In this post, we will focus on Asia’s stellar growth and the reasons behind Asia’s success.
http://www.economist.com/world/asia/displaystory.cfm?story_id=13356518
This article from economist.com highlights a common factor behind the successful growth of East Asian economies- dependence on exports as an engine of growth. The economic growth of East Asian countries have been very impressive- Japan’s “economic miracle” after World War II, the growth of Asia’s four “tiger economies” (Singapore, Hong Kong, Taiwan and South Korea) and more recently, China’s double digit growth rates. Such results were achieved when these countries opened their economies and actively promoted trade. These countries have substantial export to GDP ratios (for instance, Singapore’s exports was 186% of GDP in 2007) hence suggesting that increase in GDP is largely “export-led”.
One of the many benefits of pursuing “export-led” growth includes the utilization of inherent comparative advantages in different countries. For example, China is endowed with abundant low cost labour, giving China an edge in light manufacturing sectors where labour costs can be kept low and the cost savings are passed down to consumers. Toys, textiles, furniture, electronics and a wide range of other products are “Made in China” and exported to the rest of the world.
However, overdependence on exports for growth may not be a good thing. Exports are very sensitive to changes in the external environment- good conditions will lead to a boom in exports, whereas a depression will cause a dive in exports due to the fall in external demand, very much like what is happening in the current economic crisis. Since Asian economies are largely dependent on exports, a dramatic fall in exports will trigger off other chain effects, which will eventually hurt GDP growth. In particular, the greater the dependence on exports, the harder the economy will be hit.
But the economy may not be all that reliant on exports. This article suggests that Asian economies are not overly dependent on exports because they engage in export processing- where parts of the final product (intermediate goods) are imported and this might actually inflate the importance of exports.
So this begs the question- how important is trade to a country’s growth and what factors influence this? Is dependence on exports/trade for growth necessarily a bad thing? Do you agree with the article that “Asia needs a new model”?
Feel free to raise any point in the article too!
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This article really begs the question, which part of Asia? If one is referring to developing nations and to the poorer nations of Asia, might it be impossible to use another model, at least at first?
For developing nations, it is easiest to tap into the already available foreign demand, using either abundant natural resources, or very low per unit cost of production (wages, rent, etc.). Local markets are probably nascent due to low national income and thriftier consumption patterns, which will take time to change. There might seem to be a need for a new model due to a shrinking global market, but isn’t this global market still orders of magnitudes larger than local markets?
Besides, arguing that a higher sensitivity to the external environment should discourage trade seems to be leading down the road of protectionism. Instead of reducing reliance on global trade, maybe there should be an effective international governing body instead – an international state to balance a global economy, to prevent downswings from lasting too long and being too harsh.
I agree that for developing nations, export-led growth is probably the easiest way to achieve economic take-off and increase the size of the domestic economy, by tapping into foreign demand, as you have pointed out. However, I think the issue here, regardless of the state of development of the country, isn’t shying away from trade (that, indeed, would be protectionism), but rather reducing RELIANCE on trade as the engine for growth. Asia’s new model should not be a model that “discourages trade”, as you have put it, but rather a model that builds on areas other than trade as well.
To cite an example, the Russian economy is heavily dependent on their oil and gas exports. It’s interesting (and telling) that Russia is always full of sound and fury when oil prices are rising or at all-time highs, yet are oddly silent when oil prices plummet. Not that it’s wrong of them to take advantage of their natural resources by means of exports, but Russia has blatantly relied almost solely on this to fuel its economy. Little to nothing has been done to boost domestic demand through income redistribution or diversification of the domestic economy. Russia’s predicament is testament to the dangers of sole reliance on exports as the engine of the economy.
Noting that the discussion on the topic of exports have been tilted towards how exports have contributed to the growth of Asian economies, allow me to examine another perspective-how trade,or rather, totally free trade can be detrimental as well.
While we live in a highly-globalised world whereby economies of many countries are intertwined with one another, some countries in Asia still do not adopt export-oriented strategies. Extreme examples of such countries are North Korea and Myanmar which practise autarky and emphasise on self-reliance. The emphasis of the ideology of Juche for North Korea and Burmese Way to Socialism for Myanmar implies that their economic ideology simply has to conform to state ideology. Is this, however, a bad thing after all?
No doubt, pragmatists will claim that this form of economic philosophy is near sucidal and would cause immense hardship for its people. However, we ought to recognise that free trade and an economy that is over-reliant on exports is not completely flawless as well. One has to remember that a country that is largely reliant on exports like Singapore is very susceptible to global market forces. There might be a genuine case for protectionism and the reduction for complete free trade, especially in times of economic recession to mitigate the negative social consequences.
Besides, one needs to consider if trade for all Asian countries have been ever fair. The Common Agriculture Policy(CAP) adopted by the European nations is a clear example to illustrate that protectionism still exists and the terms of trade is clearly unfavourable to agricultural exporting nations. WTO and its predecessor, GATT, have also not been successful in reducing tariff and non-tariff barriers for agricultural products. As such, WTO has often been criticised as only serving the interests of the more developed countries. Thus, agricultural-based Asian economies that wish to adopt export-oriented strategies may face severe difficulties in exploiting their comparitive advantages.
For export-oriented Asian economies to succeed, it is also necessary for them to sign various FTAs so that trade creation occurs and nations can have a bigger common free trade area and markets for their goods and services. Prominent FTAs in Asia include China-ASEAN free trade area.
While FTAs may sound like a very exciting strategy for export-oriented countries to adopt, there are still drawbacks. FTAs may include trade obligations in areas such as intellectual property, labour and the environment which should ideally be discussed apart from the trade pacts. Furthermore, some FTAs carve out important sectors like agriculture from the free trade regime or exempt key products from the reforms. For example, the USA-Austrailia FTA excludes sugar. Therefore, it is essential for Asian countries to consider the pros and cons of FTAs and ensure that the FTAs signed are truly beneficial to them before committing into them because more often than not, these FTAs are more beneficial to the more developed nations that the less developed countries.
At the end of the day, whether an export-oriented economy is truly beneficial for a country largely depends on the political and social characteristics of the country and there is no universal ‘formula’ for countries to follow. The extents countries wish to pursue free trade or protectionism should also be flexible according to different time periods. Ultimately, asking Asian countries like North Korea and Myanmar to adopt export-oriented, outward-looking economies is a tall order since this challenges the very existence of the state.
Besides the benefits of comparative advantage raised in the article, access to markets is probably the other huge reason for countries to pursue export-led growth – which is especially the case for Singapore. Trade is probably not as important to countries like India or China, with a domestic market of 1 billion people apiece, but I hardly think they would say no to more demand from overseas markets!
