Results

Table 1 [ PDF 58.7KB | 1 page ] presents the results from estimating equation (3). The results are robust to using either country-pair fixed effects (see columns (1) and (2)) or exporter and importer fixed effects (see columns (3) and (4)). They are also robust to including a time trend (see columns (1) and (3)) or period fixed effects (see columns (2) and (4)).

The first row reports the coefficients on the bilateral exchange rate between the ASEAN exporting country and the importing country. The coefficients are statistically significant in every specification and approximately equal to -2. These findings indicate that a 10% appreciation in an ASEAN country would reduce its exports of labor-intensive goods by about 20%.

The second row reports the coefficients on the weighted exchange rate between the leading exporters of labor-intensive goods and the importing countries. The coefficients are again statistically significant in every case and range from 1.06 to 1.44. These results indicate that, controlling for exchange rates in ASEAN countries, a 10% appreciation among competitors would increase labor-intensive exports from ASEAN countries by 11–14%.

The third row reports the coefficients on income. The coefficients are statistically significant in every specification and range from 2.34 to 2.49. These values indicate that a 10% drop in income in the rest of the world would decrease labor-intensive exports from ASEAN countries by about 24%.

Tables 2 through 4 provide sensitivity checks. Table 2 [ PDF 57.7KB | 1 page ] reports the results of estimating a DOLS(1,2) model. Table 3 [ PDF 55.6KB | 1 page ] reports the results of estimating a DOLS(2,1) model. Table 4 [ PDF 54.4KB | 1 page ] reports the results of estimating a DOLS(1,1) model with exports deflated using the US consumer price index instead of the US Bureau of Labor Statistics price deflators. In every case the results reported in Table 1 are robust to these changes in specification.

An important implication of the results presented here is that exports of labor-intensive goods are very sensitive to exchange rate changes in ASEAN countries and to exchange rate changes in countries that compete with ASEAN in third markets. This supports the claim that is often made that profit margins for labor-intensive goods are thin. If this is the case it may be difficult for ASEAN countries to compete with lower-wage countries such as the PRC and Viet Nam based on cost.

A better strategy for ASEAN companies exporting labor-intensive goods would be to advance from simple to complex production activities—from low-skilled assembling to participating in the engineering and design aspects of production (Wie 2006). One way to do this would be for ASEAN countries to reduce corruption and improve infrastructure in order to attract foreign direct investment. Foreign direct investment could then be leveraged to expand the technological base (Yoshitomi, Azis, and Thorbecke 2003). Assimilating new technologies and moving up the value chain would be a far more promising way to raise living standards than engaging in price competition with low-wage economies.

A second important implication of the results presented here is that labor-intensive exports from ASEAN countries are sensitive to changes in income in importing countries. If the slowdown in the rest of the world is protracted, ASEAN's exports of labor-intensive goods will also be constrained.

Thus, exports may not be able to play as large a role as an engine of growth as they did before the crisis. ASEAN policymakers should therefore redouble their efforts to increase domestic demand. To do this, they could strengthen social safety nets, improve infrastructure, and reduce intra-regional impediments to trade.

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