Stanford Journal of International Relations

24 • Fall 2009

Saving the Golden Goose: Why the ExportDriven Growth Model Still Works For Malaysia
By Jin Tik
This paper argues for the relevance and importance of an export-led growth strategy for Malaysia, a developing nation aspiring to achieve industrialization by the year 2020. It is a response to emerging opinions that external-trade-dependent Asian economies should reconsider their long term growth models due to their susceptibility to business cycles and demand-driven economic fluctuations. However, these opinions are founded on several misconceptions about the nature of the export-led growth model. This paper will address and correct some of these popularized misconceptions and briefly reiterate the role of the export-driven model as a driver of long term growth. Trade is a fundamental contributor of technological progress, so much so that several advanced economies are still reliant on exports in the interest of sustained growth. It is also imperative to realize that the path towards long term development is context-specific as it varies from country to country. The specific macroeconomic conditions of Malaysia deter it from resorting to alternative growth models such as the consumption-driven or investment-driven models.


The modern Bintulu Port Authority serves as a symbol of the robust trade that has supported Malaysian economic development for years.

Malaysian Government

the occurrence of recessions is often blamed squarely on trade dependency. Misconceptions on Trade Dependency in Emerging Economies Jin Tik is a sophomore and plans to major in Economics. The blistering pace of technological advancements over the past three decades has revolutionized interactions at all levels. but rather globalization that leads to an increased frequency of business cycles in recent times. Although openness to trade does raise a country’s susceptibility to cyclical demand fluctuations. the trade impacts of the 1997 Asian financial crisis tarnished the credibility of this growth model. Many developing countries in mid 20th century Asia. and political philosophy. As an integrated global economy becomes a reality. He is currently exploring the option of pursuing a career in management consulting or investment banking.4 Hence. Chart 1 on the following page indicates that the relative contribution of domestic demand and external demand to GDP growth in selected East Asian economies varies greatly from year to year. South Korea. Second. This article was written during his summer internship with Khazanah Nasional.Export Driven Growth Introduction Trade. Flagging global demand sharply contracted export volumes. Other Asian economies that adoped the exportled growth stratgy also documented high growth rates. it is possible that net exports actually cushion-not accentuate-the decrease in GDP during an economic recession. despite the high export to GDP ratios in Malaysia. GDP growth in these highly open economies is primarily a function of their respective domestic demand. According to Chart 1. the resurfacing of such criticism is hardly surprising. in Hong Kong can be attributed to demand-driven shocks in the US. raising doubts about the resilience of the export-led growth strategy amidst economic recessions.2 A study by the Hong Kong Monetary Authority (HKMA) suggests that over the medium to long run. when the influences of globalization were minimal. One of the major arguments against the exportled growth model in developing countries stems from the notion that excessive openness to trade increases a country’s vulnerability to external price or demand shocks. In truth.5 Consider the series of oil price shocks of the 1970s and 1980s. and Singapore.1 Similarly. including development economics. On the contrary. as the widely-accepted principle of comparative advantage states. the investment arm of the government of Malaysia. He has broad academic interests. about 60 percent and 45 percent of variation in output and prices. engagements in trade led to domestic employment and wealth creation. have successfully adopted the export-led growth strategy to balance their finances and improve total factor productivity (TFP). Throughout the 20th century. The transition from an agricultural-based economy to a manufacturing-based economy with an outward focus on external trade paid immense dividends in terms of GDP growth as the young economy registered an average annual growth rate of close to ten percent in the 1980s and most of the 1990s.3 For example. With trade dependent countries making sluggish recoveries in the recent global economic crisis. such as South Korea and Taiwan. subsequently catalyzing drastic elevations of living standards across the globe. the emphasis on developing a niche export item in global markets has never been greater. These recession-yielding oil crises occurred primarily as a result of political disagreements. bearing no particular relationship to the size or openness of economies. Hong Kong. 1 • 25 . many counter arguments against trade dependency and the export-led growth strategy are misconstrued. while the net exports component actually contributed favorably to GDP growth. decline in domestic demand played a more direct role in the negative growth experienced by many trade dependent Asian economies during the 1997 financial crisis. This is evident in the 1973 oil embargo on the United States for aiding the Israeli military during the Yom Kippur Vol. respectively. establishing complex financial and trade linkages between nations such that a housing crisis in one part of the world could lead swiftly to stock market crashes in another. XI | No. it is not trade dependency. maximizes the welfare of both producers and consumers via economiesof-scale. education reforms. This is the prima facie evidence that the size of a developing country’s trade regime does not influence its output growth. However. it does not necessarily contribute negatively to short term GDP growth. Malaysia has invested heavily in the production and distribution of electrical & electronic (E&E) products in global export markets since the 1970s. domestic demand tends to be the main culprit behind output contractions during a cyclical fluctuation. Unfortunately. contrary to the earlier claim.