That said, for all the benefits of export-led growth and the “miraculous” experiences of the Asian tigers, the big danger from dependence on exports is that export earnings make the need to encourage domestic demand less pressing – until it is too late. If an economy is overly dependent on inflows of foreign currency from export earnings, or even on foreign investment as a major component of aggregate demand, then in times of economic turmoil the entire economy is set at the mercy of the vicissitudes of global markets. Boosting domestic demand is probably the best way to go to for some measure of self-sufficiency, short of the true blue Keynesian method of government fiscal expansion to augment aggregate demand. Witness China, which seems to have effectively decoupled from the slowdown of the American economy and is buoyed to some extent by domestic consumption, as opposed to Japan, which has failed to develop alternative sources of growth.
All in all, the experience of China in this crisis is unique among Asian nations. Asia does need a new model, I think – one that is more diverse in terms of engines for growth, and preferably with greater emphasis on domestic consumption and diversification of the local economy as well.
Su XinHui Grace/VJC
No economic model is without its flaws. While trade has allowed many Asian countries to experience unprecedented economic growth, it has proved itself not to be “foolproof” in light of the global financial crisis we are facing currently. As much as Singapore government has tried to diversify our export sectors, the most it can safeguard us against is a localised recession which explains the failure of this model.
Yet we cannot discount the benefits of this model considering the small domestic sector of Singapore’s economy and our healthy economic growth for the past few decades is largely attributed to the income we earn from exports. Unlike countries like USA whose domestic demand is strong enough to buy up their own goods, we have to depend on our foreign counterparts to make up for the lack of domestic demand and inevitably, we develop a dependence, or an over-dependence(as mentioned in the particle) on exports.
However, it must be taken note that this is largely due to the economic characteristics of a small economy like Singapore which is also not well-endowed with natural resources and trade is the only means we can gain access to other resources and raw materials.
In my opinion, trade cannot and should not be avoided no matter what. This is simply because, at a very basic level, human beings crave for variety. Countries alone cannot satisfy this desire, much less can they provide for all the goods demanded by the people in society. Resources around the world are not evenly distributed and thus, trade allows for a more even distribution of the limited resources we have. Of course, the degree of necessity of trade depends on how large the domestic market is. If you have a small domestic market like Singapore, then it is necessary to rely on trade for economic growth. However, this does put the country in a dangerous position; where it is constantly facing volatile international economic conditions and fluctuating patterns of demand and exchange rates. The more dependent on trade we are, the more likely we are to fall once the global economy hits a recession.
China being a large country may be assumed to have a market just as large. However, a significant proportion of the population is still in poverty, or not as affluent. This makes the market for goods that are not necessities smaller than it seems. However, the proportion on people below the poverty line is decreasing, indicating a rising affluence, and hence, a growing market. So, when we take a look at China’s large and growing domestic market, there is a need to put the focus on both the domestic market and the domestically produced goods. Consumption is expected to be high, and with huge numbers of people in the workforce, it would be good to focus on labour intensive industries to create export goods as well. Employment rates will thus be kept in check, and the international market will be able to enjoy goods such as apparel and computer parts at lower prices. Another important point to note would be that, for a big market like China’s, their market alone might just be sufficient to generate economic growth since it is so big. However, without trade, the rate of growth would be slow simple because the people are poor and do not have much demand for certain goods which foreigners might deem necessities. Hence, it would be beneficial to have a strong external demand as it can jump-start a slow economy.
As to whether or not Asia needs a new trade model, I feel that this might actually be true. The old trade policies which worked for the thriving economies in Asia are obviously not working any more as countries which have adopted these policies only recently, find it difficult for their economies to develop (e.g. Vietnam, Cambodia, Laos). This is not surprising as more and more countries focus on trade, creating multiple trade hubs in the world! Hence, I feel that Asia needs to improve in the areas of science and technology; such as in the field of biomedical science. R&D is the latest aspect of trade, one which many westerns nations are eyeing. With more nations injecting more funds into their R&D sector, if Asia refuses to catch up, it might once again be too late when we finally do decide to join the bandwagon. If Asia opens up more new markets, with new research and products rather than to improve on what others have done or produce cheaper products that are already in the market, then Asia would be able to pave the way for more economic prosperity. As globalisation consumes our world, trade models should change for a more dynamic world where there is balance in the emphasis placed on the trading of tangible and non-tangible goods.
Asia consists of many countries, at varying stages of development. It is an impossibility to find a model that will work out well for every single country. For example, the inherent differences in terms of size, political stability, level of technology and many other factors of the countries mean that a model that works for one country, say China with its armies of low-paid factory workers, would not work for a country like Singapore, with its small workforce. Hence, varying models that are best suited to the various Asian economies have to be found.
R&D as a sustainable growth model would probably work best for the more developed Asian countries, like Singapore and Hong Kong, that have the resources to attract experts with the expertise required. These countries do not necessarily have to have a huge talent pool, as researchers are often not limited to their native country, but move around the globe to the countries that offer the best opportunities. Thus, these countries should aim towards creating an environment that is attractive, by giving research grants and other perks. We have to recognise that if Asian economies are going to tap onto this niche area as a growth engine, they will have to GET GOING!! As early birds will be able to get the worms! (build up a reputation as a research hub, which will be beneficial in attracting talent)
However, this development model is definitely not suitable for all Asian countries. In those economies with low literacy rates and little government support in terms of infrastructure and favourable policies, progress of scientific research will be greatly hindered. These nations should instead tap onto their natural endowments and build on their strengths.
Cheerios!
Note to Melinda: Employment rates do not need to be kept in check.. It’s unemployment.. =) =)
As has been mentioned above, it is hard to deny that Asian countries are heavily reliant on growth. Indeed, even for a developed country like Japan, there has typically developed an “over-reliance” on trade. (Japan’s economy has recently shrank a record 4.0% in the first 3 months of this year) This “over-reliance” has affected many countries, most notably, our own.
However, despite all this, I do not believe that dependence on exports or trade is necessarily a bad thing. We cannot ignore the fact that we are living in very much a globalised world, and to insist that we do not depend on trade means a vote for protectionism, which I believe would be taking a step backwards in terms of world economic progress. It is obvious that over-reliance on trade is an especially bad thing with the current economic crisis, however there seems to be little complaint when the economy is in a current bull run.
Therefore I believe that Asia does not necessarily need a totally “new model”. There can be changes made to the current model that we are using, to reduce the reliance that Asia might have on trade, for example, by using import substitution methods, while at the same time stimulating local demand and investment. Asian countries should be able to weather the storms when it comes to the international market, but not totally reject the idea of dependence on trade.
This also depends on the factor endowment of an country. As has already been mentioned, Singapore’s domestic demand is much too small to service what can be produced, and trade is therefore inevitable. However, for countries like China, where a huge percentage of demand remains untapped in rural areas, the government can take initiatives to stimulate local demand.
