Malaysia's Trading Nation Status Remains
23 Jul 2012 10:49 AM

Net trade influences cyclical economic development and long-term growth potential

MALAYSIA is an open economy. Exports account for 118% of our gross domestic product (GDP). As a country with a relatively small domestic market, we depend on international trade to support economic growth.

A major concern over the export-led growth model is that a highly open economy becomes more vulnerable to external and domestic demand shocks.

With the global economy in such a state of flux, questions again arise as to whether trade can continue to be the driver of economic growth.

We seem to be going back to the arguments made by some economic historians like Irving Travis who asserted that trade expansion should be seen as an attendant consequence rather than an autonomous driver of growth.

These economists would argue that growth was mainly the result of favourable internal factors, and that export expansion did not serve to differentiate between successful and unsuccessful countries.

Given that of late there seems to be a weakening of net export contribution to economic growth, the arguments against the trade-led growth model have surfaced again.

In the first quarter of 2012, the contribution of net exports (of goods and services) to real GDP was 5%. Recall that during the 1997-1998 Asian crisis the concerns were on the sustainability of the export-led growth strategy.

Since the crisis, the country has depended more on domestic-demand-led growth strategy to buffer the downsides, and used it to boost the economy during more favourable periods.

I would like to maintain that while a trade-dependent economy may be exposed to cyclical demand, it need not necessarily dampen short term economic growth.

As the arm of the Government tasked to make Malaysia the preferred investment destination, and a successful trading nation, I prefer not to be drawn into the academic debate on the merits and demerits of international trade.

However, occasionally there is a need for me to set the record straight and re-direct arguments.

To challenge the Irving Travis perspective, the International Trade and Industry Ministry, in collaboration with MIDF Research, produced a report entitled A trading nation international trade has, and will always be, a boon to Malaysia. In the report, we assert the importance and virtues of international trade and argue against forsaking the trading sector.

Yes, net export contribution to economic growth appears to have eased. But this is only so if we look at it from the academic perspective of macro economics.

Such perspective provides a static snapshot of the national income and its constituents. It is more important to look at the relationship among net exports, domestic demand and economic growth.

Domestic demand is the key driver of the Malaysian economy. And net exports is the main contributor to economic growth either directly and indirectly through domestic demand. Imports, which include intermediate goods, investment goods and consumption goods tend to influence domestic demand, exports and the domestic economy. Hence, the argument that net export contribution to economic growth is not significant is inaccurate.

The concept of a domestic-demand-led growth model is not well defined. From a cyclical or demand-side perspective, the contribution of various domestic demand components to the economic growth, at best summarises, short-run economic conditions. Hence, one can expect great variation from quarter to quarter and from year to year.

Such variation does not have any predictable relationship with the structure of an economy because the conventional measure of the contribution to growth is purely an accounting relationship, suggesting no causal relationships or theoretical underpinning.

Take the United States as an example. Between 2007 and 2009, the contribution of net exports to GDP growth was significant although the country was running a sizeable trade deficit. We can only attribute this to the direct and indirect contributions from international trade.

To recap, my view is that the low contribution of net trade to economic growth is more of a misconception. Any notion that net export contributes insignificantly to economic growth as opposed to domestic demand is inaccurate.

In fact, net exports can be seen as the main contributor to GDP growth by influencing domestic demand either directly and indirectly.

More importantly, we must recognize that net trade influences cyclical economic development and long-term growth potential. In the long term, innovation and technological progress are critical in ensuring sustainable economic growth compared to domestic-demand and/or net trade.

The reason is that the economy must adopt the most recent production and management techniques, which, in turn will enhance technological and innovation progress.

The supply-side of the economy will benefit from technological spillovers and other positive externalities such as productivity gain, which will be translated to the demand-side of the economy.

* The writer is the International Trade and Industry Minister

Link : http://biz.thestar.com.my/news/story.asp?file=/2012/7/23/business/11702213&sec=business