The economic growth in the countries of Asia-Pacific region - Essay Example

This paper provides an insight into the Asia Pacific financial and economic performance during the last few half-century. The recent tremendous economic growth in Asia Pacific region is seen to be at varying scales in different countries of the region. This inspires the identification of important factors that affect the economic growth of a particular country. Therefore, the paper attempts to enhance a stout relationship between the economic development and the factors affecting it in a cross-national context with particular reference to East Asian countries. For this purpose, this paper will analyze and contrast the two distinct countries from this region i.e., Malaysia and Philippines in terms of their economic performance and the factors affecting the same. We will authenticate our research on the basis of existing literature and also probe into various indicators in order to signify the arguments presented for these two countries. Introduction Asian Pacific countries especially the East and South-East Asian countries have had a wondrous record of surging economic and financial performance. These countries include Thailand, Malaysia, Indonesia and Philippines. According to World Bank (1993), the significant economic growth in this region outclasses the performance of any other region of the world. The economic indicators in these countries have risen rapidly in the pre crisis era of 1965-1995 and then post crisis era to date. All the important economic indicators, for instance, Gross Domestic Product, Gross National Product and Per Capita Income etc have seen substantial growth and progress. The worst period in the history of East Asia took place in 1997-98, which had its significant impact on all the progressing countries of the region and their economic growth indicators. The causes and effects of this decline had been enormous, however the region is growing successfully out of it with rapidly improving economic condition. Economic Growth and Financial Development— An Outlook McKinnon (1973) and Shaw (1973) emphasize on the critical importance of the development of a country’s financial sector towards the enhancement of its economic growth. They are of the view that economic growth is closely linked with the financial market liberty in a country. Government interference and subjection over the financial sector through different means result in economic deterioration. Saving rate also plays a dominant role in determining a country’s economic future. A high saving rate always fosters the economic growth. Both the organizational and personal savings enhances efficiency. McKinnon (1973) says that the savings rate is also closely linked to interest rates and an increase in the latter will cause an upsurge in the former and thus the economic activity will flourish. Lucas (1988) elaborates that a nation’s capital also includes manpower skills and knowledge available to it. Human capital well equipped with the skills, knowledge, caliber, health and education lifts the esteem of a country. It is the factor on which a country’s economic productivity rests. Therefore, the quality of human capital is also an essential factor for the economic growth in a country. Park (1998) says that a country needs to invest both in human and physical capital. This also gives rise to the importance of income distribution to labour. The equality of income distribution fosters economic growth. Apart from that, international trade and foreign direct investment are also determinants of economic development. North (1990) illuminates the importance of institutions in the development of a country’s economy. Any country with fragile rules and policies is bound to have economic inefficiency and insufficiency whereas the appropriateness of laws having an impact on business and financial activities enhances the economic growth. Lasserre and Schutte (1995) highlight that effective government policies can lead to economic hike for instance, procurement of human resource, maximizing exports and minimizing imports. Increase in a country’ exports certainly leads to a boost in GDP followed by economic growth. Rate of inflation can also be termed as another factor associated with the economic growth of a country. The lower the inflation rate in a country, the lower the fragility of financial sector. Huybens and Smith (1998) illustrate the negative impacts of inflation on the performance of a country’s financial sector including banks, equity market and capital market etc. A higher rate of inflation is inauspicious for economic prosperity and therefore, the countries with lower inflation rate experience rapid economic growth. Patrick (1966) propounds that financial development in a country lead to economic growth and prosperity. In other words, the more a country establishes financial institutions and financial markets, the more progress it makes. The presence of these institutions and markets are crucial to the enhancement of economic activities and financial prosperity. Chenery and Strout (1966) relate the boom and boost of economic growth with the availability of resources in terms of foreign