I would also like to add an additional point. Trade is not the only answer as to how Asian countries can enter the international market. Recently, there have been a lot of Indian and Chinese countries who have taken steps to invest in developed countries, which is going against the traditional flow of more developed countries investing in our Asian countries. (over 1000 international mergers or acquisitions were carried out by Indian companies between 2000 and 2008, well worth over $72 billion) I believe that this is an avenue which Asian economies can start to take an interest in, other than just the physical trading of goods.
The current recession has certainly raised doubts about the sustainability of the Asian growth model; a “new era” in weak demand in traditional markets like the USA, Europe and Britain requires that Asia diversify its economy to avoid over-reliance on export-led growth.
The fact is that Asian economies can no longer rely on the USA, Western Europe and Britain as their sole export markets. Private consumption in these regions is expected to fall and settle at lower levels because of increased debt, lower incomes and possible future increases in taxes to finance their massive stimulus packages. For example, in the US, where cheap credit and financial innovations allowed increased borrowing in the boom years, income growth stagnated but debt grew by 133% of income in 2007, a jump from 2006, and household wealth fell 18% in 2008. This will weaken global demand for Asia’s exports.
It is all very well for Asian economies to try to stimulate domestic demand in order to offset such falls in export demand. However, the governments would likely face significant challenges in doing so. One problem is the Asian cultural attitudes preferring high levels of saving. For example, in 2007 China’s consumption rate was only 35.4%, significantly lower than the rate of developed countries by 30 percentage points, as well as the lowest rate since the past 30 years of reform and liberalization, despite extraordinary economic growth. A possible reason (specific to China) is a weak social safety net which encourages people to save rather than spend. The other more pertinent challenge is the presence of a widening income gap, especially in rapidly developing economies such as China. China’s urban-biased policies have resulted in a wealthy coastal strip juxtaposed against inland rural states mired in poverty. Thus, for such countries such pressing concerns need to be addressed first before domestic demand fuelled growth can be workable and sustainable.
Lastly, an option for Asian countries which do not have the fortune of a large domestic market is to encourage the growth of local enterprise which are more likely to stay loyal to their home countries, providing much-needed employment and domestic demand from firms. Singapore, for one, is looking to further encourage the growth of local small and medium enterprises (SMEs), which I believe is a step in the right direction away from the export-led model. It has even be suggested that the government invest in such local companies through Temasek Holdings, which can significantly give local enterprise a boost through providing capital. Also, policies being considered are enlisting government assistance in helping local firms expand effectively into global markets, especially emerging ones.
This is not to say Asia should move away completely from the export model, rather it should be viewed as part of a diversified economy, in which other sources of growth are necessary to reduce the effects of external demand fluctuations.
The reliance of the importance of trade to countries depends on the state and condition of different countries. For Singapore, the constraint in size creates a relatively small market that is hardly able to sustain on domestic demand itself therefore we need to export so as to increase our revenue through venturing into other markets.
In the case of China – which is a huge developing country as mentioned by many of you, have large domestic market to tap on. But, I believe that it is actually through trade that helps China raise its poverty line over the years but still have to consider that there are still hundred millions under poverty despite progressive growth. As Supply is induced by demand, low income level of its large population can hardly raise the demand by much, and hence how can domestic demand able to sustain the economy? Thus trade plays an important role in helping China to develop its domestic demand that can then support the domestic market and larger portion of its economy with the help of trade via attracting foreign direct investment creates employment increasing the standard of living of its citizens, for long term growth. Eventually, large rise in the amount of China-owned companies will dominate and lesser dependence on foreign firms.
Using China as an example, I think that Asian countries do not need a new model yet but possibly in a few decades to come as their current economy is still not mature enough. However, they can slowly shift their emphasis to encourage larger domestic market through govt implement policies.
The comments raised that a large amount of the domestic demand is untapped for China are well-pointed. IMO, however, there needs to be a clear definition of what is being referred to with respect to the status quo. To me, the current “Asian Growth Model” refers to the growth model that is dependent almost solely on exports (case in point – Japan in the past 50 years). The point here is that Japan has done little to develop its domestic demand despite having been on the export-led model for decades. This is a big part of what has left it especially susceptible to the ups and downs of global markets.
The new “Asian Growth Model” I would envision – and that I think most commenters are referring to when they talk about “encouraging diversification and domestic demand” – is one where the spoils of export-led growth are used to increase domestic consumption rather than having a large part of it kept safe in government coffers, for instance, or being pilfered by a corrupt political elite. Policies that redistribute wealth in a progressive fashion would go a long way towards this end. Export income that goes to the rich will probably be stashed away more than it is spent, but if that same earning is redistributed towards the poor through progressive taxation and an effective government welfare system, domestic consumption would increase as it is the poor that are more likely to spend their rise in income. China would do well to take advantage of its current export earnings to boost domestic demand in this fashion. Russia could probably benefit too, but the oligarchs and oligopolists are probably too firmly entrenched for such policies to come into effect any time soon.
There is no doubt that trade is of paramount importance to a country’s growth. However, great importance tends to lead to reliance and when this pillar of strength breaks, then what?
Does Asia really need a new model? Maybe. There is no sense in changing what already works. Furthermore, there is also no reason to further complicate things and expose yourself to unnecessary risk of a new system. In true economic thinking, until the opportunity cost outweighs (or is predicted to outweigh) the benefits, only then should the whole system be removed.
Trade has brought to many countries tangible results of rapid development. People have enjoyed the benefits of advanced technologies that are imported. Bonds between different countries have also strengthened over trade. However, trade dependant countries are subjected to the whims of the world’s economy. Like riding a bucking bull, the exporting country’s economy depends mostly on internal and external factors, which they often cannot or find it difficult to control. Other importing countries might also have the potential to control their economy.
Overall, the system may not be perfect but what system is anyway? Asia should not rush to change her system overnight. Instead, Asia should improve on the system by encouraging diversification and domestic demand in order to be more independent of the ups and downs of the market.
Take a look at the Heckscher- Ohlin theory of comparative advantage – just a few slight differences from the Ricardian one that we know. It states that one country with an abundance of a particular factor of production would produce and export that good, and import the rest which it does not have an excess of factor of production in.
It’s kinda like putting all your eggs in just one or two baskets.
Though looking at today’s paradigm, it may not be a bad thing. Because most countries hope to utilize comparative advantage to the largest extent possible, they would undergo factor specialization. Hence we may just see a case of lotsa ‘Singapores’, for a lack of a better word, appearing in the next 10 years, where we export a lot and import a lot as well.
Take a look at the United States – They’re undergoing some major economic restructuring, probably caused by China’s resource specialization of labour, which makes them suitable for manufacturing. Perhaps technology for the United States? Education?
