GROWTH AND RESILIENCE IN EAST ASIA
AND THE IMPACT OF THE 2009 GLOBAL RECESSION
Lino Briguglio and Stephen Piccinino*
1. INTRODUCTION
This paper assesses whether and why the 2008-2009 global economic recession impacted East
Asia less than it did the USA and the EU. For this purpose, the paper utilizes a “growth with
resilience” (GWR) index,1 aimed at measuring the extent to which a country can absorb or
counteract external shocks and at the same time promote economic growth.
Although economic vulnerability is often associated with small states (Briguglio, 1995), the
recent global recession has shown that no country is really sheltered from external economic
shocks, and this has brought the challenge of economic resilience building to the forefront of
economic policy.
The two major economic centres of the World are currently the USA and the EU, but many
studies have predicted that this is moving to East Asia (e.g. Quad, 2011; Grether and Mathys,
2008). A study comparing the three major economic centres of the world in terms of growth and
resilience is therefore of interest.
The main findings of this paper are that the GWR index scores for East Asia were higher than
those of the EU and the USA, and this may therefore explain why the impact of the 2008-2009
global recession was milder on East Asia. The paper also shows that East Asia is a very
heterogeneous region as there are major differences between the countries’ economic, political
and social realities, more so than there are in the USA and the EU, and therefore the overall
picture applicable for East Asia may not apply to the individual countries.
This paper is organized as follows. Section 2, which follows this introduction, outlines the main
characteristics of the economies of ten East Asian countries and assesses the impact on the
global recession on these countries. Section 3 describes the methodology for computing the
GWR index while section 4 presents the results of index for the 10 East Asian countries,
comparing them with those of the USA and the EU. Section 5 rounds up the study with some
conclusions and implications.
2. THE EAST ASIAN ECONOMIES
(a) The Countries of East Asia
In this paper, East Asia refers to ten countries, six of which are members of the Association of
Southeast Asian Countries (ASEAN) 2, 3 and the remaining four are China, Hong Kong South
Korea and Taiwan.4 The population of East Asia, as defined in this paper is about 2 billion, of
which about 65% live in China alone (see Table 1).
*
Lino Briguglio is Professor of Economics at the University of Malta. Stephen Piccinino, researcher,
assisted in the writing of this paper. Contact details: Economics Department, University of Malta, Msida,
MSD 2080, Malta. Tel/Fax: +356 2124-0335, email: lino.briguglio@um.edu.mt. This paper was
completed on 30 September 2011.
1
Table 1
Characteristics of East Asian Countries
Country
Population
(2010 (Millions)
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
234.4
28.3
94.0
5.3
63.9
88.3
China, PR
Hong Kong
Korea
Taiwan
1,341.4
7.1
48.9
23.3
GDP
(2010 - Billion
US$)
GDP PC
2010- US$)
GDP growth
% (2004 to
2010)
ASEAN COUNTRIES
706.7
3,015
238.0
8,423
188.7
2,007
222.7
43,117
318.9
4,992
103.6
1,174
OTHER EAST ASIAN COUNTRIES
5,878.3
4,382
225.0
31,591
1,007.2
20,591
430.6
18,458
HDI
score
Political
Governanc
e scores
5.6
4.9
5.1
7.0
4.1
7.3
0.600
0.744
0.638
0.846
0.654
0.572
-0.45
-1.80
1.47
0.74
-0.24
-0.50
11.1
5.1
3.9
4.6
0.663
0.862
0.877
0.868
-0.50
1.61
-0.97
0.76
Sources: Columns 2 to 5 from the IMF World Economic Outlook (2011), Column 6 from the Human Development Report (2010),
with values ranging from 0 to 1, with higher values corresponding to higher degrees of human development. Column 7 is sourced
from Kaufman et al. “Aggregate Governance Indicators 1996-2009” (2011), with values ranging from -2.5 to 2.5, with higher
values corresponding to better governance outcomes. All data was accessed on 26 August 2011.
There have been major developments in East Asian countries during the past 20 years or so,
including a rapid process of foreign trade liberalization and, as a result, a high rate of foreign
direct investment (FDI).
Although there is extensive cooperation between East Asian countries, notably between the
members of the ASEAN, economic integration is not very deep. The ASEAN Free Trade
Agreement (AFTA) came into force in 1992. AFTA does not apply a common external tariff on
imported goods and each member is free to impose tariffs on goods entering from outside the
area. 5
Economic relations between ASEAN and the other five Asian countries covered by this study
are increasing and there are various preferential trade agreements (PTAs) in the region, with
different rules of origin and tariff arrangements.
(b) Major Divergences
The countries under consideration are very divergent, as there are marked differences in their
population, stages of development, religious belief,
political governance and social
development.
