singapore andHongkong with commitment of transforming from an agricultural and mining-based economy

to a manufacturing-based economy With the support of Japan and Western countries, itsheavy industries have prosperiously developed during many decades Exports have become atop growth machine of Malaysia Malaysia was consistent in development policies andachieved 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 thatare a series of export-oriented industries such as: Textile, rubber products, electric andelectronic goods In 1990, Malaysia mostly met standards for a Newly-IndustrializedCountry (NIC) (30% exports including manufactured goods)

Domestic and foreign investments have played a remarkable role in the transformance ofMalaysia’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 highprice of oil In 2004, the economic growth reached 7.1% highest since 2000 thanks to theincrease of domestic & foreign consumption demand Its budget deficit decreased to 4.3% ofGDP in 2004 lower than the forecasted figure of 4.5% In 2005, the GDP growth speed stood

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at 5.3% The government of Malaysia kept speeding up its economic growth by policies toimprove bussiness environment.

Though Malaysia’s economic growth in 2010 was recorded at 7.2% that was higher than theforecasted figure of 6% from the government But, as assessed by economists the economy ofMalaysia is going behind the neighboring countries when it is gradually losing thecompetitive ability and its public debt is increasing day after day Economies of theneighboring 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 nothave to confront with economic recession in 2009 like Malaysia and Singapore

The economy scale of Malaysia now is approxiately equal to Singapore with aroundUS$239.96 billion compared to US$239.33 billion of the neighboring country The reasonthat Malaysia, a rich natural resource country, was not come over by Singapore in 2010 wasthanks to the appreciation of its currency against US dollar During the last twelve months, itscurrency was higher than by 12% against US dollar

Economic growth of Singapore has caught up and is threatening the third position of largesteconomies in the region that Malaysia has been holding for a long time after Indonesia andThailand Singapore had a growth of two number with a strong recovery of 29.7% in itsmanufacturing 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 valuewas 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

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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 helpingMalaysia’s economy grow up.

Figure 4-4 indicates that Malaysia’s economy largely relies on export growth Over thestudied period, Malaysia’s GDP growth was up and down, but its fluctuation was verymatching 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 aswell

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, Thailandhas made a transition from a subsistence agrarian society into a rapidly industrialized andmarket-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 lasttwo decades With six Economic and Social Development Plans (NESDP) went into operationduring the last 30 years, the economic level of the country and the standard of living of thepopulation have clearly improved

During the period of 1985 to 1996, Thailand had historically become a tiger in economicdevelopment with average growth rates of 10.4% From 1980 to 1988, under theadministration and leading of Prime Minister Prem Tinsulanonda in power, Thailand began toopen up their economy to the world and international trade

Nevertheless, under the impact of the Asian currency crisis in 1997–1998, many financialinstitutions collapsed, a huge number of people became unemployed or bankrupted Until

2001, Thailand recovered with a good momentum over their currency (Baht) and economy

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