It’s not just a model for Asia, ladies and Gentlemen. It’s probably going to spread to the whole world soon. =)
What you seem to be suggesting is to take the current Asian export-led growth model to the extreme (“putting all your eggs in one or two baskets”). I have to disagree that this is a desirable set-up for international trade, on two counts. Nationally, it is unlikely that any government would want to specialize in just one or two core industries at the expense of all else. (Singapore in this case is the exception, not the rule, IMO, and even we have diversified towards some small degree of self-sufficiency.) The risks are just too great for the national economy if a large chunk of it is dependent on foreign demand for its exports. We already see this in the case of many a South American or lesser-developed Asian nation with one or two primary exports as the foundation of their economy, and the instability that occurs when demand for these exports falls.
Internationally, specialization to the degree you seem to suggest implies that a small number of countries would corner the market in every conceivable industry – essentially the establishment of global cartels. This has its merits and demerits I suppose, but I’m thinking of what OPEC did in 1973 with the oil prices and what that did to the global economy. Oil is pretty unique, to be sure, but it could easily happen with any other key commodity I should think.
Your points and conclusions are well-argued but I think the initial implied premise – that comparative advantage is the only consideration when countries trade internationally – is faulty. While we’re all talking theories, it might be worthwhile reading about the Linder hypothesis (good ol’ Wiki: http://en.wikipedia.org/wiki/Linder_hypothesis), which is a more demand based theory of international trade than the traditional supply-side Heckscher-Ohlin model. It addresses some empirical failings of the H-O model, and I think it effectively argues on a theoretical level that comparative advantage is important, but only part of the story.
IMO the Heckscher Olin Theory indicates that countries tend to do well if they focus on particular niche areas, provided they will be able to do so at lower opportunity cost than other countries. In the case of countries which have high price elasticity of demand for goods, or lack a definite comparative advantage in any areas, it will be difficult for them to subscribe to this model of development.
For developing countries, their demography presents to them different unique challenges that they could perhaps rely upon to bolster growth. Domestic demand becomes of greater consequence in the later stages of development, as a country will tend to produce goods that are taken up by the global market and these will generate financial inflows into the country. However, if we look at China currently, domestic demand has become of consequence in supporting the ailing exports market, which has been affected due to the global downturn. The sheer size of the consumer market in China will be of great importance in supporting China’s growth and preventing structural unemployment from occurring, and this provides insulation against external supply shocks and fluctuations in exchange rates etc.
Hence, this presents a more advanced model of development as compared to an export based economy by increasing the resistance of the economy to global economic fluctuations.
should asia move away from it’s reliance on export trade… hmm…
i think we should not really change our plans but we should rather create a back up plan in times of economic recession.
like said in the article, we obviously have to capitalise on the comparative advantages we have, for example, cheap labour in china, it is not only good for the nation, it’s good for the consumers everywhere as such cheap goods can only be made in china because of it’s edge in that and thus, it has to be done that way for the good of the people. this is similar to the OPEC nations…they have to export oil for the good of the world. they cannot move away from that. that is their strength. the world needs it.
but what we asian economies can do is to set a back up plan i case something goes wrong and a recession occurs. like singapore, where there are two engines of growth, so if one fails, we run on short term, till the recession is over and the engine recovers, we run on one engine or if not, we can even open up a thrid back up engine. we can invest on recession-proof sectors like education and health which are relatively recession proof. thus, if we keep such as our back up plans, we can see ourselves through the recession before we once again capitalise on out strengths and speed ahead. so, i feel we should not move away from export but just be prepared and have a back up plan to see ourselves through in tough times.
Trade definitely plays a major role in contributing to a country’s growth. This is clearly seen when a country exports goods of higher quality due to better technology or a more efficient method of production, countries which import these can use them as intermediate goods in the production of other goods thereby raising their output. Examples would be machinery and other capital goods.
However, another way in which trade increases a country’s growth is by an exchange of knowledge. When we think of trade, we usually think of an exchange of goods and services. Of course, with this exchange of tangibles comes an exchange of knowledge as well. Countries can learn from the production methods of sophisticated imports so as to produce high quality goods of their own. Also, innovation is encouraged when countries improve on these methods, resulting in new knowledge of more effective methods of manufacturing.
When these improved goods are exported to other countries, the above process will repeat itself. Eventually, this flow of knowledge will benefit all countries in terms of higher output as well as efficiency. After all, knowledge is a non-rival good and as the saying goes, ‘the more the merrier’. Thus, trade is not only essential to a country’s growth but essential to the economic growth of the world as well.
The collapse of USSR was intrinsically linked to the ‘reverse oil shock’ experienced by the world in the 1980s. The era of oil glut was good for businesses, after a terrible decade of ‘stagflation’. Today, its successor state, Russia, is still heavily reliant on the energy export market to power its economy, evident by the the fall in US$ reserves due to the Russian central bank’s recent action of using its US$ reserves to maintain the value of the Ruble.
In Kishore Mahbubani’s book, “The New Asian Hemisphere”, we see that Asia wants to replicate the West. Indeed, we see signs of it happening. China, for one, has called a review on the SDR in the IMF, threatening the hegemony of the US$, but also attempting to include itself inside the equation of ‘Western’ Hegemony.
This is so because for China to power up its domestic market to be on par with the USA or even supercede it, the idea of purchasing power must be reviewed. To buy resources in the international market, you need the defacto international recognised form of receipts- US$, although the Euro is an upcoming contender to US$ domination.
Today’s version of ‘trade’ is grossly misunderstood. It doesn’t just encompasses the simple version of barter trade espoused by the comparative advantage theory, but one that is measured by US$. You can’t horde US$ in a comparative advantage situation!
So the many versions of China’s ‘comparative advantage’ possibly arises mainly from their highly undervalued RenMinBi. This makes China’s labour becomes relatively cheaper! Chinese goods become much cheaper for export and distorting trade patterns in the process.
Moreover, be it in Israel, where entrepreneurs devise laser beams which can shoot down artillery shells fire by Hezbollah or in China, where entrepreneurs trumpet green energy despite their economy growth being powered by dirty coal, the concept of money is still measured in US$ (a Zimbabween billionaire wouldn’t have make it on the list) and the impetus is on the entrepreneurs to get the US$. So the easiest way is of course, to market their goods to those who have it, who are no other than the US consumers themselves!
Zhi Ying from HCI mentioned that “import substitution methods” (ISI) can stimulate “local demand and investment”. Although it is true that this method should work theoretically, it failed miserably. Indonesia, for one, had a bad experience at it. This ISI method requires the use of protectionism due to local lobbying. Since ISI is a government policy, it gives the wrong impression that the government will protect local industry at all costs. Tariffs, quotas and other protectionist measures will arise. Without competitive exports, external value of currency falls and import costs rises (raw materials). Thus many of such countries in Asia who implemented ISI (Thailand, Indonesia…), they possess a quasi-fixed exchange rate system or fixed rate system. when the AFC struck, they suffered severe political repercussions. So ISI is bad. And we mustn’t forget that the ‘domestic market’ of Indonesia is relatively big at 200mil+ people.