Table 1 shows some of these divergences. It can be seen that Singapore and Hong Kong, two of
the smallest members of the group in terms of population, have a relatively high GDP per capita
and HDI scores whereas the large countries (China, Indonesia and the Philippines) have
relatively lower GDP per capita and low HDI scores. The governance indicator point to very
divergent governance arrangements in these countries, with some having negative scores
according to the Kaufman et al. (2010) index.
The structures of these economies are also very divergent as can be seen from Table 2.
2
Table 2
Structure of the East Asian Economies
Structure of the Economy
Trade Openness
Country
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
China, PR
Hong Kong
Korea (South)
Taiwan
Agriculture
Industry
Services
%
EXP/GDP
ASEAN COUNTRIES
14.5
47.6
37.9
27.6
9.8
46.0
44.1
103.6
14.6
31.1
54.2
36.8
0.0
26.4
73.5
220.2
11.3
44.0
44.6
72.8
21.1
40.4
38.5
77.1
OTHER EAST ASIAN COUNTRIES
10.9
48.0
41.1
43.3
0.1
8.0
92.0
204.8
2.7
37.7
59.6
48.0
1.6
31.0
67.4
69.2
%
IMP/GDP
(X+M)/G
DP*2
25.0
81.9
37.1
196.5
65.7
91.9
26.3
92.7
37.0
208.3
69.2
84.5
33.7
195.2
46.6
61.9
38.5
200.0
47.3
65.5
Source: UNCTADStat, Available at: http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx (accessed 26 August 2011):
Agriculture that includes agriculture, hunting, forestry and fishing (it corresponds to ISIC Rev.3 divisions 01-05); (b) Industry that
includes mining and quarrying, manufacturing, electricity, gas and water supply, and construction (it corresponds to ISIC Rev.3
divisions 10-45); (c) Services that include all other economic activities (it corresponds to ISIC Rev.3 divisions 50-99).
The lower income countries, namely Vietnam, Indonesia and the Philippines depend highly on
agriculture and fishing, whereas higher income ones, including Singapore, Hong Kong and
Taiwan have very small agricultural sectors, with a relatively large services sector. With regard
to economic openness, the smaller countries, as expected, tend to be more international trade
oriented, with Singapore and Hong Kong heading the openness score.
(c) The Impact of the Global Recession on East Asia
The global economic downturn impacted the growth process in the region, and almost all
countries faced reduction in demand in 2009, resulting in a decline in real GDP or in growth
rates slower than those of previous years, as can be seen from Table 3. The table also presents
data for the EU and the USA. Countries that rely heavily on exports, such as Korea, Hong
Kong, Malaysia, Singapore, Taiwan and Thailand experienced a downturn. In contrast,
countries such as China, the Philippines and Indonesia, which rely to a lesser extent on exports
and imports, did not experience negative growth but they still went through a slowdown in 2009
when compared to previous years.
With regard to the Eurozone, the EU and the USA, the changes in real GDP in 2009 were
negative and, on average, the declines were higher than those pertaining to the 10 East Asian
countries taken together.
In order to assess the recovery following the global recession, we compared GDP (and GDP per
capita) between 2007 (the year before the impact) with 2010 (the year after the impact). This
indicator is shown in Table 4, suggesting that the East Asian countries recovered better in 2010
than the USA and the EU.
This paper argues that one reason for the EU’s and USA’s sharp fall in real GDP in 2009, and
the slower recovery in 2010, when compared to East Asia, can be explained in terms of the
lower degree of “growth with resilience” ingredients in the USA and EU.
3
Table 3
Growth Rates in GDP (%) in East Asia, the EU and the USA
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
China
Hong Kong
Korea
Taiwan
Region:
ASEAN 6
East Asia 4
East Asia 10
USA
Eurozone
European Union
2004-07
5.6
6.1
6.0
8.5
5.3
8.2
12.1
7.3
4.7
5.6
2009
4.6
-1.7
1.1
-0.8
-2.3
5.3
9.2
-2.7
0.2
-1.9
Difference
1.0
7.8
4.9
9.3
7.6
2.9
2.9
10.0
4.5
7.5
6.2
10.3
9.5
2.8
2.5
2.8
1.1
6.5
5.5
-2.6
-4.1
-4.2
5.1
3.8
4.0
5.4
6.6
7.0
Source: IMF World Economic Outlook. Note the growth rates for the ASEAN, East Asia, the EU and the EZ are weighted averages,
where the weights are the GDP of each country.
