The impacts of exports on economic growth: the case of selected Southeast Asia countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS 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 i CANDIDATE’S CERTIFICATION I hereby certify that the paper has not been submitted in whole or in part for any degree before or has not been submitted at the time being to qualify for other degrees and any other academic award; All the contents of the paper is the outcome of works that I has done; any paid or unpaid material are acknowledged; and ethics standards as well as guidelines have been tightly followed Signed : _ Name : Ha Manh Cuong Date : _ ii ACKNOWLEDGEMENTS The thesis is a partial fulfilment of the requirements for obtaining the degree of Master of Arts in Economics of Development, which jointly conducted by Economics University of Ho Chi Minh City, Vietnam and the Institute of Social Studies in The Hague, Netherlands The thesis is fruit of knowledge I have gained and contributions from many other people First of all, I would like to show my deep thanks to my supervisor, Dr Le Cong Tru who gave me his caring instruction during the time I focused on doing the thesis and I did also learn so much from him the ways to write and prepare a research paper well I am profoundly grateful to the teachers and the staffs of the Vietnam Netherlands Project in Ho Chi Minh City who guided and helped me in the process of doing the thesis Besides, I would like to give my heartfelt thanks to Prof Nguyen Trong Hoai who taught me Econometrics and the ways to write a paper well Finally, I am very happy to express my profound gratitude to my parents who are always in my back to silently encourage and support me at anytime I got difficult and discouraged in doing the thesis I bear full responsibilities for all errors, omissions, and shortcomings in the thesis Ha Manh Cuong Ho Chi Minh City, 2012 iii TABLE OF CONTENTS CHAPTER 1.1 PROBLEM STATEMENT 1.2 RESEARCH OBJECTIVES 1.3 RESEARCH QUESTIONS 1.4 STRUCTURE OF RESEARCH CHAPTER 2.1 INTRODUCTION 2.2 CONCEPTS AND DEFINITIONS 2.3 THEORETICAL FRAMEWORK CHAPTER 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 21 4.1 INTRODUCTION 21 4.2 SELECTION REASON OF FIVE ASIAN COUNTRIES 21 4.3 HIGHLIGHTS OF EXPORT ACTIVITIES AND SOURCES OF EXPORT GROWTH OF ASEAN-5 OVER THE LAST DECADES 22 4.3.1 Economic growth of Vietnam over the studied period 22 4.3.2 Export activity of Vietnam 24 4.3.3 Comparison of correlation between Vietnam’s export growth and economic growth 25 4.3.4 Economic growth of Malaysia over the studied period: 26 4.3.5 Export activity of Malaysia 28 4.3.6 Comparison of correlation between Malaysia’s export growth and economic growth 28 4.3.7 Economic growth of Thailand over the studied period 30 4.3.8 Export activity of Thailand 33 4.3.9 Comparison of correlation between Thailand’s export growth and economic iv 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 48 5.1 INTRODUCTION 48 5.2 DESCRIPTIVE ANALYSIS 48 5.3 5.2.1 Correlation Coefficient Matrix 48 5.2.2 Descriptive statistics result 50 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 59 6.1 CONCLUSION 59 6.2 POLICY RECOMMENDATIONS 61 6.3 6.2.1 For The Selected Southeast Asia Countries 61 6.2.2 For The Case of Vietnam 62 LIMITATIONS OF THE THESIS 64 APPENDIX A 68 APPENDIX B 69 APPENDIX C 70 APPENDIX D 72 v 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 vi 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 vii The Impacts of Exports on Economic Growth: The Case of Selected Southeast Asia Countries ABSTRACT The thesis aims to answer the question that how is exports affect on the economic growth in the five selected Southeast Asia countries, including Indonesia, Malaysia, Singapore, Thailand and Vietnam, during the period of 1991-2010 by using the neoclassical growth model established by Romer (1986) and Lucas (1988) In the period of 1991-2010, economic growth of the five Southeast Asia countries were growing very fast in tandem with the strong growth of exports This is because the economies of the five Southeast Asia countries largely relied on trade activities, especially exports, with developed countries such as USA, Japan, and European countries, etc… Therefore, determining and examining the impact of exports on economic growth are important to help these countries keep their growth sustainable In this paper, the augmented Solow Growth Model was adopted to find the impact of exports on growth Also, the key model employed to run regression is Linear Exports-Growth Model with a panel data of the five Southeast Asia countries To