Information about Asia and the Pacific Asia y el Pacífico
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VI. The Economy in a Regional Perspective

Author(s):
David Robinson, Ranjit Teja, Yangho Byeon, and Wanda Tseng
Published Date:
September 1991
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Information about Asia and the Pacific Asia y el Pacífico
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After four consecutive years of rapid growth (averaging over 11 percent a year), moderate inflation, and record balance of payments surpluses, Thailand has emerged as one of the most dynamic economies in the world today. While there are special factors at work that are unique to Thailand, it is difficult to ignore its location in a region that has become synonymous with economic dynamism. In seeking such a regional perspective, this section takes a broad view of the term “region” to include both a core of neighboring developing countries (Thailand, Malaysia, and Indonesia) and an outer circle of the more advanced economies of Japan and the four NIEs: Hong Kong, Korea, Singapore, and Taiwan Province of China. Two concentric notions of the term are needed because the shared experiences and policy issues in the core developing region have been shaped by developments in the outer circle of East Asia’s more advanced economies. In particular, the latter have not only been an important source of expanding trade, but have also, in response to structural changes in their own economies, become major investors in the core region.

The choice of countries here is as much defined by an underlying similarity in economic policies as it is by geography. Clearly, the common denominator has been the pursuit of an outward-oriented growth strategy supported by cautious financial policies, arguably the central forces behind the region’s impressive economic record.32 In this respect, the recent experience of Thailand differs from that of the more advanced outer circle economies more in timing than in substance. Like the NIEs in the 1970s, and like Japan a decade before, Thailand has used the high savings rate associated with rapid economic growth to finance a step-up in domestic investment, especially in export-oriented industries, rather than to run trade surpluses, thereby sustaining export-led growth over time. The investment and export boom of recent years is not unique to Thailand and may also be found, in greater or lesser degree, in Malaysia and Indonesia, giving rise to a similar (but not identical) set of macroeconomic policy issues.

Common Policy Issues in the Core Region

While the countries of the core region share the common features of geographic proximity and a rich endowment of natural resources, they are scarcely a homogenous economic zone. There are important differences in per capita incomes and economic structure (Table 13): for example, Indonesia and Malaysia, but not Thailand, are large oil exporters, and Indonesia’s population is more than three times that of Thailand, and ten times that of Malaysia. Differing economic priorities therefore prevail. For example, reducing the dependence of government revenues and exports on oil and gas is a key objective of economic policy in Indonesia and a somewhat lesser objective in Malaysia, whereas it is obviously not an issue in Thailand. Nevertheless, while bearing such factors in mind, it is instructive to focus on the substantial commonality of experience and policy issues encountered in these three economies.

Table 13.Regional Economic Indicators, 1989
GDP (in billions of U.S. dollars)GDP per Capita (in U.S. dollars)Average GDP Growth (1985-89)Share of Manufacturing in GDP1ExportsImportsRatio of Exports/ GDPRatio of Savings/ GDP2Ratio of Investment /GDPForeign Direct Investment (in billions of U.S. dollars)
(in billions of U.S. dollars)
Core region
Thailand69.71,2578.624.120.1(—)25.829.127.531.11.7
Malaysia37.52,2104.625.125.0(3.6)322.566.829.229.61.9
Indonesia94.05255.518.422.2(8.7)39.323.633.634.71.0
Four NIEs
Korea211.95,0009.833.761.456.829.036.934.50.5
Singapore28.410,5826.028.743.245.7152.143.635.44.0
Taiwan Province of China146.97,3079.935.666.152.545.030.622.8–5.3
Hong Kong362.910,9168.919.173.172.5116.334.726.7
Japan2,833.723,0164.527.4269.6192.79.534.331.5–45.2
Sources: International Monetary Fund, International Financial Statistics; Fund staff reports; and Taiwan Province of China, Monthly Statistics.

Percentage share of GDP at current prices, except for Malaysia, Thailand, and Korea whose shares are at constant prices. Hong Kong’s share is based on 1988 data.

Savings data refer to national savings, except for Hong Kong where a domestic savings concept is utilized.

Oil and gas exports.

Sources: International Monetary Fund, International Financial Statistics; Fund staff reports; and Taiwan Province of China, Monthly Statistics.

Percentage share of GDP at current prices, except for Malaysia, Thailand, and Korea whose shares are at constant prices. Hong Kong’s share is based on 1988 data.

Savings data refer to national savings, except for Hong Kong where a domestic savings concept is utilized.