it is compelled to adopt the most advanced production and management techniques. a substantial fraction of export-oriented firms add value concurrently to the economy’s private gross domestic capital formation.Stanford Journal of International Relations War. abolishing the export-led growth strategy due to fears of global recessions would be myopic and misguided. employ skilled human capital.8 With increased purchasing power. Justification of this misconception derives from the fact that over the past eight years. Export-oriented foreign electronic firms that outsource to the country can initiate a multiplier effect in the economy through the creation of employment opportunities. By establishing export-oriented operations in Malaysia. it is imperative to realize that during cyclical fluctuations. This underlines the importance of preserving the export-led growth model for Malaysia. It does not act as the root cause. When a country is open to international trade and competes in global export markets. it is clear that the export sector generates positive externalities on the demand-side of GDP such as investment and consumption. In the context of Malaysia. Based on this line of reasoning. As such. the export sector in Malaysia can also positively impact domestic consumption. such as investment and consumption via indirect wealth effects.1 percent of the annual average of 5. Despite observations that manufacturingbased foreign investors are shifting toward less capitalintensive operations such as IT services. Take the manufacturing sector. as well as in the 1979 Iranian Revolution that led to a sudden drop in oil supplies. 26 • Fall 2009 .1 percent increase in GDP growth.7 Extrapolating further. a key component of long term growth. it is also one of the key benefactors of foreign direct investment (FDI) in recent years (see table 2). sparking a virtuous cycle of thriving businesses and high employment. and engage in sophisticated research and development (R&D). local employees can then boost their marginal propensity to consume (MPC).6 Despite the low direct contribution to aggregate GDP. as the formation of intangible capital is equally important. Taking into account the net benefits of engaging intensively on trade. it was political instability in the Middle East that ultimately resulted in economic recessions in the US-dependence on foreign oil was merely a channel for the recessions to occur. the role of locally established foreign exporters in stoking investment growth should not be in doubt. for example. Thus. net exports as a component constituted only a meager 0. The notion that net exports only contribute an insignificant portion of aggregate GDP growth is also inaccurate. Besides forming the primary export component over the past two decades. replacing the export-led growth model with an alternative model is akin to killing the golden goose. In this context. the net exports component helps to reinforce the contributions of other components. foreign firms will naturally engage in capital investment. trade merely acts as a propagation mechanism. The Export-driven Model: A Driver of Long Term Growth External trade is also an engine of long term growth by inducing technological progress.