Table 4
Rate of Recovery: Growth Rates (%) in East Asia, the EU and the USA:
Percentage Difference between 2007 and 2010
Country:
Indonesia
Malaysia
Philippines
Singapore
Thailand
Viet Nam
China
Hong Kong
Korea
Taiwan
Region:
ASEAN 6
East Asia 4
East Asia 10
United States
Eurozone
European
GDP Per Capita
13.2
6.1
6.1
8.0
6.5
15.4
30.0
3.8
7.8
7.7
GDP
17.6
10.3
12.5
15.3
7.9
19.6
32.0
6.4
8.8
9.5
9.6
24.0
21.2
-2.5
-3.3
-3.1
13.9
25.8
23.6
0.13
-2.1
-2.1
Source: IMF World Economic Outlook. Note the growth rates for the ASEAN, East Asia, the EU and the EZ are weighted averages,
where the weights are the GDP of each country.
4
3. CONSTRUCTING A “GROWTH WITH RESILIENCE” INDEX
To construct the GWR index, this paper mostly draws on two studies, namely that authored by
Briguglio et al. (2006; 2009), and that authored by the Commission on Growth and
Development, (2008). 6
(a) The Economic Resilience Index
Briguglio et al. (2006) argued that the term economic resilience can be used in two senses
respectively relating to the ability of an economy to (i) recover quickly from harmful external
economic shocks; and (ii) withstand the effect of such shocks.
The ability of an economy to recover from the effects of adverse shocks will be severely limited
if, for example, there is a chronic tendency for large fiscal deficits. On the other hand, this
ability will be enhanced when policy tools can be utilised to counteract the effects of negative
shocks, such as in a situation of a strong fiscal position, which would entail that policymakers
can utilise discretionary expenditure or tax cuts to contrast the effects of negative shocks. This
type of resilience is therefore associated with ‘shock-counteraction.’
The ability to withstand shocks occurs when such shocks are neutered or rendered negligible.
This type of resilience is possible when the economy has mechanisms in place to reduce the
effects of shocks, which can be referred to as ‘shock absorption’. For example, the existence of
a flexible market could act as an instrument of shock absorption, as negative external demand
shocks affecting a particular sector of economic activity could be relatively easily met by
shifting resources to another sector enjoying stronger demand.
The authors have hypothesised that the variables that enable a country to build its economic
resilience are the following:
1. Economic factors: measured by macroeconomic stability and market efficiency;
2. Socio-political factors: measured by good political governance and social development.
(i) Macro-economic stability
According to Briguglio et al. (2006) macroeconomic stability is conducive to economic
resilience as it relates to the interaction between an economy’s aggregate demand and aggregate
supply. If aggregate expenditure in an economy moves in equilibrium with aggregate supply,
the economy would be characterised by internal balance, as manifested in a sustainable fiscal
position, low price inflation and an unemployment rate close to the natural rate, as well as by
external balance, as reflected by the level of government debt. These can be considered to be
variables which are highly influenced by economic policy. Briguglio et al. propose that the
macroeconomic stability component of resilience can be measured by three variables, namely (i)
the fiscal deficit-to-GDP ratio; (ii) the sum of the unemployment and inflation rates; and (iii) the
debt-to-GDP ratio.
Regarding fiscal deficit, Briguglio et al. argued that the government budget position is suitable
for inclusion in the resilience index because it is policy induced – in fact it is one of the main
tools available to government, and relates to resilience of a shock-counteracting nature. This is
because a healthy fiscal position would allow adjustments to taxation and expenditure policies
in the face of adverse shocks. The fiscal deficit, standardized as a ratio to GDP, is thus included
in the resilience index proposed in this study.
The inclusion of the misery index (inflation and unemployment) was justified on the grounds
that they are policy-induced. They are associated with resilience because if an economy already
has high levels of unemployment and inflation, it is likely that adverse shocks would impose
5
significant costs on it. If, on the other hand, the economy has low levels of inflation and
unemployment, then it can withstand adverse shocks to these variables without excessive
welfare costs. In this sense, therefore, unemployment and inflation are associated with resilience
of a shock-absorbing nature. The sum of these two variables, also known as the economic
discomfort index (or economic misery index), is thus included in the resilience index proposed
here.
Referring to external debit, Briguglio et al. argued that this may capture the adequacy of
external economic policy. Its relation to resilience was explained in terms of a country’s room
for maneuver. A country with a high level of external debt may find it more difficult to mobilize
resources in order to offset the effects of external shocks. Thus, this variable would indicate
resilience of a shock-counteracting nature.
In their 2009 version of the study, Briguglio et al recognized that that certain countries may
have external debt not because of a weak policy framework but because of highly developed
international financial activity. This is a weakness in the use of this indicator. However, the
inclusion of other variables related to market efficiency and governance would, to an extent,
“correct” this weakness, as these variables either exacerbate the effect of external debt in the
presence of a weak policy framework or counteract it otherwise.