capture the different impact of exports on growth over the selected countries, fixed effect regression model is chosen to apply in the paper The main findings of the paper point out that only Malaysia, Singapore and Thailand of which exports have statistically significant positive impacts on economic growth at the levels of significance of 1%, 1% and 10%, respectively Oppositely, Indonesia and Vietnam showed a negative impact on economic growth, however, these impacts were not statistically significant In addition, to measure and compare the different impacts of exports on growth over the selected countries, the fixed effect regression model is employed The results showed that the more developed the economy is, the stronger impact of exports on economic growth is More specifically, the impact levels of exports on growth at the five selected Southeast Asia countries are ascendingly arranged based on development of the economy as follows: Vietnam (-0.029%), Indonesia (-0.016%), Thailand (0.151%), Malaysia (0.196%) and Singapore (0.495%) Chapter INTRODUCTION 1.1 PROBLEM STATEMENT Economic growth is often the final goal of the economy To accelerate economic growth, it is vital to know where sources of economic growth come from and this is subject of controversy amongst economists One side, economists such as Solow (1957), Romer (1986), and Lucas (1988) reckoned that TFP laying residual brings about growth in long term Romer (1986) emphasized research and development while Lucas (1988) stressed on role of human capital formulation as significant cause of growth Trade far ago was an effective way that human being used to exchange products they had and received other essential products that they were unable to produce to meet their daily life Trade at that time played a vital role as a blood vent in a human body and was the best way that human being had in daily life, production activities and social development Nowadays, the importance role of trade in modern society and economy is significantly increasing, especially exports Exports have helped many countries reach impressive economic growths and become very rich and powerful countries such as Japan, China, Korea and Taiwan, etc From the origin of theories of reputable economists with classical school thoughts in hundreds of years ago such as: Adam Smith (1776) and David Ricardo (1817), and being connected recently by a series of theoretical works of other well-known economists Misselden (1623) Chapter CONCLUSIONS, POLICY RECOMMENDATIONS AND LIMITATIONS 6.1 CONCLUSION This paper aims to examine the hypothesis if exports will increase economic growth and it also makes clear how different will exports affect on economic growth over the selected Southeast Asia countries It complements the previous literature by focusing on exports and by considering a more representative sample of variety of economies in Southeast Asia From the result of descriptive statistics and regression methods, this paper has examined and measured the impact of exports on economic growth using the Fixed Effects approach with a pooled data set of the five Southeast Asia countries including Indonesia, Malaysia, Singapore, Thailand and Vietnam By using descriptive statistics and regression analysis method, the paper found out that exports have unequal impacts on the five Southeast Asia countries’ economic growth More specifically, there are obviously two groups of countries that the impact of exports is oppositely different: Group comprises of three countries: Malaysia, Singapore and Thailand of which economies are more developed than the two remaining countries Group contains the two Indonesia and Vietnam of which economies are less developed In Group 1, export growth is statistically significant and has positive impact on these countries’ economies The paper concludes that export growth and capital growth are two important factors on long term positively impacting on the development of these countries’ economies Besides, labor growth 59 is also to have positive contribution on Singapore’s economic growth, but has no impact on Malaysia and Thailand This result is considered as quite reasonable with the current development of the three countries’ economies In that, Singapore with a very highly developed economy largely depends on export activities of capital-intensive and high value added products Additionally, Singapore’s economy shows that it is very sensitive to labor growth and labor growth brings a very good growth for its economy by 0.476% for each percent of growth in labor force This is thanks to Singapore’s good