private consumption’s contribution to GDP leapt from 32 percent in 2002 to 93 percent to 2008. they do not automatically shift to a domestic demand-driven growth model (with a few exceptions including the United States). In other words. Malaysia simply does not enjoy a sufficiently expansive consumer market to stoke rapid private consumption growth.Export Driven Growth This is the central dogma of the Export-Led Growth Hypothesis (ELGH). This increased efficiency in terms of cost and scale can in turn boost labor. 1 • 27 . contributing as much as 4. given a set of suitable conditions. as countries grow richer. This again places a cap on the growth of private consumption. Malaysia would face a severe constraint in its domestic market size if it were to run a consumption-based economy. the share of exports in relation to GDP in several European economies actually increased over time and has remained high. Over the past six years. According to Chart 3. there is no distinct relationship between an economy’s exposure to external demand and its level of development. First. the principle of comparative advantage also means that nations that engage in specialization can achieve economies of scale through an expanded market for their respective exporting products. Chart 5 clearly illustrates that private consumption has replaced investment as the primary driver of the economy. the export-led growth model can potentially be sustainable. which sees export expansion as one of the primary determinants of growth through technological spillovers. On the other hand.9 This further reinforces the notion that. Chart 5 The Domestic Demanddriven Model: The Unappealing Alternative Malaysia’s economy is currently driven by private consumption. compared with an average of 80 percent in Asian economies (Chart 4). A time series study on growth experiences also indicates that several advanced economies are still relying on external trade as a driver for sustainable Source: Department of Statistics Malaysia growth. Furthermore. Is a consumption-driven model desirable for an emerging economy like Malaysia? There are several reasons that demonstrate otherwise.1 percent. the 1990s. the share of private investment declined by over six percent in the same period. With a relatively small population of 26 million people and a slow annual population growth rate (one to two percent). between 50 and 80 percent. unlike the private investment of Source: Khazanah Research and Investment Strategy (KRIS) Vol. and total factor productivity. This suggests that advanced economies also believe in the potency of an export-driven growth model as a means to long term development. Moreover. XI | No. The country’s mediocre Gross National Income (GNI) per capita of approximately $6400 also implies a restriction on the average citizen’s purchasing power.6 percent to the country’s annual average GDP growth of 5. as a developing nation. capital.

if an economy’s consumption grows faster than its GDP. in turn. A further break down reveals that Malaysia’s primary savings component is actually corporate savings (see chart 8). Malaysia also registered the second worst Gini coefficient score in Asia in a recent UNDP Human Development Report. As such. This trend began in 2003. This is inconsistent with a consumption-based economy. Besides the fact that investment relinquished its status as the primary driver of growth after the 1997 financial crisis. This prevents economic surpluses from trickling down to households. a domestic-demand led growth model would jeopardize long term growth as it is sometimes taken to imply that domestic demand grows faster than GDP. stateaffiliated firms do pay dividends to the government. given the development of certain recent trends. It reflects more the abruptly declining levels of investment (see chart 6) than a substantial rise in raw private consumption figures. This. the post-crisis period also reflected how consumption usurped investment as the primary driver of the Malaysian economy. Chart 7 shows that over the past 2 decades. After all.7 percent. Malaysia’s marginal propensity to save is too high to sustain a consumption-led growth strategy. then the economy would be on an unsustainable path of exploding trade deficits. the domestic market constraint factor may explain Malaysia’s stunted growth trajectory in the aftermath of the 1997 financial crisis where the annual growth rate plunged from 9. both public and private savings have been on the rise.Stanford Journal of International Relations Furthermore. Indeed.4 percent to 5. Fourth and lastly. is detrimental to an emerging economy’s account balance and ultimately long term output growth. More shockingly. it is understood that developing nations should not adopt a consumption-driven economy due to the pressing need to mobilize domestic savings for capital stock formation in the future. The Investment Driven Model: The Unattainable Alternative Despite the merits of an investment-driven growth model.15. This unique relationship between the state and corporate entities can partially explain why households have not fully benefited from the high rate of GDP growth. it may be argued that consumptiondriven growth does not guarantee an efficient pattern of Chart 7 growth from a welfare-enhancing perspective.13 Due to a rapidly increasing reliance on foreign oil. the increase in consumption share over the past eight years could be misleading. Not surprisingly. the US serves as a stern reminder that a domestic-demand driven growth model could result in trade imbalance.12 This signals that Malaysia does face some sort of distribution issue despite posting credible consumption share growth figures.10 This demonstrates that the average Malaysian has the inclination to defer current consumption to future consumption. profitable state-owned enterprises are not required to pay dividends to either the state or shareholders. where the corporate savings rate surged from 6 percent to 18 percent in recent years. the trade balance for the US has deteriorated over the decades. Malaysia also has an increasing gross national savings rate. there are still signs of inequality in Malaysia’s growth patterns.12 The United States serves as a classic example of a country that is teetering on the edge of an increasingly large trade deficit due to its consumption-driven economy.16 Although Malaysia is fortunate enough to evade the aforementioned circumstances. The increasing 28 • Fall 2009 . Chart 6 Source: World Development Indicators Second. In China. with private consumption growth being 1-2 percent below average annual GDP growth. Nevertheless. Third. they do not appear to have materialized for Malaysia.11 In Malaysia however.