The variables utilised by Briguglio et al. for the macroeconomic component of the resilience
index are measured as period averages across business cycles so as to eliminate the effects of
cyclical fluctuations and policies.
(ii) Market efficiency
Briguglio et al. (2006) further argued that if markets adjust rapidly to achieve equilibrium
following an external shock, the risk of being negatively affected by such a shock will be lower
than if market disequilibria persist. Indeed, with very slow or non-existent market adjustment,
resources will not be efficiently allocated in the economy, resulting in welfare costs, manifested,
for instance, in unemployed resources and waste or shortages in the goods markets. These
considerations have important implications for shock-absorbing resilience.
Following a search for suitable indicators, Briguglio et al. decided to use a component of the
Economic Freedom of the World Index (Gwartney and Lawson, 2005), entitled ‘regulation of
credit, labour and business’ which is aimed at measuring the extent to which markets operate
freely, competitively and efficiently across countries. The index is designed to identify the
effect of regulatory restraints and bureaucratic procedures on competition and the operation of
markets. Bureaucratic control of business activities tends to inhibit market efficiency as it limits
competition and the operation of markets. This occurs, for example, when such activities retard
entry into business or when prices are determined by dictat thereby discouraging private sector
involvement. These actions impede the adjustment market to absorb shocks.
Similar considerations apply in the case of the labour market. Here interference relates to
unduly high unemployment benefits (which could undermine the incentive to accept
employment), excessive restrictions in dismissal regulations, minimum wage impositions,
centralised wage setting and conscription. All these could preclude work effort, thereby limiting
the ability of a country to recover from adverse shocks.
(iii) Socio-political factors7
Briguglio et al. (2006) argue that good political governance is essential for an economic system
to function properly and hence to be resilient. Good governance is associated with issues such
as rule of law and property rights. Without mechanisms of this kind in place, it may be
relatively easy for adverse shocks to result in economic and social chaos and unrest. Hence the
6
effects of vulnerability to external shocks would be exacerbated. There are various indicators of
political governance, including that produced by the World Bank (Kaufmann et al., 2010) An
analysis of these indices would indicate that the highest rankings in terms of good governance
tend to be associated with economic success in terms of GNI per capita (Curmi, 2009).
Briguglio et al. (2006) also argued that social development indicates the extent to which
relations within a society are properly developed, enabling an effective functioning of the
economic apparatus without the hindrance of civil unrest. Social development can also indicate
the extent to which effective social dialogue takes place in an economy which, in turn, would
enable collaborative approaches towards the undertaking of corrective measures in the face of
adverse shocks. Briguglio et al. propose that the social development component of economic
resilience can be measured by education and health indicators utilised to construct the UNDP
Human Development Index (HDI).
(iv) The Singapore Paradox
Briguglio et al. (2006) referred to what they call the “Singapore Paradox” as a seeming
contradiction that a country can be highly exposed to exogenous shocks, rendering it
economically vulnerable, and yet still manage to attain high levels of GDP per capita. This is
explained in terms of the juxtaposition of economic vulnerability and economic resilience, on
which the authors proposed a methodological approach. In this approach, economic
vulnerability is ascribed to inherent conditions affecting a country’s exposure to exogenous
shocks, while economic resilience is associated with actions undertaken by policy-makers and
private economic agents that enable a country to withstand or recover from the negative effects
of shocks. On the basis of this approach, the authors identify four possible scenarios into which
countries may be placed according to their vulnerability and resilience characteristics. These
scenarios are termed best case, worst case, self-made and prodigal son.
The best-case category applies to countries that are not inherently vulnerable and which, at the
same time, adopt resilience-building policies. The worst-case category refers to countries that
compound the adverse effects of inherent high vulnerability by adopting policies that run
counter to economic resilience. Countries classified as self-made are those with a high degree of
inherent economic vulnerability, but which are economically resilient through the adoption of
appropriate policies that enable them to cope with or withstand the effects of their inherent
vulnerability. Countries falling within the prodigal son category are those with a relatively low
degree of inherent economic vulnerability but whose policies are deleterious to economic
resilience, thereby exposing them to the adverse effects of shocks. This method of defining
vulnerability in terms of inherent features and resilience in terms of policy-induced changes has
a number of advantages. First, the vulnerability index would refer to permanent (or quasipermanent) features over which a country can exercise practically no control and therefore
cannot be attributed to inadequate policies. In other words, countries scoring highly on the index
cannot be accused of inflicting vulnerability on themselves through misguided policy
approaches. Second, the resilience index would refer to what a country can do to mitigate or
exacerbate its inherent vulnerability.