exchange reserves and the domestic savings level. Comparative Economic Analysis Of Malaysia And Philippines Malaysia and Philippines are the two East Asian countries with a visibly diverse rate and state of economic growth and performance. We will analyze both the economies in terms of major economic indicators in order to gain an insight on the causes of differences in economic condition in the same region. These economic indicators include GDP per capita, financial sector performance, investment rate, savings rate, inflation rate, exports and foreign exchange reserves. GDP per capita 1950 1973 1996 2004 Malaysia 1,696 3,167 7,764 4,187 Philippines 1,293 1,956 2,369 977 Crafts (1999), International Monetary Fund (various issues) The above chart displays the GDP per capita of both the countries. As GDP is the most authentic measure of economic growth, we can use it to analyze the economic performance of these East Asian countries over the last half-century. As evident from the GDP per capita shown above, Malaysia has had a much better sounding economic growth during the last 50 years than Philippines, not only before the crisis but also after it. Infact, it shows that Malaysia has risen much rapidly out of the crisis (1997-98). Philippine, on the contrary has failed to recover after the financial crisis shock. The GDP per capita indicates the economic growth of both the countries and thus it can be conveniently said that Malaysia is a much faster growing economy than Philippines, even though both are from the same East Asian region. Why is the difference between growth rates of economies of the same region, and what makes an economy to grow at a faster rate than its contemporaries can be illustrated through the following factors: Financial Sector Performance (Annual Turnover in terms of GDP) Money Market Foreign Exchange Market Equity Market Malaysia 420 227 137 Philippines 193 N/A 9 Source: Lynch (1996) The literature shows that development in financial sectors of a country brings about boost in its economic conditions. The financial sector performance of Malaysia indicates that the country’s financial markets performed more productively than that of Philippines. All the three major financial markets seem to be operating strongly in Malaysia. This is one of the reasons of the differences between the economic conditions of both the countries. Investment Rates (% of GDP) 1990 1993 1997 Malaysia 31.3% 37.8% 42.8% Philippines 24.2% 24.0% 24.8% Source: IMF (1998), “World Economic Outlook” Investment rate in a country also determines its economic growth. As shown in the above table, Malaysia has had rising investment rates throughout the 1990s whereas these rates have been constant in Philippines at the same time. An increase in a country’s investment rate enhances its financial activities and thus leads to economic growth. Hence, it is one of the reasons behind the speedy growth of economy in Malaysia. Savings Rates (% of GDP) 1990 1993 1997 Malaysia 29.07% 27.70% 5% 39.3% Philippines 17.85% 17.29% 18.77% Source: IMF (1998), “World Economic Outlook” Increase in savings rate is one of the factors that are crucial to the boost in a country’s economic growth. As depicted above, Malaysia’s substantial economic growth is also owing to a constant upsurge in its savings rate. A rise in saving rate lead to a rise in interest rate and therefore enhances business activity in a country, therefore the economic performance hikes. Inflation Rates (% of GDP) 1990 1993 1997 Malaysia 4.40% 3.57% 2.66% Philippines 18.70% 7.58% 5.01% Source: IMF (1998), “World Economic Outlook” High inflationary rates are associated with the deterioration of a country’s economy while a low rate of inflation leads to flourishing economic performance. Whenever inflation rate rises in a country, the lending capacity of lenders decline and thus the economic activity slows down. The importance of inflation rate in the economic performance of a country is depicted in the above chart where Malaysia has a much lower rate of inflation than Philippines, which is a vital factor underlying the differences in economic growth of both the countries i.e., a high growth rate in Malaysia and a lower one in Philippines. Foreign Exchange Reserves 1990 1993 1997 Malaysia 3.68 5.64 2.73 Philippines 0.75 2.59 1.79 Source: IMF (1998), “World Economic Outlook” Foreign exchange reserves also play an important role in the development of a country’s economy. An increase in the foreign exchange reserves of a country leads to the advancement of a country’s economic activities. Here again, Malaysia has a higher level of foreign exchange reserves than Philippines, leading to the betterment of its economic conditions. It shows that one of the reasons underlying the difference between both the countries’ economic growth is the quantity of foreign exchange reserves with each country. In our analysis, the more a country has foreign reserves, the more its economy grows. Net Export of Goods and Services (billion $) 1995 2000 2003 Malaysia -3.79 16.266 17.421 Philippines -10.839 2.756 -3 Source: APEC Energy Statistics 2003 The net export of goods and services refer to the amount of total exports minus