Export Driven Growth inclination for firms to retain and not reinvest their profits reaffirms the general lack of confidence in Malaysia’s investment climate. a closer look at its composition reveals that only the tourism sub-sector is a net contributor to GDP. is still very much domestically operated (see chart 10). In the long run. author’s calculation Adaptation. XI | No. In order to boost the contribution of the other sub-sectors. the diversification of export products is also of paramount importance. these sectors will eventually face a shortage in raw material supply as Chart 9 Source: MITI Vol. as their export values fluctuate with uncertain global prices. timber. which proposes loosening trade and financial linkages with the United States. considering that emerging economies like China and India have a competitive advantage with lower labor costs and rent. it will likely replace the US as Asia’s biggest center of demand and investment. So far. Throughout the present decade. Thus it is important for Malaysia to diversify its export destinations by gradually incorporating China as one of its primary trading partners to take advantage of its economy’s progress towards becoming the region’s demand hub. continues to grow its consumer base and foreign reserves. The increasing dependence on commodities is a concern. In relation to diversification. and rubber. Besides diversifying export products. primary commodities constituted a substantial share of total exports and even surpassed the net exports of manufacturing in 2008 (see chart 11). As China. in turn. Chart 8 Source: Bank Negara Malaysia. Even so. Not Abandonment: Structural Readjustments into the Future In lieu of the pertinence of trade as the driver for long term economic growth. the fastestdeveloping nation in the world. Moreover. Despite the fact that the business cycles of the developing world are still strongly correlated to those of the United States. The country is also facing increasingly severe competition for foreign investments. it is essential to attract more foreign investment into these areas. with a relatively uniform distribution of exports and imports among trading partners. it is susceptible to exogenous and cyclical variables. in general. imply the need to implement service liberalization to effectively tap into the immense potential of the services sector as an export-oriented GDP contributor. One important trade policy worth considering is the diversification of export destinations. 1 • 29 . Despite the high value-adding characteristic of the services sector to real output growth. This would. Furthermore. the Malaysian services sector. Despite contributing as much as 85 percent of GDP growth in 2008. considering the size and growth prospect of mainland China. Employees Provident Fund (EPF). in which the simple logic of not “putting all of one’s eggs into one basket” applies. some propose the decoupling thesis. Malaysia has done reasonably well in diversifying its export destinations (see chart 9). there is fresh optimism that decoupling is a feasible prospect in the long run. Malaysia should proactively seek pre-emptive strategies and measures to reduce vulnerabilities to external shocks instead of doing away with the export-led growth model for good. export-oriented manufacturing industries are also increasingly reliant on natural resource-based sectors such as oil and gas. emphasis should also be given to restructuring the export regime.