(b) Factors Conducive to Economic Growth
In identifying a number of countries that attained high growth rates, and establishing the reasons
for their success, the Growth Commission (Commission on Growth and Development, 2008)
listed thirteen countries with an average growth rate of 7 percent or higher for 25 years during
the post-war period were studied. These were Botswana, Brazil, China, Hong Kong, China,
Indonesia, Japan, the Republic of Korea, Malaysia, Malta, Oman, Singapore, Taiwan and
Thailand. The findings of the Growth Commission present useful insights on the issue of
economic growth.
7
(i) Five key ingredients
In describing its findings, the Commission considered five key ingredients contributing to
sustained high levels of growth. These are:
1. economic openness, which enabled successful countries to import ideas, technology
and know-how from the rest of the world while at the same time exploiting global
demand; and which spurred inward FDI and investment by multinational companies
which in turn led to technological advance and the creation of export markets;
2. economic stability, which was found to encourage investment, and leave room for
manoeuvre when the economy is under pressure. Conversely, volatility and
unpredictability were found to discourage private sector development and discourage
savings;
3. high rates of saving and investment (including public investment in infrastructure).
The Commission noted that had a high degree of inflation prevailed in these
countries, wealth could have been redistributed from savers to debtors and would
have possibly discouraged people from holding financial assets. In some cases direct
measures to encourage or even enforce thrift were employed as in the case of
Singapore and Malaysia;
4. reliance on a market system to allocate resources, to provide price signals and
encourage competitive participation by the private sector. The Growth Commission
argued that even in China and Singapore, where the political role of the government
was very prominent, the administration was essentially laissez faire in the economic
(though not in the political) sphere. There were government interventions, such as
the provision of tax breaks, subsidized credit, direct lending and similar government
led initiatives, but generally speaking these measures were not restrictive – on the
contrary they often enhanced mobility in the factors of production, particularly
labour, leading to the destruction of jobs with low productivity while creating more
productive ones; and
5. Sound institutions, to define property rights, enforce contracts and encourage fair
trading. The Commission argued that the immaturity of these institutions is
synonymous with underdevelopment.
Growth also requires credibility and
commitment in governance.
The Growth Commission also put forward a list of bad ideas, which would inhibit economic
growth. These include subsidization of energy, artificial employment by the government,
solving fiscal deficits by cutting public spending that yields large social returns in the long run,
protecting inefficient firms, imposing price controls, ignoring environmental issues, neglecting
the quality of education, underpaying civil servants, poor regulation of the banking system,
excessive direct government control, and letting the exchange rate appreciate excessively before
the economy is ready for the transition towards higher-productivity industry.
The findings of the Growth Commission have substantial validity for the developing world. Of
the five considerations identified by the Growth Commission in building resilient growth, this
paper will a high rate of savings on which to draw funds for investment are important bases of
growth. Both these factors are policy-induced.
With regard to the relating between growth and savings, empirical evidence would seem to
suggest that there cannot be one without the other. There is some debate as to whether growth
generates savings or vice-versa (Mohan, 2006, Loayza, 2000) or whether developing countries
are different from developed ones in this regard (Aghion, et al, 2009). However, economic
growth requires investment and these can either come from private savings, or from government
sources, the latter derived from taxation, borrowing from local or foreign sources, or from
foreign aid.
8
The Growth Commission assigned major importance to the role of institutions and of
governance. It considered institutions as an important contributors to development. These
institutions are generally the result of a deliberate policy and the market cannot function
properly without them. Such institutions are important for defining property rights, enforcing
contracts and promoting fair trading. The Commission argued that in many developing
countries, the immaturity of these institutions is synonymous with underdevelopment.
The Commission argued that successful growth cases were characterized by credible and
committed governments with strong political leadership. One implication of the Commission’s
results was that such sustained growth sometimes occurred in countries governed by a singleparty government over a long period of time. However they did not argue that this was a
necessary condition, as in other cases, multiparty democracies “found ways to be patient and
maintain a consistent focus over time.”
(c) Juxtaposing Growth with Resilience
Combining the resilience index proposed by Briguglio et al. (2006) and the findings of the
Growth Commission (2008) it is possible to identify a number of economic traits or
“ingredients” that are likely to lead to “growth with resilience”, all of which can be associated
with good economic governance. These ingredients shall be used in this study to construct the
GWR index in order to compare the impact of the global recession on East Asia with that on the
USA and the EU.
The GWR index proposed in this paper has three components, namely
1. Market flexibility indicator
2. Macroeconomic stability indicator
3. Bases of growth indicator
The “market flexibility” component was introduced in the index on the assumption that markets
which operate well permit a country to better absorb external shocks, and therefore be more
resilient, as explained above, with reference to Briguglio et al (2006).