policy in training labor as well as attracting qualified labor that help it have high skilled labor and bring positive growth for the economy However, capital growth causes an unremarkable contribution to this economy This proves that Singapore’s economy is becoming less efficient in investing capital that has led to a wave of investing capital to foreign countries because of higher efficiency Malaysia and Thailand have also achieved a relatively developed economy by focusing on export-oriented policies and capital to invest in major industries for export, for example IT industry with Malaysia and automobile industry with Thailand In contrast, the result for Group shows that exports are both statistically insignificant and bring negative sign In the two countries of this group, unexpectedly export growth has no meaning in their economic growth In term of impact of other variables, capital growth of Indonesia has better contribution to economic growth than Vietnam More particularly, except exports capital growth have statistical meaning and positive impact on Indonesia’s economic growth, especially the strong contribution of capital growth at 0.402% growth for percent growth of capital This evidences that Indonesia is efficient in attracting and using capital for economic development The most special case is Vietnam with all variables bringing negative values and being insignificant that show that capital, export and labor growth has no meaning in Vietnam’s economic growth in all 60 6.2 POLICY RECOMMENDATIONS 6.2.1 For The Selected Southeast Asia Countries The study result has pointed out that in the five studied countries; exports show its importance and positive impact of on economic growth at countries of which economies are more developed including Malaysia, Singapore and Thailand This is thanks to good policies and appropriate supports from these countries’ government for export industries They have specialized and focussed on key export industries that bring high value added products, for example ship building, electronic goods, sea port services for Singapore, IT for Malaysia and automobile making for Thailand They have selectively invested in high-tech production and modern technologies At the same time, they have built up a good and perfect infrastructure to support export industries They have also led their economies to be export-oriented for many years ago Thus, to continue having good economic growth, these countries should continue promoting and supporting exports, continue purchasing policies to keep an export-oriented economy They should keep their trade surplus achievements and always be the pioneer in technology and technology innovation They also need subsidy policies for export enterprises to find new markets, partners and expand market for export With the two remaining countries including Indonesia and Vietnam of which economies are less developed than the above counties, exports have no meaning on economic growth and exports not yet play obvious important role in these countries economies This is due to trade deficit, behind-time technology, weak competitive ability, inefficient and expansive investment and low value-added products Therefore, a policy to encourage exports and lead the economy growing under export-oriented base is recommended This proper policy will help increase international trade surplus, increase export value and national accumulation As a result, export growth will have a positive impact on economic growth and will be a good basement for an economy to grow For example, a country with an export surplus will help increase its national resource accumulation to produce more goods and services and make the economy grows 61 6.2.2 For The Case of Vietnam In particular, for the case of Vietnam, Vietnam’s economy is still developing and the export industry is quite weak Exports still have no impact on economic growth This is due to many reasons: Firstly, Vietnam export products mainly are mainly raw, agricultural products and natural resources; Vietnam also does not have high value-added or high-tech products Typically, Vietnam only exports raw products with low value added for example non-processed agricultural products and crude, non-refined oil This makes exports not bring high value surplus to Vietnam’s economic growth Meanwhile, Vietnam imports processed agricultural products and refined oil from foreign countries with a very high cost As such, it is a bitter fact that Vietnam is selling its natural resources with low price and buying those products back with high price As a result, it will lead