4 This is consistent with the fact that it is the difference between exports and imports that contributes to an economy’s growth. Philippines: 2005 <http://www. Malaysia’s net exports actually added value to GDP growth because both demand for exports and imports deteriorated simultaneously. As an emerging economy. relatively less developed financial markets compared to industrialized countries. Lillian Cheung. research & development. 2009. and demographic influences in relation to a relatively young population (IMF. Hong Kong Monetary Authority. intellectual property etc. 7 Intangible capital is defined as capital that is non-physical. Print. Other indicators such as quality of governance. 2009. This includes human capital. Malaysia should continually embrace an export-oriented path of development to maximize its chances of achieving industrialization by 2020. regardless of race and religion. are also crucial in determining a country’s level of development. sector-specific technologies will become redundant and obsolete due to their high switching costs. Despite the fact that it can be affected by boom and bust cycles around the world. Conclusion There is no doubt that trade is an integral part of a developing country’s long term growth model. Jesus. Malaysia needs to strive for holistic development in these key areas so that economic prosperity can be shared with and enjoyed by its citizens. it is of course by no means a sufficient condition for Malaysia to join the exclusive club of advanced economies. Sense and Nonsense On Asia's Export Dependency And the Decoupling Thesis. mature private sector and scarcity of primary resources ensure a consistently high demand for imported goods and services. are too substantial. state accountability and transparency etc. Economics and Research Dept. Cambridge. Manila.adb. including technological spillovers as well as positive externalities on consumption and investment. Dong.Stanford Journal of International Relations Chart 10 necessary. Export or domestic-led growth in Asia? / Jesus Felipe and Joseph Lim Asian Development Bank. the opportunity costs for not adopting an export-driven growth strategy. Thesis. Hong Kong: Hong Kong Monetary Authority. Print. MA: National Bureau of Economic Research. 10 Common perception suggests that this may be due to increased precautionary savings in response to greater macroeconomic uncertainties. Stiglitz maintains that the rapid exchange of information. 30 • Fall 2009 . 5 In Globalization and Its Discontents (2002). and Jian Chang. This justifies the role of adaptive strategies that help alleviate the impact of cyclical fluctuations.pdf> 3 He. 6 Prasad. Joseph. empowers individuals to make split-second decisions from any corner of the globe. long term growth models are contextspecific. § Endnotes natural resources continue to deplete. export expansion is one of the main determinants of growth 2 Felipe. 9 As mentioned in the abstract. This phenomenon is alleged to be the basis of the Asian contagion during the crisis. high income per capita. During the 1998 recession. 2007. 8 Several electronic firms such as Intel. National Bureau of Economic Research. and Asian Development Bank. Thesis. and Lim. education. In the context of the United States. Dell and Motorola had established production outlets in Industrial Free Trade Zones in Malaysia. hence the phrase net exports.14 Although the export-led growth strategy is Chart 11 Source: Khazanah Research and Investment Strategy (KRIS) 1 The export-led growth strategy originates from the export-led growth hypothesis (ELGH). As a result. political stability. Eswar S. and Asian Development Bank. Rebalancing Growth in Asia. September 2006) 11 Private consumption growth is consistently 2 percent below the annual rate of GDP growth in China (Aziz 2006). which postulates that besides labor and capital expansion. The 1997 Asian financial crisis demonstrates how speculation of currency instability in Malaysia quickly affected investor confidence in other countries due to tight financial and trade linkages between these countries. factors such as large domestic market. 2007. made possible by the Documents/ERD/Working_Papers/wp069. thus enabling the country to maintain or minimize the fall in its trade balance.

14 US consumers spend approximately 70 percent of the entire US GDP Also. Print. Lillian Cheung. Dr. Mahathir Mohamed during his term in office. Hong Kong: Hong Kong Monetary Authority. 15 Contraryinvestor. 2007. 2007. Thesis. was inspired by the fourth Prime Minister of Malaysia.Export Driven Growth 12 UNDP Human Development Report 2007/2008 13 He. Hong Kong Monetary Authority. XI | No. 1 • 31 . also known as Vision 2020. Dong. Something about the Malaysian people looking hopefully into the future? Malaysian National Space Agency 16 GoldForcaster. a vast majority of total imports are classified as consumer-based goods and services. and Jian 17 The vision for Malaysia to achieve industrialization by the year 2020. Sense and Nonsense On Asia's Export Dependency And the Decoupling Thesis.

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