I liked Zhi Ying’s point of how trade patterns are occured to the changing dynamics of capital flows. Such flows would indeed influence the nature of trade in the future by promoting capital flow back to the home country (eg. GIC’s dividends to the Ministry of Finance) and reducing the need for capital flows via current account surplus. However, with rigid US laws, (remember Dubai World purchase of P&O? ) this model is hard to implement even if Asian governments have the will.
I agree with Jeremy from RJC. The third world debt crisis arose partly due to the monocultures many African nations inherited from their colonial masters, but also because the of the domination of the international financial system by the USA and its currency, which created lots of problems for the BOPs, which probably wouldn’t exist in a true ‘comparative advantage’ scenario.
I disagree with Fong Whye Kit from NJC.
Although, when we look from a larger perspective, with altruism, for Asia as a whole, we clearly see that technological progress as beneficial in the long run. It works like a multipler and countries becoming firms in a globe like a perfectly competitive marketplace, although different resource endownments would obviously impede such a progress. Being non-rivalry in nature, such good would do not only Asia, but also the World at large a big favour, moving PPC curves out and increasing efficiency in all industries.
A macroeconomic goal of the government is not to benefit other nations, but to enrich itself. Take Singapore for example. Although our largest trading partner is the US, we have a current account deficit with this country! Surprisingly, we possess a huge current account surplus with Indonesia, a relatively ‘backward’ nation. Should we trade our knowledge then? Wouldn’t they become our competitors then? As Whye Kit mentioned, our competitors would “produce high quality goods of their own” and it is very likely that “innovation is encouraged”, in a way they innovate to replicate our manufacturing processes and undercut us, leaving us with ‘normal profits’ in the long run, which would not do us good.
Yet, we can view such an Asia from the current theoretical flaws of a perfectly competitive market. One major flaw will be the reluctance to engage in R&D, since you know that your competitor will also acquire the same knowledge as you do. So ironically, such an idea might be self-defeating after all.
So the question should not be on whether Asia should move away from its export-orientated model, but can it?
Personally, I don’t think that Asia needs a new growth model. Over-reliance on exports is not a problem. After all, local consumption levels in Asia are much lower than the levels seen in the West, primarily the United States. In the US, consumption forms about 60% of GDP compared to most Asian countries where it only takes up 20-30%. The Western spending culture just does not apply to Asian countries, where Asian values promote thrift and moderation. Of course, we can attribute this to the fact that Asian countries are mostly Newly Industrialized Countries (NICs). Countries such as Thailand, Malaysia and China are just coming to terms with their newfound affluence and the people have not attained the level of extravagance of the US yet, so people are still very much averse to spending. Even for developed countries like Japan, the people still continue to save a large part of their income, as seen by Japan’s “Lost Decade” following the asset price bubble’s collapse when the Bank of Japan decreased interest rates to virtually zero for a decade and yet was still unable to stimulate local consumption and investment levels. Asians are much more risk-averse and with the current economic crisis, it is unlikely that most Asian countries, with the possible exception of China and India, can hope to recover their domestic economy by stimulating local consumption. We will still be looking towards exports to drive our economy out of recession.
So, with the current spate of economic affairs globally, with the US economy mired in deep trouble and the EU in not much better state, it seems that our exports are going to suffer big-time. I don’t believe that it’s all doom and gloom though. What matters most in this argument is not about whether exports are important to drive the economy or whether Asian economies should depend on their local consumption levels. What eventually determines how countries are affected by recession is actually the make-up of the economy, or how prone a country’s industries are to recession.
In a global downturn, every country is going to find a drop in aggregate demand. People will demand less goods, businesses will invest less, countries will import less. The situation, caused by lack of confidence, is the same everywhere. What ultimately determines the extent is the type of goods and services a country produces. Some industries are so-called “recession-proof”, namely industries like healthcare, agriculture and education. These industries are minimally affected by a global recession. People still need to eat, the sick will continue to seek treatment and education is a long-term investment which people will not shun just because there is a recession. By focusing on such areas, where the goods are income-inelastic, a country can actually become less exposed to a recession. Singapore is actually moving towards these industries during the current recession period, with plans to open new universities and greater investment in medicine and healthcare. All these point towards the fact that export-dependence is not the issue, rather, a country’s industries determine to what extent it will be affected by a recession.
Of the Asian countries, only China may be lucky enough to have such great momentum for growth that it can still achieve high growth rates even though a large part of its industries lie in the manufacturing sector. For the others, the effect of the recession will not depend on whether the country is export-driven or consumption-driven. With a heavy focus on secondary sectors, Asian economies may be quite heavily hit by the recession, although less than Western economies which focus a lot on services.
So, here I provide a totally different opinion, income elasticity of demand for a country’s goods and services matter more than dependence on exports or consumption.
I agree with your ideas about “recession-proof” industries and how they can be safe harbours in an economic storm, but I do think there are limits to how much respite these can provide, for several reasons. First, not everyone can be a doctor, nurse, teacher or farmer when recession strikes! Second, I’m skeptical as to the proportion that such unique industries account for in the GDP of a developed economy (correct me if I’m wrong on this count). And third, countries are likely to experience diminishing marginal returns to investment in these areas. If significant improvements were made through government investment and policy the last time there was a recession, it’s unlikely that the same amount of resources put in will have comparable effect (and if the improvements weren’t significant the first time around then it would just have been a waste of resources anyway). How much more can you improve a healthcare or education system that already works?
Hence I think your conclusion that “income elasticity of demand for a country’s goods and services matter more than dependence on exports or consumption” is limited only to these rather special areas that you have identified. No country can thrive on these areas alone, which suggests that something has to be done to bolster other sectors, i.e. consumption, investment, exports etc, which brings us back to the original question of whether export reliance (or over-reliance on any one sector, for that matter) is desirable. WRT that I’ll just reiterate what I’ve said before, that I believe increased focus on domestic demand is the way to go.
“In China, as your leadership has recognized, growth that is sustainable growth will require a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption. Strengthening domestic demand will also strengthen China’s ability to weather fluctuations in global supply and demand.”
(Source: http://www.treas.gov/press/releases/tg152.htm)
From Mr. Geithner’s speech at Peking University on June 1st. Evidently the U.S. is also of the opinion that domestic demand will be of prime importance to sustainable and stable growth in China (and the rest of the world, presumably?).
I agree with Jeremy from HCI. Expanding one’s domestic economy will help one changes in external worldwide demand, as a larger and more well developed domestic economy not so reliant on exports will experience a smaller fall in aggregate demand.
The export led model used by many Asian countries involved exporting their goods and services to larger economies in Europe or the USA. In the past, as these economies were doing well and imported a large amount of goods and services from Asia. (for example, ASEAN is the fourth largest trading partner of the USA, http://www.aseansec.org/5928.htm) However, given the current golbal economic slowdown, these economies have cut back on their imports from our Asian economies, severly hurting our export led economies. Does this then mean that an export led economy is necessarily bad?