Oil and gas exports.

Thailand, Malaysia, and Indonesia each emerged from a difficult period in the mid-1980s only after implementing major adjustment programs. The global recession and downturn in commodity prices in the early 1980s adversely affected growth, inflation, and export earnings in the three countries. In Malaysia and Thailand, persistent fiscal deficits contributed to a weakening in their external positions, and to a buildup in external debt. Indonesia attempted to adjust to the external shocks by curtailing government expenditures; however, because of an even larger decline in oil revenues, larger government deficits were incurred and were financed by external borrowing. Compounding these problems was the large cumulative loss in export competitiveness resulting from the strong links of the three currencies to the appreciating U.S. dollar during the first half of the 1980s.

They all responded promptly to adverse developments with strong adjustment measures. The type and mix of policies varied, but in general they were designed to increase economic efficiency, improve domestic resource mobilization, and diversify the structure of production and exports. In Malaysia and Thailand, the focus was on fiscal adjustment, with fiscal balances improving in each by close to 6 percent of GDP during 1986–88. In Indonesia, there was a more fundamental shift toward an out ward-oriented growth strategy (already a feature of policies in Malaysia and Thailand), and the key measures included fiscal retrenchment, tax and financial reforms, and the progressive deregulation of trade and industry. Exchange rate devaluation was a feature of all three programs, an objective aided by the fall of the U.S. dollar following the Plaza Accord.

Adjustment efforts were hampered in each country by deteriorating terms of trade. Nevertheless, perseverance with adjustment policies began to yield results that, in turn, poised all three countries to take advantage of the improved international setting that ensued from 1986. By about 1987, they entered a period of economic expansion, driven by exports and private investment. Total fixed investment increased substantially in the core region, most notably in Thailand and Malaysia, where it rose by about 7 percent of GDP in 1987–89 (Chart 7). Foreign direct investment, much of it export oriented, was an important force behind the step-up in investment during this period, accounting for about 15 percent of the increase in Thailand, and close to 40 percent in Malaysia. Correspondingly, exports also grew rapidly, with the shift from primary commodities to manufactured goods accelerating markedly (Chart 8). Manufactured exports more than doubled in value and volume terms between 1987 and 1990, and now account for the bulk of exports in both Thailand and Malaysia. As a result, all three economies became steadily more industrialized, as reflected in the rising shares of manufacturing in output and exports. In 1989 manufacturing accounted for about one fourth of GDP and about one half of exports in Malaysia and Thailand; the shares for Indonesia were slightly smaller, at 19 percent and 24 percent, respectively.

Chart 7.Macroeconomic Trends in Core Region, 1985–90

Source: Data provided by the Indonesian, Malaysian, and Thai authorities.

1 In view of large variations In inventories and statistical discrepancies, national savings is defined here as gross fixed investment plus the current account balance.

2 Decline in index indicates depreciation.

Chart 8.Composition of Trade,1 1986–89

Source: Data provided by the Thai and Malaysian authorities.

1 Customs data classified by Standard International Trade Classification. Indonesia is nor included here for lack of data on a comparable basis.

2 Manufactured goods, machinery, transportation equipment, and miscellaneous manufactures.

Not surprisingly, the similar origins of their success have given rise to similar problems. Booming investment since 1988 has led to demand pressures that have raised inflation (most obviously in Indonesia and Thailand) and contributed to a decline in the current account balance (Chart 7). The latter development has, to a large extent, reflected rising imports of construction materials and machinery and equipment (Chart 8). Also associated with such demand pressures has been the growing prominence of infrastructural bottlenecks in the region. This phenomenon has attracted most attention in Thailand, where it is feared that shortages in skilled labor, power, water, transport, and communications could act as a brake on foreign direct investment as well as stow down the economy’s growth momentum. In response to these developments, a number of efforts have been initiated to alleviate such bottlenecks, including greater private sector involvement in the provision of basic infrastructure (see Section III). In Indonesia too, shortages in the power sector have become serious, and the authorities are considering plans for investments entailing private sector participation, along the same lines as in Thailand. Malaysia, by contrast, has thus far avoided major bottlenecks, but the heightened pace of economic growth in recent years has prompted the authorities to target an expansion in infrastructure and spending on human resources as a central goal of fiscal policy over the medium term.

