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Thailand's Positioning in a New Global Economic Paradigm |
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| Introduction |
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That a slowdown in exports due to slackening external demand would be met with a boost in domestic demand through government policy measures and conversely that domestic demand stimulation would be held back when exports pick up in an effort to maintain stable economic growth constitute the essence of the "Dual Track Policy" of Dr. Thaksin Shinawatra, the Prime Minister of Thailand. This specific policy approach, together with the Prime Minister's initiated Asia Cooperation Dialogue (ACD), has of late significantly contributed to the most recent major paradigm shift in the understanding of how the international economy actually operates today and in the immediate years to come. The explicit policy focus on the duality of the export and the domestic sectors to bring economic growth with stability, through the actively supportive role of the public sector in a multi-country context not necessarily dependent on the traditional economic powers of the world, adds a new dimension to the nature of the international economy that has hitherto been understood or assumed to be under outdated paradigms. |
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- Historical Development in Macroeconomic Policy Paradigm Shift
Some seventy years or so prior to this latest policy paradigm shift, the Great Depression of the 1930's led to widespread private debt and ample excess industrial capacity in England. To wait for supply to create its own demand in the long run as Say's Law would have it was untenable. John Maynard Keynes with his General Theory of Employment, Interest and Money then proposed a new and alternative framework for macroeconomic policy analysis in the context of a closed, single economy. He introduced the active role of the government and the multiplier concept in creating the necessary demand to lift an economy out of the depression. After World War II, Sir John Hicks, Paul A. Samuelson, James E. Meade, and Bertil G. Ohlin subsequently popularized Lord Keynes' approach by introducing international trade among open economies and the discovery of what is known today as modern macroeconomics. More importantly, the theory was proven successful when put into practice. The New Deal, under which came the advent of the Tennessee Valley Authority with the aim to create employment and income, was a prime and well-known example of policy application of Keynesian economics by President Franklin D. Roosevelt of the United States of America.
Around a quarter of a century ago, a newer concept emerged, whereby a multi-country perspective and international trade were added on, in a significant manner, to the understanding of how the world economy functioned. The three major blocs of the world's foremost economic powers consisting of the United States, Western Europe, and Japan were together regarded as the sole engines of growth for the entire world. Whatever happens to this Group of Three, otherwise known as the G-3, would also happen to the dependent, developing world. It was believed that East Asia and the rest of the developing world could not possibly experience economic growth without the required external demand from and thus the necessary growth in the G-3 economies, hence emerged the "Locomotive-wagon" policy paradigm of international macroeconomics, which is still widely held today. |
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LOCOMOTIVE - WAGON WORLD ECONOMIC MODEL: 1970-1995 |
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- A New Macroeconomic Policy Paradigm is Born in Asia
The belief in the combined G-3 engine of growth to be the only source and determinant of world prosperity and without which the future would not hold for anyone else is however being refuted as new quantitative evidence coming out of Asia is beginning to undermine its validity. In this light, the G-3 "Locomotive-wagon" paradigm will hence need modification. A major catalyst that has been driving changes leading to the latest paradigm shift in the way the workings of the world economy is to be understood and appreciated is undeniably the miraculous progress made by the Chinese economy during the last fifteen years. The People's Republic of China has been increasingly making its presence felt on the world scene. Its impact on world trade in particular will be even stronger in the years to follow with China's accession to the World Trade Organization (WTO). While India's foreign sector is still not all that large given the sizes of its economy and population, it is inevitable that the economic role and influence of India will sooner or later become another important force to be considered and analyzed, at least in the Asian context.
In East Asia, China is found to have resorted to domestic demand stimulation through investment and consumption spendings in parallel with export promotion for at least a decade without articulating the policy approach as "dual track." The Republic of Korea has been adhering to a similar policy line since the 1997 Asian financial crisis broke out. The same holds true with the policy strand that runs through Malaysia's New Economic Policy, before and after the 1997 crisis. If a country was to pursue a dual track policy on its own all by itself, the effect that a collective and coordinated force would be able to muster up would sure to be missing. The impact of such a policy taken in isolation can be limited and in any case fall far short of what could be expected from the cooperative action of a critical mass of a number of economies simultaneously applying similar domestic demand stimulus packages. As it turns out, there are at least four countries that can be clearly identified as having followed a dual track policy - namely, China, Malaysia, South Korea, and Thailand.
- Dual Track Policy and Asia Cooperation Dialogue
The current Government of Thailand is able to articulate and popularize what has been practiced by at least 3 other countries in East Asia. Reinforcement of this pattern of policy application can be expected well beyond East Asia, also to include member countries of the Thai Government-initiated Asia Cooperation Dialogue (ACD), such as, the Philippines, Indonesia, and India. Both the ACD and the ASEAN+3 forums, which include Japan, China, and South Korea, have served as venues for not only policy dialogues among leaders of Asia but also platforms to coordinate action plans, such as, the ASEAN+3 currency swap arrangements, the Asian bond implementation steps, and the bilateral free trade agreements.
