Conclusion

Exports from ASEAN countries soared between the 1997–1998 Asian financial crisis and the 2008–2009 global financial crisis. Many of these exports were electronic goods or automotive products produced within regional production networks.

Exporting such large quantities of sophisticated manufactured goods produced within East Asian supply chains poses several problems. The share of domestic content in these exports is small, implying that ASEAN's value-added is also small. Concentrating so much activity in a single sector also exposes countries in the region to the risk of a downturn in that sector. In the current crisis, demand for electronic goods assembled in ASEAN countries has plummeted.

This paper thus investigates whether LIM exports can function as an engine of growth for ASEAN countries. To do this, it investigates the factors affecting the demand for labor-intensive exports. Results using DOLS indicate that exports are very sensitive to income in the importing countries, the exchange rate between ASEAN countries and the importing countries, and the exchange rates between other exporters such as the PRC and importing countries.

The results imply that labor-intensive exports may not be able to promote recovery in ASEAN countries. High income elasticities indicate that if growth in the rest of the world remains slow, demand for ASEAN's exports will also be curtailed. In addition, the high estimated exchange rate elasticities support the claim that profit margins for labor-intensive goods are thin. It may thus be difficult for Indonesia, Malaysia, Philippines, and Thailand to compete with lower-wage economies in the region such as the PRC and Viet Nam based on cost.

Several policy implications flow from these findings. First, ASEAN countries should seek to assimilate new technologies and move up the value chain rather than engaging in price competition with low-wage economies. Second, countries in the region should attempt to promote domestic demand to replace weak demand abroad. They could do this by improving healthcare, education, and pension systems in order to reduce precautionary saving and by improving infrastructure to promote growth and development in the region. Finally, the evidence that competition in third markets is strong indicates that there might be a role for exchange rate coordination in Asia to mitigate “beggar-thy-neighbor” policies, “free-rider” problems, and other unpleasant outcomes.

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