Despite rising current account deficits, the overall balance of payments has been in substantial—and still rising—surplus in both Thailand and Malaysia (Indonesia, by contrast, has recorded overall deficits since 1988). While the bulk of net capital inflows into Malaysia have been in the form of foreign direct investment, Thailand has relied primarily on foreign borrowing. In both cases, the sheer volume of capital inflows has greatly complicated the task of restraining monetary growth. For example, net capital flows into Thailand in 1989 exceeded in value the stock of reserve money at the start of the year. As a result, monetary aggregates have tended to grow ahead of the authorities’ original targets.33

In all three countries, the authorities have assigned the task of restraining domestic demand to fiscal policy, with an improved public sector performance playing a major role in checking the increase in the overall savings-investment gap (Chart 7). This trend has been particularly marked in Thailand, where chronic deficits during the first half of the decade have since given way to large and growing fiscal surpluses, achieved primarily through considerable restraint in both current and capital spending (including a cautious approach that avoided proceeding with large projects until the need for them was clearly demonstrated), but also reflecting buoyant revenue growth, partly a by-product of the booming economy.34 In Malaysia too, the public sector deficit declined appreciably during the second half of the 1980s. However, the burden of adjustment fell primarily on development spending, where the cutbacks were sufficient even to offset a substantial fall in the ratio of revenues to GDP. The same was also true for Indonesia, although the magnitudes have been somewhat smaller. If infrastructural investment is targeted to recover in these countries (led by the private sector in Thailand, and by the public sector in Malaysia and Indonesia), they must now confront the implications for the overall savings-investment gap as a central issue for the medium term.

Regional Interdependence

What role has the region played in generating the fundamental forces—investment and exports—that have impelled Thailand, Malaysia, and Indonesia toward record growth rates? Clearly, since trade and investment between these countries is small,35 the answer must lie within a wider regional grouping that includes the more advanced NIEs—Korea, Singapore, Taiwan Province of China, and Hong Kong—and Japan. On this basis, the region is indeed significant for the core developing economies.

The statistics on trade are revealing. Table 14 confirms that regional trade grew dramatically during the 1980s in dollar terms, particularly in Thailand (where it multiplied fivefold) and in Malaysia (where it nearly tripled),36 While regional trade has declined slightly in relative importance—as measured by trade shares—in Malaysia and Indonesia, it nevertheless continues to account for well over half of total trade. On the other hand, the importance of regional trade to Thailand grew steadily through the 1980s. Underlying this trend has been a greater reliance on the region not so much as an export destination but as a growing source of imports, particularly from Japan (Chart 9).37 This is not really surprising, given the investment-driven nature of demand growth in the core region, and Japan’s pre-eminent position as one of the world’s leading suppliers of capital and machinery (so that all countries in the region—even the NIEs—run bilateral trade deficits with Japan). The strong link between capital goods imports and foreign direct investment (both dominated by Japanese companies) has also been an important factor in the growth of imports from Japan.

Table 14.Regional Trade of Core Developing Countries, 1980–901
19801981198219831984198519861987198819891990
(In millions of U.S. dollars)
Regional trade
Thailand5,7206,4225,9957,0497,4106,7797,38310,04314,84319,90425,684
Malaysia11,13211,74513,07114,34616,32814,99612,65615,72419,06424,25731,288
Indonesia19,64921,02225,53522,12919,78015,86713,94716,58917,88320,75423,943
Regional exports
Thailand2,4802,5822,4982,3552,4932,4503,2454,0375,5827,0237,985
Malaysia6,3956,3646,9187,8589,1568,8287,4109,38710,70212,58515,545
Indonesia14,17014,62415,33213,64013,85311,7359,06610,59011,96613,51414,891
Regional imports
Thailand3,2403,8403,4974,6944,9174,3294,1586,0069,26112,88117,699
Malaysia4,7385,3826,1546,4887,0826,1675,2456,3378,36111,67215,743
Indonesia5,4796,3998,2038,4895,9284,1324,8825,9995,9177,2409,052
(Percentage share of total)2
Regional trade
Thailand36.437.938.742.341.741.440.940.641.043.746.3
Malaysia46.950.453.452.453.254.451.351.450.750.953.1
Indonesia60.059.260.159.055.355.052.155.354.754.053.8
Regional exports
Thailand38.136.836.037.033.634.436.334.435.034.935.3
Malaysia49.454.157.555.755.557.753.652.450.750.252.7
Indonesia64.765.768.864.563.263.156.461.861.561.660.6
Regional imports
Thailand35.238.740.945.647.446.845.346.245.750.753.9
Malaysia44.046.649.548.950.450.348.550.050.651.753.6
Indonesia50.648.248.751.942.740.345.546.544.744.045.3
(In percent of total trade)
Memorandum items:
ASEAN trade3
Thailand13.813.014.314.215.216.614.214.611.911.813.0
Malaysia17.719.921.420.320.320.918.719.719.519.621.7
Indonesia11.612.316.819.012.09.89.310.79.79.55.7
Source: International Monetary Fund, Direction of Trade Statistics.

