Trade and Economic Development in South East Asia

Abstract

Contrary to cross-country studies, this paper explores the regional relationships between trade and output growth for three rapidly developing Southeast Asian countries; Malaysia, Thailand and Indonesia, using time series framework and vector error-correction model. This article also investigates the balance-of-payment growth constraints of these three countries. The results suggest that there is evidence of growth-led exports in Malaysia and Thailand whereas growth-led imports hypothesis is supported in Thailand and Indonesia. There is also evidence of bidirectional causality between gross domestic product growth and trade flows. For balance-of-payments analysis, higher estimates of elasticity reflect greater trade liberalization and expansion of inter-regional trade. Therefore, a successful economic policy that increases the income elasticity of exports and/or reduces income elasticity of imports, permits a country to secure growth in demand and supply without suffering a deterioration in its balance of payments.

Keywords: Trade liberalization, balance-of-payments constrained growth, export-led growth, error correction model, cointegration

JEL Classification: F10