In my opinion, such a model is not inherently flawed, although it has much room for improvement. The export led model has helped lift many small Asian economies out of extreme poverty and help them expand their economies. With such a model being shown by so many countries to work (India, China, South Korea, Singapore and Malaysia), it would be hard to imagine that countries would want to discard this model and try coming up with something new on their own. We live in an increasing interconnected world, where trade has become inevitable between countries all over the world. Trade has often been praised for the many benefits it proveides to all parties, and to argue against trade and opt for a protectionist stand would surely be a step in the wrong direction. In that case, what would be the answer to the failings of the export led model in an economic crisis like the one we are experiencing currently?
The business cycle is made up of booms and recessions. As noted in the post, “exports are very sensitive to changes in the external environment- good conditions will lead to a boom in exports, whereas a depression will cause a dive in exports due to the fall in external demand’. I believe the problem lies in the times of good conditions. In times of good conditions, governments should take steps to strengthen their domestic economies, expanding their infastructure and helping to develop local industries catering for the domestic market. By doing so, governments can then ensure that when external demand becomes sluggish, their domestic economy has been developed to a extent that fiscal policies implemented by the government will have a significant impact on their economies.
Scarcity is paramount to economics, and one needs to remember that to develop the domestic economy during a boom time, when resources are close to fully employed, this would involve a trade off of having to let up on some potential gains from trade. However, it would be important to take a long term view on things, and prepare one’s economy for future slumps in the global economic climate. An encouraging sign is that many Asian economies ranging for China to Singapore have taken this into account and began to develop their domestic economies, ensuring that they will be better prepared for such economic crises.
It is also noteworthy that as Asia emerges and becomes an economic force to be reckoned with, there is a need to realise that we need to conduct more trade among Asian countries, with the larger markets now not only confined to Europe and the USA but also China and India. As such, export led economies should bear this in mind, and ensure that they also trade with each other on a larger scale. If the usual countries who do imported our goods now import less, our only option wpuld be to look for new markets to trade in, and it would be difficult to find a better emerging market to trade with than in Asia itself.
Trade and exports as a major driving force for an economy is not necessarily a bad thing, but there is a need to use the BOP surpluses gained in good times to strengthen one’s domestic economy. While it is true that smaller countries with smaller domestic economies will only be able to do this to a limited extent, they still need to do so. Another option for such small economies would be to increase trade between themselves and other small economies, so as to diversify their economies and trading partners, ensuring that they will be better protected for slumps in external demand for a particular good.
As for a recession like the one we are facing now, the best remedy for us would be Keynesian fiscal stiumulus. As such, it is important that the domestic economy has been developed to a certain extent such that these fiscal stimulus would have a significant impact on the economy. However, such fiscal stimulus would involve government borrowing or digging out of their coffers, which would go against the usual Asian mindset, and such changes in attitudes and mindsets would take a longer time to accomplish.
Many believe that Asian economies are pushing for a fast recovery and there seems to be a general notion that the new world economic order will arise such that China will be an important economic powerhouse. There is also talk of a multi-polar economic geopolitical system on the rise and if Asia can decouple from America and the EU given their collapsed financial systems.
However, there are underlying problems in Asia that needs attention before countries can embark on a ambitious economic restructuring programme. These include low literacy rates, poor standard of living, presence of widespread bureaucracy and corruption and well as a malnourished education system void of qualified teachers especially in the remote parts of Asia. These need to be reformed because they will be the long -tem solution plans in the asian economies. Decoupling therefore still remains a myth.
Trade is important to a country’s growth as it can allow inflow of income coming from foreign countries if it engages in active exporting. However the importance of trade to a country depends on factors such as whether the country is developing or already developed and the ability of the country to import and export goods. For example if country is developing, it may not yet have to rely on trade as it does not have sufficient means to engage in trade and may just have to rely on foreign direct investment coming in.
Dependence on trade may be a bad thing if the country excessively focuses on exporting/importing. It may also be harmful if their exports are expensive luxurious goods in times of recession. They would need to have alternatives in boosting their growth as the successful prospects of trade is interdependent on other countries. If economies in other countries are fading, foreign consumers would prefer to save or spend on cheaper local or other foreign products. Hence trade may not be a dependable source to boost economic growth.
Asia may need a new model as now even the Westerners are learning to save as mentioned in the article. In the past it used to be in the Asian culture to save, however it seems the West are latching onto this idea too. With the large Western population starting to save, the export industry would become increasingly competitive and export-reliant countries such as Singapore would have to learn to adapt to a new model to succeed once again.
I believe the Asian growth model is multi-faceted, and thinking that it being “export-led” is equivalent to it being solely dependent on exports (which the article seems to suggest) may be a little too myopic. One important key to growth will also be sound government policies and application of economic theory and models in a way that will maximise the extent of long term growth by allocating resources to sectors which can bring the most profits. Simply relying on exports does not help an economy grow; relying on exports, sensible financial management and flexibility (among many other factors) help an economy grow.
The claim that Asia should change its growth model just because growth is impeded because of fall in exports in recessions is careless. The reliance on exports for growth has many benefits (as pointed out by many) and may be the most sustainable way of growth for many Asian countries with not enough raw materials to help its population survive. Through exports, Asian countries can earn export revenues which peak during booms; accumulate savings, which theoretically tide them over recessions. The existence of business cycles is inevitable in reality, and export-led growth seems to be best method to tap on booms. During recessions when reliance on trade cripples the economy, flexibility and government policies becomes crucial in helping to mitigate such effects, with the help of the reserves accumulated when the economy was doing well. In addition, there are other sources of growth to support the economy too, such as domestic consumption for some countries (especially with countries of growing population like China). If protectionism is embraced during a recession because of a lack of short term benefit from trade, mending the trade relations after the storm can be very difficult and the country will be a step behind others in recovery.
Which sustained long term growth isn’t export-led in our highly globalised world?
Export-led Industrialisation is the key catalyst behind the expansion of the Asian Economies ( even outside the 4 Asian Tiger Grouping)By having a slightly deregulated economy, allowing international trade helps to maximize inherent Comparative Advantages in a Countries’ Economy ( Labour/ China, High Innovation/Japan, Raw Materials/Indonesia). Trade generates many opportunities for the participant countries. Ranging from revenue to raw materials for new infrastructure to an increased standard of living, clearly trade can be seen as a great tool for economic expansion.