Trade between core countries and with Korea, Singapore, Taiwan Province of China, Hong Kong, and Japan.

Respectively, in percent of each country’s total trade (exports plus imports); exports; and imports.

Trade with the Association of South East Asian Nations: Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand.

Source: International Monetary Fund, Direction of Trade Statistics.

Trade between core countries and with Korea, Singapore, Taiwan Province of China, Hong Kong, and Japan.

Respectively, in percent of each country’s total trade (exports plus imports); exports; and imports.

Trade with the Association of South East Asian Nations: Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand.

Chart 9.Pattern of Trade in Core Region, 19850–90

(In billions of US. dollars)

Source: International Monetary Fund, Direction of Trade Statistics.

Although foreign direct investment is hardly new to the region, the magnitude of recent inflows sets it apart as a distinct and increasingly important factor. While foreign direct investment has doubled in Indonesia in recent years, it is, quantitatively, most significant in Thailand and Malaysia. Again, it has been investment flows from the NIEs and Japan—-accounting for over two thirds of total foreign direct investment in Thailand and Malaysia in recent years—that has driven foreign direct investment to unprecedented levels in these countries (Tables 15 and 16).38 The major impetus to foreign direct investment in the core region has come from higher wage costs and exchange rate appreciation in the NIEs and in Japan, as well as in response to rising international protectionist pressures, all of which have worked to encourage plant relocations away from the advanced East Asian economies. For their part, Thailand, Malaysia, and Indonesia have been able to attract such investment by virtue of their low labor costs, financial and political stability, and a traditional commitment to out ward-oriented policies and to the private sector. In Thailand, as in Malaysia and Indonesia, these plant relocations have been focused on the tradable goods sector, including consumer electronics, household appliances, computer equipment, and toys. A major implication of this pattern of investment is that, insofar as these facilities replace production earlier undertaken in the NIEs, export growth is less constrained by overall growth in the world economy. In this sense, regional foreign direct investment has helped sustain the growth momentum in the core region even as world economic growth has slowed. The next phase in the product cycle, only just under way, is the relocation of lower value-added industries from Thailand to neighboring countries, including Myanmar, the Lao People’s Democratic Republic, and Viet Nam.

However, saying that regional foreign direct investment is important is not the same as saying that the foreign direct investment is equally important in every case. It must be measured particularly against the overall level of savings and investment in the economy, where a crucial difference emerges. Although foreign direct investment has grown in importance relative to domestic investment, it still accounted for only about 8 percent of total investment in Thailand in 1989, whereas it was as high as 17 percent in Malaysia. Indeed, foreign direct investment accounted for nearly 40 percent of the total increase in investment in Malaysia in 1987–89. Similarly, total foreign direct investment was only 27 percent of net capital inflows into Thailand in 1989, but was 129 percent in Malaysia. A slowdown in foreign direct investment would therefore have a relatively smaller impact on aggregate demand and on the capital account of the balance of payments in Thailand than it would in Malaysia.

Even so, there is little doubt that all the developing countries of the core region attach great importance to foreign direct investment flows and, moreover, actively compete with one another for it in a variety of ways. Although tax incentives are frequently given prominence, their role in attracting foreign investment is not generally regarded as primary. Other factors such as wage competitiveness, availability of skilled labor, and adequate infrastructure are considered to be more important. While it is in these areas that the developing countries of the core region are expected to compete in the coming years, it should be recognized that such competition does not preclude cooperation. A recent example is the joint development of export centers in Johore (Malaysia) and Balaam (Indonesia) by Malaysia, Indonesia, and Singapore.