to trade deficit and make Vietnam exports have no positive impact on growth Secondly, technique and technology of Vietnamese export enterprises are weak, old and mostly are backward technologies This leads to low value of export product and low comparative ability of Vietnam export enterprises One more reason is that Vietnam lacks of key products with its own well-known brand-name and high-tech products for export Typically, in garment and IT industries, Vietnam has no its own well-known brand-names for export and almost focuses on processing products for other countries to be paid a very low processing cost While processed products from Vietnam will be brought brand-names of other countries and sold at a very high price of which gainers are other countries Therefore, in order to help make Vietnam become a country with a developed economy as Malaysia, Singapore and Thailand, it should have economic policies focusing on the following determinants: Policies to lead the economy becoming an export-oriented economy are very necessary for Vietnam Encourage and promote exports should be made with products and industries that have high comparative advantage for export Besides, it is an effective way to utilize all 62 resources for developing industries and fields bringing high value-added and high comparative advantage products for export Policies to limit and stop trade deficit by imposing high tax barriers to import products that Vietnam can produce or luxurious products This will benefit the economy trade surplus and make exports positively contribute to economic growth Policies should also have subsidies or supports to encourage export enterprises to find as many trading partners as possible, this will help expand and develop new markets In term of destination, policies should encourage to find new market out of traditional Asia market to diversify "destination" and avoid or reduce locally risks because export is the most important foreign exchange source in supporting import for domestic production The government can this by providing domestic and international market information for entrepreneurs to reduce problems of asymmetric information (this is considered as new failure of market that the government must play a considerable role in solving this problem (Stiglitz, 2002) and stepping up commercial promotion Besides, the government can support domestic entrepreneurs by building good soft and hard infrastructures to reduce costs and time to enter and exit market as well as costs and time of production At the same time, it is very necessary to build high-tech industry zones to specialize in manufacturing products for export Technology innovation and improvement are very necessary to the economy to help enterprises improve competiveness and product quality for export Building and supporting processing industries will help to create more value-added for export products Avoiding and minimizing to export rude goods with low value and non-processed natural resources will make economic growth more sustainable and balanced One more factor is capital, a very important factor for growth So, it is necessary for growth to attract investment capital However, it is evidenced that capital from national saving and internal sources is safer for economic growth than external debt Government expenditure and private investment are determinants for growth As a result, Vietnam should make investment environment better by infrastructure improvement, simplifying administrative bureaucracies and formations At the same time, Vietnam should have more preferential tax policies and 63 subsidies to encourage domestic investment Controlling well and tightly investment capital is very vital to help using capital efficiently and avoid waste and loss of capital by corruption and bribe Finally, quality of labor force is very important Vietnam should have more supports for training and enhance in both quantity and quality of labor force In addition, Government should also have proper policies of vocational education and training focusing on key high technical and technological industries for exports This will help and benefit Vietnam to have a skilled and talented manpower to develop and get sustainable growth 6.3 LIMITATIONS OF THE THESIS There is a limitation that the paper have not obtained regarding the second objective: comparison of the impact of exports on growth crosss the selected countries That is because both export growth and labor growth of Indonesia and Vietnam are insignificant and have no statiscal meaning, therefore the measure impact of these countries