The “macroeconomic stability” component indicates the extent to which an economy can
manoeuvre if it is hit by an external shock. The raison d’etre for including the stability
component has been explained in Briguglio et al(2006) as indicated above.
The “bases of growth” indicator has two sub-components, namely national savings (and by
implication investment) as a percentage of GDP and sound institutions, both of which were
given major importance by the Growth Commission (2008). 8 Savings and investment may be
considered as an indicator of the extent to which resources are assigned for economic growth.9
The “Institutions” component was introduced because economic growth requires sound and
credible economic management, as explained above with regard to the Growth Commission
report.
These flexibility, stability and bases of growth indicators are summarised in Figure 1, which
shows the basic arguments underpinning each indicator
9
Figure 1
The Growth with Resilience Pyramid
GROWTH WITH
RESILIENCE
Growth
Resilience
Resources needed for growth
and
credible economic management
Room for manoeuvre
and
flexibility in use of resources
Investment expenditure
and
good institutions
Macroeconomic stability
and
market efficiency
These flexibility, stability and bases of growth indicators will be used to assess the degree of
“growth with resilience” of 10 East Asian countries and compare them with the USA and the
EU.
4. GROWTH WITH RESILIENCE IN EAST ASIA, THE EU AND THE USA
The GWR index proposed in this study is computed from data derived from three main sources,
namely the IMF World Economic Outlook (IMF, 2011), the Freedom of the World Index
(Gwartney et al., 2010) and the World Competitiveness Report (World Economic Forum, 2008;
2009; 2010).
(a) The Growth with Resilience Index
As already indicated, the GWR index developed in this paper draws on the index proposed in
Briguglio et al(2006) to which a component related to bases of growth has been added, drawing
on the arguments of the Growth Commission (2008). The components of the index are shown in
Table 5. The reasons why these indicators were selected have been explained earlier. Appendix
1 presents the data and gives more information about the sources.
Table 5
The Components of the Growth with Resilience Index
Flexibility*
●
●
●
●
Credit market regulations
Labour market regulations
Product market regulations
Soundness of Banks
Source: Gwartney et al. (2010) and World
Economic Forum (2010)
Stability
●
●
●
●
Sources of Growth
Inflation
Unemployment rate
Government deficit/GDP
Gross government debt/GDP
Source: IMF (2011)
● Investment/GDP
● Institutions**
Source: IMF (2011) and World
Economic Forum (2010)
* Appendix 2 presents information as to how the “Flexibility” component was measured.
** Appendix 3 presents information as to how the “Institutions” sub-component was measured
10
(i) Rescaling the Data
The data was standardized (or rescaled) using the following formula so as to enable summation
and averaging of the three components:
XSi = (Xi – Xmin)/(Xmax – Xmin)
Where:
XSi is the standardized observation in an array of observations of a given variable;
Xi is the actual observation in an array of observations of a given variable;
Xmax is the maximum-valued observation in an array of observations of a given variable;
Xmin is the minimum-valued observation in an array of observations of a given variable.
It can be shown that XS will take a value of between 0 and 1.
(ii) Weighting
It was decided to assign equal weights (0.333) to each of the three main components. 10 The
issue of weights is very contentious, and has been discussed at length in various studies (see
Farrugia, 2008). In practice, authors of composite indices either use equal weights, as in the case
of this study, or else put forward ad hoc arguments to justify unequal weights. Is should
therefore be stated here that alternative weightings might have produced results which are
different from those produced in this study.
What follows is a summary of the results.
(b) The “Market Flexibility” Component
The “market flexibility” component has two sub-components, namely one which measures the
extent to which markets operate efficiently and the other relates to soundness of the banking
system.
An explanation as to why the “soundness of the banking system” component has been included
alongside a market efficiency component is warranted at this juncture. The market efficiency
index emphasizes the importance of freely and properly operating markets for allocative
efficiency and, hence, relates to the ability of an economy to reallocate resources quickly and
effectively following an economic shock. Briguglio et al. (2009) argue that this fundamentally
neo-liberal approach is should be balanced by an emphasis on soundness of the banking system.
Thus, the GWR index proposed here views free markets and a framework of financial bank
prudence as two essential aspects of a properly working market.
The results, shown in Table 6, indicate that in East Asia, Hong Kong has the most efficient
market, followed by Singapore, Malaysia and Thailand, in that order. The USA is also
characterized by a highly efficient market but this is weighted down by lack of soundness of the
banks. The EU suffers from various market inefficiencies. A closer look at the index suggests
that the market inefficiencies in Europe stem mostly from labour market regulations
(particularly those relating to hiring and firing) and bureaucracy costs.