Regional Cooperation

Formally, Thailand’s involvement in regional cooperation has proceeded mainly under the aegis of the Association of South East Asian Nations (ASEAN), which consists of Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. To date, ASEAN has functioned more as a political forum than as an economic one, although the latter role has been growing since the late 1970s. Economic cooperation has been evident in two principal areas. Preferential trading arrangements, allowing for lower tariffs on intra-ASEAN trade in selected goods, were initiated in 1977 and subsequently expanded to cover some 15,000 goods. However, because of substantial exclusions in individual countries, as well as the focus on lightly traded goods with low price elasticities, the volume of trade under such preferential arrangements has remained small (about 2 percent of intra- ASEAN trade in 1987)— see Rieger (1989) for further details. A number of schemes—including the ASEAN Industrial Projects (AIP), ASEAN Industrial Complementation (AIC), and ASEAN Industrial Joint Ventures (AIJV)—were begun in the late 1970s and early 1980s to exploit economies of scale in the region. These programs—covering areas such as fertilizers, automobile parts, and pharmaceuticals—have included both equity participation from member governments as well as tariff incentives going beyond what is available under the general preferential tariff arrangements. The number of projects under these schemes has been limited, however.

Table 15.Foreign Direct Investment in Core Region, 1985–89
19851986198719881989
(In millions of U.S. dollars)
Total foreign direct investment
Thailand1622611821,0821,650
Malaysia6954894237191,846
Indonesia310258385576682
Total investment
Thailand8,9829,07511,65517,18021,646
Malaysia8,6057,2077,2349,01311,102
Indonesia24,49522,63023,81426,53232,639
(Percentage ratio)
Total foreign direct investment/total investment
Thailand1.82.91.66.37.6
Malaysia8.16.85.88.016.6
Indonesia1.31.11.62.22.1
Total foreign direct investment/GDP
Thailand0.40.60.41.82.4
Malaysia2.21.81.32.14.9
Indonesia0.40.30.50.70.7
Memorandum items:
Total foreign direct investment/net capital flows
Thailand9.945.39.628.026.5
Malaysia36.235.5–38.0–25.1128.8
Indonesia13.118.09.980.373.3
Source: International Monetary Fund, International Financial Statistics.
Source: International Monetary Fund, International Financial Statistics.
Table 16.East Asian Foreign Direct Investment in Core Region, 1989(Share of total foreign direct investment)
Thailand1Malaysia2Indonesia3
A. Four NIEs30.434.419.0
Korea0.51.1
Singapore7.910.63.1
Taiwan Province of China9.517.98.1
Hong Kong12.54.87.7
B. Japan42.230.319.5
C. East Asia (A + B)72.564.738.4
D. Other27.535.361.6
E. Total100.0100.0100.0
Sources: Bank of Thailand; Bank of Indonesia; and Bank Negara Malaysia.

Actual foreign direct investment, cash basis (which differs from IFS data).

Approvals basis, data averaged 1987–89.

Approvals basis, data averaged 1987–89; excludes Korea, for which data were not available separately.

Sources: Bank of Thailand; Bank of Indonesia; and Bank Negara Malaysia.

Actual foreign direct investment, cash basis (which differs from IFS data).

Approvals basis, data averaged 1987–89.

Approvals basis, data averaged 1987–89; excludes Korea, for which data were not available separately.

Overall, the importance of ASEAN for trade and investment has been small for most of its members (Table 14). In practice, particularly for Malaysia, intra-ASEAN trade has amounted to trade with Singapore, partly reflecting the latter’s position as the regional center of entrepôt trade; in Thailand, intra-ASEAN trade (about 15 percent of the total) and intra-ASEAN investment (about 8 percent of the total) are also dominated by Singapore. Accordingly, ASEAN may be more important as a forum for collectively voicing the concerns of this group of small and relatively open economies on global economic issues, particularly on world trade. The Thai authorities, in particular, have stressed the importance of an open trading system and have expressed their strong commitment to the success of the Uruguay Round of the GATT.

The objective of promoting regional economic cooperation was strengthened in 1989 with the formation of the Asia Pacific Economic Cooperation Council (APEC), which, in addition to Thailand and the other ASEAN countries, also includes Australia, Canada, Japan, Korea, New Zealand, and the United States. The group aims at lowering trade barriers between APEC members, in a manner consistent with the GATT, while at the same time opposing protectionism worldwide. It is thus hoped that regional economic cooperation will evolve from being primarily a reflection of growing trade and investment links to becoming a cause for economic integration. More recently, partly in response to the slow progress in completing the Uruguay Round of trade talks, Malaysia proposed a third grouping—the East Asian Economic Group—consisting exclusively of East Asian countries. While discussions are still under way on the membership and the precise means by which it would promote free trade in the East Asian region, there is general agreement that the organization should also promote the aims of the GATT.

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