Targeting Final Demand in Regional Markets

As argued in the previous section, the small size of the Asian tiger economies dictates that they remain open and reliant on foreign demand. In fact, the export-led growth strategy adopted by these economies had for decades proved highly successful in delivering strong output growth, notwithstanding greater volatility in GDP growth rates.⁷ The challenge faced by policymakers in these countries is to dampen the business cycle fluctuations that were accentuated by recurrent shocks from the external environment. A key way to increase the resilience of an economy against exogenous shocks is through the diversification of its export markets. In fact, the Asian tigers had long diversified their trading partners, as reflected by the myriad of free trade agreements that they had entered into.

In particular, the Asian tigers had steadily increased trade with regional partners over the past decade. This is evident from Figure 13 [ PDF 14.1KB | 1 page ], which depicts the intraregional trade of the individual economy as a percentage of its total trade. It is well recognized that the increase in intraregional trade in Asia had been spurred by the global integration of PRC's economy.

Table 1 [ PDF 17.3KB | 1 page ] shows, for each Asian tiger, the six most important trading partners based on bilateral exports trade data as well as the share of total exports they each account for in 1990 and 2008. We observe from the table that, without exception, the regional economies, particularly PRC, gained importance as trading partners of the Asian tigers.

However, the rise in intraregional trade can in large part be attributed to the growing intensity in vertical intra-industry trade in Asia. The Asian tigers are well integrated in the regional production networks which had been strengthened by the emergence of PRC as a manufacturing powerhouse. Specifically, these economies supply high value intermediate components to PRC for further processing and final assembly. The export profiles of Korea; Singapore; and Taipei,China are similar—their export baskets weigh heavily on electronics components such as semiconductors and printed circuit boards bound for PRC, the information technology assembly hub. In other words, trade flows with the regional countries is dominated by trade in parts and components rather than trade in final products.

Due to the emergence of production networks, trade statistics no longer accurately reflect the dependence of Asian countries on extra-regional demand. Pula and Peltonen (2009) used an updated Asian input-output table to show that Asia has not decoupled from the rest of the world.⁸ In fact, a study by ADB (2007) estimated that approximately only a third of the final demand composition of Asia's exports in 2006 can be accounted for by the region. Hence, it is not surprising that the recent collapse in demand of the end markets was transmitted to these countries involved in the different stages of the production process, resulting in the synchronized fall in trade. Not unlike the other Asian economies, the Asian tigers are still heavily dependent on the US and Euro area markets in terms of final demand. Consequently, the economic prospect of the Asian tigers remains coupled to the upswings and downturns in the developed markets.

To reduce the vulnerability of export growth to demand shocks from the extra-regional markets, the Asian tigers need to gear their trade structure in terms of trade in final goods away from excessive dependence on the US and Euro zone markets towards regional markets. The aim would be to have intraregional trade based on trade in final products as an additional source of demand and growth for these economies. This means that intraregional trade should also be driven by consumption rather than by production alone. In this regard, the level of private consumption in Asia is likely to increase in view of rising affluence and standards of living in the fast growing regional economies. In particular, PRC offers some potential as a strong source of independent demand in view of the emergence of its large middle class with growing purchasing power.

A recent ADB study (ADB, 2009) provides evidence that domestic demand in PRC is already starting to play a more prominent role in supporting exports from the Asian tigers. Figure 14 [ PDF 16.9KB | 1 page ] shows the composition of trade balance evolving over time between PRC and the individual economies. In the study total trade balance is decomposed into four major categories namely: basic products; construction materials; parts and components; and final goods. Since the figures for the first two categories are relatively small for the countries under consideration, we focus only on the last two categories in our analysis.

Figure 14a reveals that PRC has been running current account surpluses with Hong Kong, China. This is not surprising given Hong Kong, China's role as a major transshipment centre for PRC's exports. Although PRC also runs a trade surplus in final goods with Singapore, the magnitude is much smaller than the level of trade balance with the other three countries (see Figure 14c). By contrast, we see from Figures 14b and 14d that PRC has been running current account deficits with Korea and Taipei,China. Moreover, final goods are accounting for a growing share of PRC's trade deficit with these two countries over time. The magnitude of these deficits are significantly higher for Taipei,China, reflecting its cross-strait trade integration with PRC. Considering the probable shifts in PRC towards a bigger consumption basket that is typical in a rapidly growing economy, trade in final goods would likely play a more important role in driving the increase in trade between PRC and the Asian tigers going forward.

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