- Empirical Facts Supporting the New Paradigm
Relative to East Asia, the G-3 economies as well as their external trade - both imports and exports - are currently not experiencing high growth. For the United States, the European Union, and Japan, the latest release (2002) of the figures on their real GDP year-on-year growth rates reveal a range of 0.3 to 2.4 per cent (or a weighted average of 1.3 per cent). For their US$ value export growth rates, the range is between -1.9 and 7.3 per cent (or a weighted average of 3.0 per cent, given the following weight shares: US = 0.45, EU = 0.23, and JP = 0.32). And for their US$ value import growth rates, the range is between -3.0 and 4.0 per cent (or a weighted average of 2.4 per cent).
Meanwhile, the corresponding ranges (or weighted averages) for the figures on year-on-year growth rates for East Asia-9 (defined as the nine East Asian economies of China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand) span between 1.8 and 7.9 per cent (or a weighted average of 5.8 per cent) for real GDP, between 2.4 and 18.5 per cent (or a weighted average of 8.6 per cent) for US$ value exports, and between 0.1 and 14.6 per cent (or a weighted average of 6.6 per cent) for US$ value imports. Incidentally, the relatively high rates of growth for East Asia in both real GDP and US$ value (and real) imports are self-confirming, given the well established, positive, empirical relationship between real imports, real output, and real income for practically all countries of the world. |
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Real GDP Growth Rates (%) |
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% |
1998 |
1999 |
2000 |
2001 |
2002 |
5-Year Average |
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US |
4.28 |
4.11 |
5.00 |
0.25 |
2.45 |
3.22 |
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JP |
-1.15 |
0.17 |
1.70 |
0.37 |
0.29 |
0.28 |
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Euro Area |
2.86 |
2.70 |
3.40 |
3.20 |
0.71 |
2.57 |
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G-3 |
2.33 |
2.60 |
3.45 |
1.34 |
1.28 |
2.20 |
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EA-9 |
-0.83 |
6.83 |
7.90 |
3.90 |
5.82 |
4.72 | |
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Correlation Coefficient (r) between Real GDP Growth Rates (%yoy) of Any Two Countries, |
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Based on Quartyerly Data from Q1:1997 - Q4:2002 (24 observations) |
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RGDP Weight |
EA-9 |
CN |
HK |
ID |
KR |
ML |
PH |
SG |
TH |
TW |
G-3 |
Euro |
JP |
US |
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EA-9 |
11.60 |
1.00 |
0.45 |
0.92 |
0.85 |
0.95 |
0.97 |
0.85 |
0.78 |
0.82 |
0.41 |
0.38 |
0.05 |
0.47 |
0.20 |
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- CN |
4.60 |
0.45 |
1.00 |
0.39 |
0.40 |
0.25 |
0.41 |
0.46 |
0.41 |
0.12 |
0.31 |
0.34 |
-0.13 |
0.42 |
0.29 |
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- HK |
0.60 |
0.92 |
0.39 |
1.00 |
0.76 |
0.81 |
0.91 |
0.76 |
0.79 |
0.69 |
0.43 |
0.53 |
0.25 |
0.56 |
0.24 |
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- ID |
0.90 |
0.85 |
0.40 |
0.76 |
1.00 |
0.78 |
0.88 |
0.92 |
0.54 |
0.81 |
0.01 |
0.09 |
-0.00 |
0.47 |
-0.23 |
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- KR |
2.50 |
0.95 |
0.25 |
0.81 |
0.78 |
1.00 |
0.89 |
0.76 |
0.62 |
0.90 |
0.25 |
0.20 |
0.02 |
0.30 |
0.07 |
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- ML |
0.40 |
0.97 |
0.41 |
0.91 |
0.88 |
0.89 |
1.00 |
0.88 |
0.80 |
0.76 |
0.42 |
0.41 |
0.11 |
0.49 |
0.19 |
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- PH |
0.40 |
0.85 |
0.46 |
0.76 |
0.92 |
0.76 |
0.88 |
1.00 |
0.58 |
0.72 |
0.20 |
0.11 |
-0.09 |
0.34 |
-0.04 |
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- SG |
0.40 |
0.78 |
0.41 |
0.79 |
0.54 |
0.62 |
0.80 |
0.58 |
1.00 |
0.38 |
0.72 |
0.75 |
0.27 |
0.58 |
0.56 |
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- TH |
0.50 |
0.82 |
0.12 |
0.69 |
0.81 |
0.90 |
0.76 |
0.72 |
0.38 |
1.00 |
-0.06 |
-0.05 |
-0.12 |
0.27 |
-0.22 |
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- TW |
1.30 |
0.41 |
0.31 |
0.43 |
0.01 |
0.25 |
0.42 |
0.20 |
0.72 |
-0.06 |
1.00 |
0.69 |
0.02 |
0.24 |
0.91 |
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G-3 |
88.40 |
0.38 |
0.34 |
0.53 |
0.09 |
0.20 |
0.41 |
0.11 |
0.75 |
-0.05 |
