Introduction

The value of the Association of Southeast Asian Nations' (ASEAN) exports increased threefold between 1998 and 2008. Many of these goods were produced within East Asian production networks. 40% of the exports from Malaysia, Philippines, and Thailand in 2007 were electronic goods. In addition, 13% of Thailand's exports were automotive products. These goods were produced using parts and components coming from Japan, Republic of Korea (hereafter Korea), and Taipei,China. Demand for sophisticated manufactured goods produced within East Asian supply chains has plummeted. Can labor-intensive manufacturing exports take their place as an engine of growth?

To answer this question it is necessary to examine the factors affecting the demand for labor-intensive exports. How will slower growth in the rest of the world affect spending on clothing, furniture, and footwear produced in ASEAN countries? Is it true, as policymakers in Asia often argue, that profit margins for labor-intensive goods are razor-thin and, thus, that exchange rate appreciations could decimate these industries? How much competition is there between ASEAN and countries such as the People's Republic of China (PRC) and Viet Nam in the export of low-technology products to third markets?

Previous work investigating these questions has yielded mixed results. Ahearne et al. (2003), using a vector autoregression and annual data from 1981 to 2001, found that income growth in importing countries is a much more significant determinant of exports from East Asia than exchange rate changes. Bénassy-Quéré and Lahrèche-Révil (2003), using panel data techniques and annual data from 1984 to 2001, reported that a 10% appreciation in one East or Southeast Asian country reduces exports to the rest of the world by 5.5%. Thorbecke (2006), using dynamic ordinary least squares (DOLS) estimation and quarterly data from 1987 to 2005, presented evidence indicating that a 10% depreciation of ASEAN currencies against the United States (US) dollar would decrease the PRC's exports to the US by 7.5%. Cheung, Chinn, and Fujii (2009), on the other hand, using DOLS estimation and quarterly data from 1993 to 2006, did not find a statistically significant relationship between the PRC's exports to the US and exchange rates in third countries.

This paper takes up these issues by investigating labor-intensive exports from Indonesia, Malaysia, Philippines, and Thailand to the rest of the world. Results using DOLS estimation and annual data from 1983 to 2007 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 the importing countries.

These results imply that labor-intensive exports may not be able to promote recovery in ASEAN countries. The high estimated income elasticities indicate that if the recovery in the rest of the world is slow, demand for ASEAN's exports will also be constrained. 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.

From a policy perspective, these findings imply that ASEAN countries should promote domestic and regional demand to compensate for weak demand abroad. They should also seek to assimilate new technologies and move up the value chain rather than engaging in price competition with low-wage economies. Finally, they should consider exchange rate coordination with their Asian neighbors to avoid “beggar-thy-neighbor” policies and other unpleasant outcomes.

The next section presents the data and methodology employed in this paper. Section 3 contains the results. Section 4 concludes.

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