The importance of trade is different for every country; it is mainly dependent on the nature of the country’s economy. Singapore, a small country with a very open economy, is highly reliant on international trade as it needs hinterland for raw materials needed for production and consumers for the final goods. China, with its strong local demand, actually does not depend much on trade, but with the increasing consumerism, the dependence grows steadily, especially for imports of luxury goods. Observers has also pointed out that Chinese consumers form 12% of the world luxury goods market in 2006, paving the way for estimates of 25% in 2016 ( Souce: TNS GLOBAL)
Dependence is not necessarily bad,during an economic boom, it helps a country to maximize its growth as it will benefit from all of its trading partners (Singapore!) – when they increase their demand and channel more investments, growth is boosted (countries like Vietnam alleviated out of poverty). There’s also CA! it is a God-given blessing to be good at one thing and hence profit maximizing firms would rush in on such an opportunity
When a country becomes TOO dependent on international trade, a country ignores other economic aspects (domestic demand, domestic products) that it renders itself vulnerable when the economic goes into the dumpster. This is even more pertinent if the country is inherently very dependent on exports such as Singapore ( more than 100% of its GDP) and Hong Kong, and the call to boost export more than a country can manage is even made worse by Westernisation of trade. There’s still ‘good governance’, as stated in the text, which helps to raise living standards. The current crisis proves this, even though countries have build up their foreign reserves since 1998 Financial Crisis. The growth of ‘Asian Tigers’ has decreased. Who needs foreign reserves when the western consumers aren’t buying our exports?
There are countries who followed the model, but backed with the strong local demand (China, Indonesia) they are better off when the recession hits the western consumers. The habit of exporting might be hard to dismiss, since it had been applied for numerous years. What Asian countries have to learn from the current crisis and the previous ones are that international trade comes with its inherent risks due to interdependent economies hence, their economies must be diversified into different sectors so that risks are spread out across the board.
Coming from one of Asia’s developing nations, I agree that Asia really needs a new economic growth model. We have been too reliant on exporting to other continents and look what happens to us even when the economic crisis didn’t stem here. Asian financial sectors aren’t filled with troubled assets like in the US or Europe, but it seems like all Asian businesses have gone wild since we can no longer export simply because no one is buying. Maybe when we, Asians, can finally come to our senses that there is still our own Asian markets to serve, we’ll realize that this isn’t the end of the world like what the media had told us. Instead the governments should be thinking of how to make sure that their people have better living standards, better-quality products to consume, better country’s infrastructures, and maybe stop trying to please the Western-led international organizations when your people still struggle to fill their hunger. GDP is not all about X but there are still C and G, or I if we have any left.
I believe that trade is definitely important to a country’s growth especially for those of developing countries in Asia. With potential economic growth through increased productivity comes the adoption of newer and more efficient technology, there would be lesser need for firms to demand for factors of production such as labour if they were to only produce for their own domestic economies. As such,countries such as Singapore with its small domestic population may face widespread unemployment, and the solution to this would be to produce more through exporting to other countries, thus solving the problem of unemployment since there would be an increased need for labour now. Hence, it can be seen that exports and trade is definitely important for a country’s growth should a country want to avoid other macroeconomic problems such as unemployment.
Reliance on exports for growth may not be such a bad thing after all as it do allows for BOP surpluses and increase in aggregate demand through the mutiplier effect and allows for residents in a country to have higher real national income. However, we must recognise that by relying on exports for growth, countries would be subjected to the business cycles of the global market, but we must still realise that global markets are much larger than those of domestic markets, and for some countries, they have no other choice but to rely on trade for growth. Having said that, we must note that countries could still do a part in making their countries more resilient in times of global recession, such as having huge foreign reserves to help their people pull through the recession
As such, I believe that although Asia could be over-relying on trade for growth, but we must consider if there is really any other choice for Asia to sustain its growth other than relying on the huge global market.
In times of globalisation like today, countries who open themselves up to trade see a rise in their economic growth and SOL. For example, before China open herself up to trade, she was a poor country and now, China has risen to be one of the few countries experiencing growth despite the current economic downturn. On the other hand, North Korea is still living in an age of “barter trade”.
Thus, it cannot be contended that trade is almost synonymous to economic growth, especially in Singapore who has depended on trade for decades.
Trade can be imports or exports. Higher export earning generate more employment and income, increasing BOP surplus. Higher imports would increase consumption and gives consumers greater variety of goods, thus also increasing SOL. Looking at it from whichever viewpoint, trade is definitely good for the domestic economy.
However, it must be noted that as more countries open themselves up to trade, it would increase the trade competitiveness. To the consumers, they would benefit in terms of lower prices and greater varieties, but to firms, more competition would mean less profits. Hence, to better benefit from trade, they would need to increase their productivity and focus on their comparative advantage.
Now the next question is, do Asia need a new model? Diversification is always good for the economy as the risks would be spread. For example, in Singapore, we do not only focus on trade, as we are also a medical and financial hub. Singapore is now famous for their medical advantage as seen in many news recently. Thus, people all over the world come Singapore to seek expertise medical treatment. Thus, in times of global financial downturn, there would be something which Singapore can rely on (:
Also, a new model may be better for its people if trade is not their expertise. They may be better off focusing on other things. For example, it their domestic market is huge, trade may not always be necessary.
I agree that the export-led growth model may not sustain an economy’s growth, especially during economic turmoil when consumers in wealthier countries start to save. As many have discussed the importance of diversifying growth engines and boosting domestic demand, I shall not belabor this point.
Talking about diversification, we can also discuss diversification within the export sector. The common view about export is to export goods to wealthier nations, such as US and Europe nations, because of the cost advantage. However, trade can also be done with developing countries such as China, India and Brazil. Though these countries may not be big consumers of high end products, they also have large appetites for cost-efficient goods and intermediate products. Through diversification of consumer profiles, a major economic downturn will thus hit an export dependent country less hard if the country does not depend for its exports entirely on rich nations. For now, while the US and Europe consumers are tightening their belts, China is still spending lavishly on infrastructure building, and hence has a huge demand for capital goods. The point is, an economic downturn will affect all nations, but not with equal impacts. Diversifying one’s trading partners’ profiles will allow a nation to stand a better chance of survival in an export crisis.
International trade plays an extremely important role in a country’s growth – trade can be used to increase actual growth by raising the aggregate demand (AD) of a nation. Based on the Keynesian model, assuming that the country has spare capacity, trading can boost AD to eliminate high levels of unemployment. How open an economy is influences this – open Asian economies have managed to reduce their high poverty rate and increase their GDP per capita tremendously through trading – the Japanese and Chinese economies have reached double digit growths before, whereas even smaller Asian nations, such as Singapore and Korea, have managed to flourish through trading. Moreover, trading can increase the potential growth of a country through increasing competition. In order for firms to survive in an international economy, they must be competitive in the world market: through trading, firms can learn of the various technologies employed by rival firms and strive to overtake them in order to stay competitive. The use of better technology can reduce the cost of production, thus increasing potential growth. International trade therefore is extremely important since it has the potential to affect both potential and actual growth of a country.