0.69 |
1.00 |
0.55 |
0.64 |
0.73 |
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- Euro |
32.10 |
0.05 |
-0.13 |
0.25 |
-0.00 |
0.02 |
0.11 |
-0.09 |
0.27 |
-0.12 |
0.02 |
0.55 |
1.00 |
0.15 |
0.12 |
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- JP |
21.50 |
0.47 |
0.42 |
0.56 |
0.47 |
0.30 |
0.49 |
0.34 |
0.58 |
0.27 |
0.24 |
0.64 |
0.15 |
1.00 |
0.12 |
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- US |
34.80 |
0.20 |
0.29 |
0.24 |
-0.23 |
0.07 |
0.19 |
-0.04 |
0.56 |
-0.22 |
0.91 |
0.73 |
0.12 |
0.12 |
1.00 | |
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Correlation Coefficient (r) between Real GDP Growth Rates (%yoy) of Any Two Countries, |
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Based on Quartyerly Data from Q1:1998 - Q4:2002 (24 observations) |
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RGDP Weight |
EA-9 |
CN |
HK |
ID |
KR |
ML |
PH |
SG |
TH |
TW |
G-3 |
Euro |
JP |
US |
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EA-9 |
11.60 |
1.00 |
0.43 |
0.91 |
0.84 |
0.97 |
0.97 |
0.85 |
0.78 |
0.90 |
0.36 |
0.33 |
0.09 |
0.44 |
0.13 |
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- CN |
4.60 |
0.43 |
1.00 |
0.40 |
0.31 |
0.41 |
0.28 |
0.27 |
0.26 |
0.44 |
0.02 |
0.16 |
-0.05 |
0.35 |
0.03 |
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- HK |
0.60 |
0.91 |
0.40 |
1.00 |
0.74 |
0.83 |
0.92 |
0.75 |
0.81 |
0.75 |
0.39 |
0.51 |
0.31 |
0.55 |
0.19 |
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- ID |
0.90 |
0.84 |
0.31 |
0.74 |
1.00 |
0.81 |
0.87 |
0.93 |
0.51 |
0.89 |
-0.10 |
-0.00 |
0.05 |
0.42 |
-0.36 |
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- KR |
2.50 |
0.97 |
0.41 |
0.83 |
0.81 |
1.00 |
0.92 |
0.81 |
0.66 |
0.92 |
0.26 |
0.21 |
0.04 |
0.32 |
0.06 |
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- ML |
0.40 |
0.97 |
0.28 |
0.92 |
0.87 |
0.92 |
1.00 |
0.87 |
0.79 |
0.87 |
0.35 |
0.35 |
0.16 |
0.46 |
0.10 |
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- PH |
0.40 |
0.85 |
0.27 |
0.75 |
0.93 |
0.81 |
0.87 |
1.00 |
0.52 |
0.86 |
0.07 |
-0.00 |
-0.05 |
0.30 |
-0.20 |
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- SG |
0.40 |
0.78 |
0.26 |
0.81 |
0.51 |
0.66 |
0.79 |
0.52 |
1.00 |
0.50 |
0.68 |
0.75 |
0.33 |
0.63 |
0.50 |
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- TH |
0.50 |
0.90 |
0.44 |
0.75 |
0.89 |
0.92 |
0.87 |
0.86 |
0.50 |
1.00 |
0.01 |
-0.01 |
-0.12 |
0.32 |
-0.18 |
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- TW |
1.30 |
0.36 |
0.02 |
0.39 |
-0.10 |
0.26 |
0.35 |
0.07 |
0.68 |
0.01 |
1.00 |
0.66 |
0.06 |
0.17 |
0.89 |
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G-3 |
88.40 |
0.33 |
0.16 |
0.51 |
-0.00 |
0.21 |
0.35 |
-0.00 |
0.75 |
-0.01 |
0.66 |
1.00 |
0.64 |
0.61 |
0.71 |
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- Euro |
32.10 |
0.09 |
-0.05 |
0.31 |
0.05 |
0.04 |
0.16 |
-0.05 |
0.33 |
-0.12 |
0.06 |
0.64 |
1.00 |
0.26 |
0.16 |
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- JP |
21.50 |
0.44 |
0.35 |
0.55 |
0.42 |
0.32 |
0.46 |
0.30 |
0.63 |
0.32 |
0.17 |
0.61 |
0.26 |
1.00 |
0.03 |
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- US |
34.80 |
0.13 |
0.03 |
0.19 |
-0.36 |
0.06 |
0.10 |
-0.20 |
0.50 |
-0.18 |
0.89 |
0.71 |
0.16 |
0.03 |
1.00 | |
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| Note: Correlation Coefficient (r) value of 0.75 is used as a cut-off point to indicate statistically significant degree of positive couplings (higher than 0.75) or decouplings (less than 0.25). |
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- The theory relating to the traditional "Locomotive-wagon" paradigm of course cannot explain the fact that currently the economic growth rate of East Asia as a bloc significantly exceeds that of the G-3 bloc. What the empirical evidence above suggests however renders the observation totally unsurprising. With such high growth in intra-regional trade, intra-East Asian trade shares have increased substantially during the last four years (1999-2002) after the 1997 Asian financial crisis, as have been well documented by many economists and analysts. The intra-East Asian (in this case, including Japan) merchandise trade alone has come to account for no less than half of the region's entire foreign merchandise trade world-wide, not to mention the impact of the recent interests in both intra-regional investment and tourism cooperation.