11
Table 6
Standardised Scores of the “Market Flexibility” Component*
Country
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
China
Hong Kong
Korea, South
Taiwan
Regions:
ASEAN 6
East Asia 4
East Asia 10
United States
Eurozone
EU
Market
Soundness
Regulations of Banks
Average
Rank
0.387
0.722
0.526
0.936
0.688
0.447
0.000
1.000
0.470
0.489
0.150
0.650
0.600
0.950
0.650
0.150
0.450
1.000
0.150
0.450
0.269
0.686
0.563
0.943
0.669
0.298
0.225
1.000
0.310
0.470
9
3
5
2
4
8
10
1
7
6
0.584
0.145
0.229
0.797
0.537
0.588
0.473
0.422
0.431
0.000
0.310
0.216
0.528
0.283
0.330
0.398
0.423
0.402
1
6
5
4
2
3
*The raw data is presented in Appendix 1. Higher scores represent a higher of flexibility
China has the lowest score in terms of market efficiency, ranking last among all countries. The
main reason for this relates to the ownership of banks, the presence of conscription and price
controls. At the same time, confidence on the banks is not as low as it is in the USA and the EU.
(c) The “Macroeconomic Stability” Component
The “macroeconomic stability” component has four sub-components, namely inflation,
unemployment, government deficit and gross public debt. 11 The reason why these were
introduced was explained above, but basically they indicate the extent to which an economy can
manoeuvre if it is hit by an external shock.12 It should be noted that the data for the
macroeconomic component was averaged over an eight-year period (2001-2008), to eliminate
changes relating to the business cycle.
The stability scores of the GWR Index are shown in Table 7. Each sub-component was assigned
equal weights.
The results indicate that Hong Kong, China and Taiwan and Korea were the most stable
economies, with Indonesia, the Philippines and Vietnam being relatively more unstable. The
Eurozone exhibited more instability than East Asia, considered collectively.
12
Table 7
Standardised Scores “Macroeconomic Stability” Component*
Country
Inflation
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
China
Hong Kong
Korea
Taiwan
0.000
0.754
0.410
0.847
0.700
0.178
0.765
1.000
0.668
0.895
Government
Deficit/GDP
0.597
0.302
0.576
1.000
0.628
0.000
0.526
0.492
0.786
0.602
Government Unemploy –
Average
Debt/GDP
ment Rate
0.446
0.067
0.277
0.545
0.821
0.606
0.359
0.000
0.336
0.000
0.882
0.682
0.505
1.000
0.708
0.597
0.576
0.338
0.822
0.742
0.714
1.000
0.546
0.760
0.753
0.811
0.754
0.658
0.700
0.714
Regions:
0.410
0.410
0.413
0.483
0.429
ASEAN 6
0.767
0.572
0.806
0.743
0.722
East Asia 4
0.699
0.572
0.731
0.693
0.674
East Asia 10
0.550
0.716
0.539
0.353
0.591
USA
0.765
0.424
0.276
0.227
0.423
Eurozone
0.754
0.427
0.349
0.277
0.452
EU
*The raw data is presented in Appendix 1. Higher scores represent a higher degree of stability
Rank
10
7
9
6
5
8
3
1
2
4
5
1
2
3
6
4
(d) The “Bases of growth” Component
The “bases of growth” component is shown in Table 8. It has two sub-components namely the
national savings to GDP ratio and an institutions indicator. It can be seen that the East Asian
countries of China, Singapore, Hong Kong and Vietnam are characterized by relatively high
scores, whereas Indonesia and the Philippines have relatively low scores in this regard. The EU
and the USA have lower scores than East Asia in general, with the USA exhibiting the lowest
scores.
Table 8
Standardized Scores of the “Sources of Growth” Component*
Countries
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
China
Hong Kong
Korea (South)
Taiwan
Regions
ASEAN 6
East Asia 4
East Asia 10
USA
Eurozone
EU
Savings/GDP Institutions Average
0.383
0.281
0.332
0.632
0.495
0.564
0.099
0.000
0.050
0.836
1.000
0.918
0.554
0.271
0.413
0.436
0.221
0.329
1.000
0.411
0.706
0.544
0.866
0.705
0.453
0.281
0.367
0.518
0.562
0.540
0.481
0.863
0.790
0.000
0.208
0.177
0.368
0.417
0.408
0.512
0.564
0.585
0.425
0.640
0.599
0.256
0.386
0.381
Rank
8
4
10
1
6
9
2
3
7
5
3
1
2
6
4
5
*The raw data is presented in Appendix 1. Higher scores represent higher degree of sources of growth
13
(e) The Growth with Resilience Scores
Table 9 presents the average of the three components of the GWR index, namely (1) market
flexibility (ii) macroeconomic stability and (iii) bases of growth. It can be seen the most
countries with the highest scores are Hong Kong, Singapore, Thailand and Malaysia, whereas
those with the lowest scores are Indonesia and the Philippines.