the amount of total imports. A country’s trading activities are much closely related to its economic growth and GDP than any other factor. If the total exports exceed total imports, the net exports become positive and if the total imports exceed total exports, the net balance becomes negative. Therefore, the minus sign in the above figures implies a negative balance in net exports i.e., exports less than imports. Here, Malaysia had a negative net export balance before the crisis period but after the crisis its export trade grew rapidly reaching about 17 billions in the year 2003. On the other hand, Philippine’s economy was at the negative side pre-crisis and even the post-crisis period. It must also be noticed that increase in net exports leads to a rise in the country’s foreign exchange reserves. Foreign Exchange Rate 1995 2000 2003 Malaysia (MYR/USD) 2.5044 3.8000 3.8000 Philippines (PHP/USD) 25.7145 44.1923 54.2033 Source: APEC Energy Statistics 2003 The foreign exchange rate shows the power of a country’s currency to purchase a number another foreign currency. Here, the exchange rate has been determined in terms of the US dollars. As evident, Malaysian Ringgit is much stronger than that of the Philippines Peso in terms of US dollars. A country’s stronger and a stable foreign exchange rate indicates its solid economic condition and this suits best to Malaysia in our analysis. Philippines has had an increasing rate of exchange for over a decade, which shows its deteriorating economic position. Balance of Payment (USD billions) 1995 2000 2003 Malaysia -1.763 -1.009 10.181 Philippines 1.235 -0.376 -0.079 Source: APEC Energy Statistics 2003 The balance of payment shows the difference between a country’s total foreign receipts minus total foreign payments. If the difference comes to be positive, it means that the company has received more money though trade, aids, services etc than what it has paid to foreign countries. As the above chart indicates, Malaysia had a negative balance of payment in the pre-crisis period and soon jumped to a positive balance after then whereas Philippines has gone from positive balance pre-crisis to the negative balance post-crisis. It means that Philippines pays heavily to foreign countries more than what it receives, which has adverse bearing upon its economy. Conclusion Economic growth in the East Asian region over the last half-century has not been the same in all the countries of the region. The growth in economic performance of a country and the differences underlying the economic conditions of various countries in the region is owing to the factors affecting growth. In the same sense, the past (pre-crisis) and recent (post-crisis) economic boost as noticeable in Malaysia is not a matter of coincidence, rather it has been due to the fact that those factors responsible for economic growth prevail and flourish rapidly in the country as discussed throughout the essay. Malaysia has been one of those few countries in the region to be able to recover quickly from the East Asian crisis and thus has rapidly taken a tremendous development track. This has only been possible due to the prevalence of such economic and financial factors that enhance such a growth. On the contrary, the countries having a slower economic growth rate such as Philippines reveal the lagging of factors that undermine a country’s economic growth as has already been illustrated in the essay. References APEC Statistics (2003), Malaysia [Internet] accessed June 4, 2006 from http://www.ieej.or.jp/egeda/general/info/pdf/May.pdf APEC Statistics (2003), Philippines [Internet] accessed June 4, 2006 from http://www.ieej.or.jp/egeda/general/info/pdf/Phi.pdf Chenery, H. and Strout, A. (1966), “Foreign Assistance and Economic Development,” American Economic Review, Vol. 4, No. 1 Crafts, N. (1999), “East Asian Growth Before and After the Crisis”, International Monetary Fund :IMF Staff Papers, Vol. 46, No. 2 Huybens, Elisabeth, and Smith, Bruce, (1998), “Financial Market Frictions, Monetary Policy, and Capital Accumulation in a Small Open Economy”, Journal of Economic Theory, Vol. 81 International Monetary Fund (1998), World economic outlook. International Monetary Fund, Washington, DC Lasserre, P. and H. Schutte (1995), Strategies for Asia Pacific, London: MacMillan Business Press Ltd. Lucas, R.E., (1988), “On the Mechanic of Economic Development,” Journal of Monetary Economics, Vol. 22 Lynch, D. (1996), “Measuring Financial Sector Development: A Study Of Selected Asia-Pacific Countries”, The Developing Economies, Vol. XXXIV, No. 1 Mankiw, N.G., Romer D., Weil D.N., (1992), “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics, May Mckinnon, R. (1973), “Money and Capital in Economic Development”, Washington, D.C.: Brookings Institution North, D. (1987), “Institutions, Transactions Costs and Economic Growth,” Economic Inquiry, Vol. 25, No. 3 Park, K.H., (1998), “Distribution and Growth: Cross-country Evidence,” Applied Economics, Vol. 30 Patrick, H.T. (1966), “Financial Development and Economic Growth in Underdeveloped Countries”, Economic Development and Cultural Change, Vol. 14 Shaw, E. 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