- The case of Thailand is illustrative of such widely observed, but not yet appreciated, phenomenon. The magnitude of Thailand's foreign trade with East Asia excluding Japan has more than doubled that of its foreign trade with Japan. Its export shares to fellow ASEAN countries and 4 other North East Asian economies of China, South Korea, Taiwan, and Hong Kong increased from 15.7% and 13.1% in 1998 to 20.3% and 15.9% in 2002, respectively. The corresponding shares to the United States and the European Union declined from 23.0% and 18.4% to 20.2% and 15.3%, respectively, while the export share to Japan rose slightly from 14.1%15.0%. Thailand's import shares from other countries of East Asia and from the G-3 countries change even more dramatically as the interdependent nature of the intra-East Asian trade increases, ironically thanks partly to the 1997 financial crisis that resulted in marked declines in the currency values of most East Asian countries relative to the US$, except China and Hong Kong. Studies of other East Asian countries' trade patterns by many scholars and analysts have arrived at the same conclusion as in the case of Thailand.
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- Macroeconomic and Microeconomic Reasons for the New Paradigm
While imports into the G-3 economies have not gained much for East Asia lately, both exports and imports of the East Asian economies on the whole have managed to leap during the same time period. The trade expansion of the latter has evidently not been at the expense of one another. An important macroeconomic explanation for the phenomenon is obviously the success of the coordinated intra-regional demand stimulation measures undertaken within the dual track policy framework in many East Asian countries. A microeconomic explanation can also be found in the nature of the production and exchange that has evolved within the region. A large share of the additional exports of East Asia is no longer destined to end up in the G-3 markets in order to find the necessary outlets. As industries in the region grow more and more vertically integrated across countries, the domestic value added to be reaped in each of the regional economies that participate in a particular line of product manufacturing - such as, information and communications technology (ICT) and electrical and automotive goods - is shared and dispersed more equitably. Thus, the value chain involved in such an activity increasingly completes much of its international production and consumption network well within the region itself, resulting in a natural enhancement and augmentation of intra-regional trade. Under an environment of overall world slowdown, East Asia has managed to generate sufficient intra-regional demand such that its rate of economic expansion actually outpaces that of the traditional "Locomotives" by a clear and decisive margin. East Asia has, in other words, developed the capability to sustain its own growth. A new "Locomotive," known as East Asia, thus may have just arrived on the world scene.
- Modeling the Paradigm Shift
In line with the above paradigm shift, enhanced by the concerted application of the dual track policy in the context of East Asian regional cooperation and coordination, the Fiscal Policy Research Institute (FPRI) of the Thai Ministry of Finance is developing a world macroeconomic model linking domestic economies through international trade flows of goods and services among 5 major blocs - i.e., the United States, the European Union, Japan, East Asia-9 (including Thailand), and the rest of the world. The model is to be used in conjunction with the institute's own Thailand macroeconomic model. The forecasting and simulation exercises for the Thai economy as published in the ThailandOutlook.com Web site are based on the FPRI Thailand Country Model, which is in turn linked up with the FPRI World Model. The new overall conceptual framework can be called the "Diamond-5" policy paradigm to reflect the diamond-shaped structure of the new world economy that is made up of 5 equally important and interacting blocs, as opposed to the one-way "Locomotive-wagon" paradigm that is getting a bit outdated.
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FPRI Diamond-5 World Economic Model |
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The interpretations and conclusions given represent those of the authors. They
do not necessarily reflect the view of the Royal Thai Government, its
departments or other related institutions.
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