A dependence on exports can be both good and bad – however, the degree of dependence is what causes it to be good and bad. An under dependence on trade or exports means that less goods will be imported and exported – this may prevent a country from increasing it’s potential growth and thus increase its material standard of living as there is no need to compete and lower cost of productions, while the variety of goods consumed are very limited which hampers their standard of living. However, an over dependence on trade will make the economy extremely vulnerable to world demand – a global recession, such as the 2009 Financial Crisis, has affected extremely open economies such as Singapore very badly. As such, dependence on exports is not necessarily a bad thing provided the country is not over dependent nor a closed economy.
The current financial crisis has seen many export-led Asian economies crippling – the Chinese economy has been retrenching many workers due to the great fall in world demand. For their products As such, it is true that “Asia needs a new model” – this model should not be over dependent on world demand and should instead cultivate local consumption habits and make them increase. This “new model” has seen a strong proponent – China, facing a great lack in demand for their goods, is now trying to achieve this new model and be less susceptible to world demand fluctuations, which may prevent their economy from shrinking too much in future economic crises.
In our globalised world, many countries (not only the Asia) are dependence on export. Being dependence on export is not necessarily a bad thing. These exports are beneficial to countries that are having comparative advantage. With what I call the“vertical specialization”, I believe that dependence on export may be a good thing and may determine a country growth even in the long run. I shall explain “vertical specialization” using an example. A branded shirt could be designed in Paris but the textile used to make the shirt could be produced in China. This is because France could have comparative advantage in fashion design while China has a comparative advantage in labor intensive industries due to the abundance of labor which allow them to produce textile cheaper than France. Therefore, china has a lower opportunity cost in producing textile while France a lower opportunity cost in fashion design and both countries produce according to their comparative advantage. True enough, many countries have been exporting intermediate goods and they are earning bucks!! With vertical specialization, many countries are having more opportunity to grow!
Many of you have mentioned in the comments that countries should tap on domestic market when export markets collapse and raised China as one example. However, I believe that this is not very realistic. This is because when export revenue has been the engine for economic growth for these Asian economies for the past decades, the breakdown of this engine will inevitably bring about massive structural unemployment and fall in output, until the a new driving force for the economy can be found. In China last year, precipitous fall in export demands have led to foreclosure of many export firms, laying hundred thousands migrant workers from the rural area unemployed. Those who have been lifted from poverty may well have been pushed back to poverty again. Even the middle class people are now tightening their wallet as the economic outlook worsens. The fall in consumption is further exacerbated by the failed social benefit system in China. People are not likely to spend more, but save more instead, because they expect rainy days ahead. This example shows that even countries which have impressive double digit growth rates are not immune to the effects of an economic slump, and solely depending on one’s domestic market in times of crisis is not a reliable and feasible solution in the short-run. Even in the long-run, an economy cannot decouple itself from the international community. Trade is important not only to the productive and allocative efficiency of an economy, but also to the dynamic efficiency of the economy. It is the fierce competition from abroad that will challenge the economy’s monopoly, drive innovation and provide a variety of products to the domestic market.
Especially in the context of Asia, where thrift is deemed a virtue, and the domestic market is limited by either its population size or the people’s purchasing power, export may be one of the most powerful drivers towards economic growth. Putting export as the growth engine may be risky as it makes the country vulnerable to the vicissitude of the international economy. However, this drawback does not make this model obsolete as it is still one of the few viable models we can use to develop our economy. Therefore, what can be done in addition to promoting trade would be to expand one’s domestic market and diversify the economy by developing different industries and working to increase the number of goods in which the country has comparitive advantage, so that even during an economic crisis, there are other alternatives of economic growth which can help the country to weather the storm.
I disagree with the author’s wording that Asia requires a new growth model to modernize its economy. Although the recent global financial crisis has exemplified the inherit flaw in the export led model to generate economic growth, we must also credit the model for bringing about exponential growth in Asia over the past few decades.
Let’s bring in an analogy on investment. Everyone knows that putting their savings in bank deposits is the safest way to protect the value of their money. Capital guarantee ensures that their money do not get lost in the complex financial market today. However this inherit low risk also means that the interest earned will also be very low, barely enough to cover inflation. Contrast this with buying shares using the savings; high returns but also inherit high risk. Link this back to our topic, the global market resembles the shares while the domestic market resembles the bank deposits. There will always be domestic demands for the nation’s output, thus the chances that this demand collapses one day under unfavourable economic conditions are very small. As a result, it will be logical to focus on growing the domestic market to ensure sustained economic growth. However, Marco-Economics also states that a small consumption market will only generate a small multiplier effect, meaning that economic growth will also be limited, consistent with the rule of low risk, low returns.
Compare this with the global market of 6 billion population, where demand for goods are almost limitless. It provides an almost perfect place for producers to sell their goods and services and earn huge revenues. The national economy can also enjoy a large multiplier effect through the global market and generate impressive economic growth. However, high returns are always accompanied by high risks. This is exemplified by the current economic crisis whereby fall in global demand for exports has reversed the trend, piling up huge multiplied fall in economic growth in export driven countries like Singapore and China.
All in all, I would like to emphasize that export-driven model remains to be the most efficient way to achieve economic success. In the continent of Asia whereby millions of people are still in poverty and states desperately needs huge economic growth to ensure social stability, there is hardly any credible model which can fulfill Asia’s needs and desires.
Trade is a very important tool in today’s globalised world. Due to improvement in telecommunication technology, it is possible to buy products from all over the world, hence allowing countries to be more efficient as they can produce products that they have a comparative advantage in and buy goods and services from other countries that have a comparative disadvantage in. it is important for us to utilize the new conveniences brought about by globalization so that the world can progress faster.
Increased dependence on trade will cause the country to be susceptible to the volatility of the world. It is especially shown by the great impact the recent global recession on developing countries like Vietnam and Thailand. However, the export-led model might be the best way for these countries to break out of the poverty trap. By capitalizing on the low cost of their labour, they can develop the labour-intensive industries and produce goods for the developed nations. Hence, I feel Asian countries should continue adopting this model.
However, it is important for these countries to diversify their economy. Other than concentrating on increasing their exports, they should try to boost their internal demand by encouraging their people to spend their income on goods and services produced in the economy. By encouraging their people to spend on the economy too, this will reduce the importance of exports to the economy. However, one cannot deny the fact that export-driven economy might be the fastest way for the economy to grow in good times and for the people in the developing world to break out of poverty.
As I mentioned in my earlier posts, I feel that there is still a need to develop one’s local economy such that fiscal policies can have a substantial effect when used to stimulate the economy in times of recession. However, the export led model is still useful for jump starting new economies, as seen time and time again. As such, for more developed economies such as our country’s and perhaps South Korea and Japan, we should pursue policies which will help develop our economies, while newer economies such as perhaps East Timor or other smaller Asian countries might want to stick to the tried and tested export led model to help their economies grow quicker.
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