met difficulty and the comparison cross the selected countries are limited Not enough data for Vietnam has made the study choose the panel data of five ASEAN countries including Indonesia, Malaysia, Singapore, Thailand and 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Method: Pooled EGLS (Cross-section SUR) Date: 07/11/12 Time: 16:50 Sample: 1991 2010 Included observations: 20 Cross-sections included: Total pool (balanced) observations: 100 Linear estimation after one-step weighting matrix Variable Coefficient Std Error t-Statistic Prob C _IDN GK_IDN _MYS GK_MYS _SGP GK_SGP _THA GK_THA _VNM GK_VNM _IDN EG_IDN _MYS EG_MYS _SGP EG_SGP _THA EG_THA _VNM EG_VNM _IDN GL_IDN _MYS GL_MYS _SGP GL_SGP _THA GL_THA _VNM GL_VNM Fixed Effects (Cross) _IDN C _MYS C _SGP C _THA C _VNM C 0.818076 0.402025 0.124190 0.016040 0.124227 -0.043010 -0.016317 0.196289 0.495102 0.151327 -0.029043 0.175775 0.052436 0.475759 -0.557617 -0.199194 1.316820 0.094184 0.055201 0.071594 0.078640 0.047283 0.063107 0.066299 0.056748 0.078854 0.036940 0.632606 0.371148 0.256417 0.553551 0.342986 0.621251 4.268501 2.249792 0.224036 1.579699 -0.909628 -0.258560 2.960681 8.724504 1.919088 -0.786222 0.277858 0.141281 1.855416 -1.007346 -0.580764 0.5362 0.0001 0.0272 0.8233 0.1181 0.3658 0.7966 0.0040 0.0000 0.0585 0.4341 0.7818 0.8880 0.0672 0.3168 0.5630 -6.889097 -0.192361 -1.010218 -0.710870 8.802547 Effects Specification Cross-section fixed (dummy variables) Weighted Statistics R-squared Adjusted R-squared S.E of regression F-statistic Prob(F-statistic) 0.615397 0.524054 1.025976 6.737199 0.000000 Mean dependent var S.D dependent var Sum squared resid Durbin-Watson stat 2.425154 2.724768 84.21006 1.719755 Unweighted Statistics R-squared Sum squared resid 0.531458 793.8318 Mean dependent var Durbin-Watson stat 68 5.830533 1.700013 APPENDIX B Test Heteroscedasticity by White test approach Table B.1: Test Heteroscedastiscity with White test method of Indonesia White Heteroskedasticity Test: F-statistic Obs*R-squared 11.92146 16.92412 Probability Probability 0.000124 0.009566 Table B.2: Test Heteroscedastiscity with White test method of Malaysia White Heteroskedasticity Test: F-statistic Obs*R-squared 0.659149 4.665195 Probability Probability 0.683629 0.587413 Table B.3: Test Heteroscedastiscity with White test method of Singapore White Heteroskedasticity Test: F-statistic Obs*R-squared 1.439476 7.983465 Probability Probability 0.272700 0.239317 Table B.4: Test Heteroscedastiscity with White test method of Thailand White Heteroskedasticity Test: F-statistic Obs*R-squared 1.219603 7.203225 Probability Probability 0.356914 0.302461 Table B.5: Test Heteroscedastiscity with White test method of Vietnam White Heteroskedasticity Test: F-statistic Obs*R-squared 1.154526 6.952479 69 Probability Probability 0.386354 0.325264 APPENDIX C Scatter Diagrams with the correlation among GDP Growth Rates and Exports 36 12 GGDP_IDN vs EG_IDN GGDP_MYS vs EG_MYS 32 GGDP_MYS GK_IDN 28 24 20 16 -4 12 -8 -15 -10 -5 10 -20 GGDP_IDN -10 10 20 30 EG_MYS Figure C.1: Scatter diagram: Exports vs Growth of Indonesia Figure C.2: Scatter diagram: Exports vs Growth of Malaysia 70 16 12 GGDP_SGP vs EG_SGP GGDP_THA vs EG_THA 12 GGDP_THA GGDP_SGP -4 -8 -4 -12 -10 -5 10 15 20 25 -20 -10 EG_SGP 10 20 EG_THA Figure C.3: Scatter diagram: Exports vs Growth of Singapore Figure C.4: Scatter diagram: Exports vs Growth of Singapore 10 GGDP_VNM -20 -10 10 20 30 40 EG_VNM Figure C.5: Scatter diagram: Exports vs Growth of Vietnam 71 APPENDIX D Scatter diagrams with all variables in the model of the countries 30 20 28 10 24 20 GL_IDN 32 EG_IDN GK_IDN 36 -10 16 -20 12 -30 -40 -15 -10 -5 10 -15 -10 -5 GGDP_IDN -15 10 -10 -5 10 GGDP_IDN GGDP_IDN Figure D.1: Scatter diagrams with the variables in the model of Indonesia 44 24 40 20 16 36 12 28 GL_MYS EG_MYS GK_MYS 32 24 20 -4 16 -8 -12 12 -8 -4 -8 12 -4 12 -8 -4 GGDP_MYS GGDP_MYS GGDP_MYS Figure D.2: Scatter diagrams with the variables in the model of Malaysia 40 25 36 20 32 15 28 10 24 GL_SGP EG_SGP GK_SGP 5 20 16 -5 -1 -10 12 -4 GGDP_SGP 12 16 -2 -4 GGDP_SGP 12 16 -4 12 GGDP_SGP Figure D.3: Scatter diagrams with the variables in the model of Singapore 72 16 12 40 EG_THA GK_THA 36 32 20 2.5 15 2.0 10 1.5 1.0 GL_THA 44 0.5 28 24 20 -5 0.0 -10 -0.5 -15 -15 -10 -5 10 -1.0 -15 -10 -5 GGDP_THA 10 -15 -10 -5 GGDP_THA 10 GGDP_THA Figure D.4: Scatter diagrams with the variables in the model of Thailand 45 40 40 30 35 25 GL_VNM EG_VNM GK_VNM 20 30 10 20 -10 15 -20 10 GGDP_VNM 10 -1 GGDP_VNM 10 GGDP_VNM Figure D.5: Scatter diagrams with the variables in the model of Vietnam 73 10