Table 9
The Growth with Resilience Index
Country:
Indonesia
Malaysia
Philippines
Singapore
Thailand
Viet Nam
China
Hong Kong
Korea
Taiwan
Region:
ASEAN 6
East Asia 4
East Asia 10
USA
Eurozone
EU
Total Score
0.292
0.618
0.316
0.847
0.596
0.321
0.548
0.821
0.477
0.574
Rank
10
3
9
1
4
8
6
2
7
5
0.474
0.548
0.534
0.401
0.410
0.411
3
1
2
6
5
4
Now the four high-GWR countries were highly impacted by the global recession (see Table 3)
and registered relatively high declines in real GDP in 2009, while the two low-GWR countries
did not even register a fall in GDP in 2009, although they were still impacted by the global
recession. The question arises, therefore, as to how come the former have relatively high GWR
scores whereas the latter have relatively low GWR scores. The answer to this seeming
contradiction is that whereas Honk Kong, Singapore, Thailand and Malaysia are highly exportoriented and therefore very open economies, Indonesia and the Philippines are more
domestically oriented. 13
When looking at the regional scores of the index, it can be seen that East Asia, as a region,
registered higher scores than the USA and the EU. This may explain why the East Asian region
may not have been as harmed as the USA and the EU by the financial crises and the ensuing
recession.
5. CONCLUSION
This paper has constructed a growth with resilience (GWR) index, based on three components
namely market flexibility, macroeconomic stability and bases of growth, and used this index to
compare East Asia with the EU and the USA.
14
The main findings of this paper are that the score on the GWR index for East Asia, as a region,
were higher than that of the EU and the USA, and this may therefore explain why the impact of
the 2008-2009 global recession was milder on East Asia.
The study also showed that East Asia is a very heterogeneous area as there are major differences
between the countries’ economic, political and social realities, possibly more so than there are in
the USA and the EU, and therefore the East Asia average should be interpreted with some
caution. As a matter of fact, the Philippines and Indonesia in East Asia registered lower GWR
scores than the EU and the USA.
The main policy implication of this study is that the pursuit of macroeconomic stability and
market flexibility would enable countries to better withstand external shocks. This ability would
be reinforced by high rates of savings and investment and appropriate institutions conducive to
economic growth.
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http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf .
15
APPENDICES
APPENDIX 1: THE DATA
Data for the “Macroeconomic Stability” Component
Consumer
Government
Price
Deficit/GDP
Changes
(%)
(%)
Asian Countries: Data Rank Data Rank
Indonesia
9.44 10
-0.25
5
Malaysia
2.47
5
-4.40
9
Philippines
5.65
8
-0.56
4
Singapore
1.62
3
5.41
1
Thailand
2.97
6
0.18
3
Vietnam
7.79
9
-8.65
10
China
2.37
4
-1.25
7
Hong-Kong
0.20
1
-1.73
8
Korea
3.27
7
2.40
2
Taiwan
1.17
2
-0.19
4
Regions
ASEAN 6
5.65
6
-0.59
1
East Asia 4
2.36
1
-0.61
3
East Asia 10
2.99
5
-0.61
2
USA
2.83
4
-1.07
4
Eurozone
2.38
2
-2.68
6
EU
2.48
3
-2.65
5
Government
Unemploymen
Debt/GDP
t Rate (%)
(%)
Data Rank
52.65
8
43.54
6
60.63
9
93.61
10
47.21
7
38.79
5
18.10
2
1.76
1
24.48
3
33.20
4
Data Rank
9.45
9
3.44
3
9.98
10
2.95
2
2.02
1
5.39
7
4.08
5
5.63
8
3.52
4
4.41
6
55.68
19.55
26.45
61.23
68.25
61.53
6.13
4.06
4.46
5.27
8.17
7.78
3
1
2
4
6
5
4
1
2
3
6
5
Source: IMF, World Economic Outlook
http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx, accessed on 26 August 2011. Data is
an average for 2001-2008. Note: In this and the following tables, the scores for ASEAN, East Asia 4 , East
Asia 10, the EU and the EZ are weighted averages, where the weights are the GDP of the respective
countries forming part of these groupings.
16
Data for the “Market Efficiency” Component
Asian Countries:
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
China
Hong Kong
Korea, South
Taiwan
Regions:
ASEAN 6
East Asia 4
East Asia 10
USA
Eurozone
EU
Market Regulation
(Score 0-10)
Data
Rank
6.08
9
7.55
3
6.69
5
8.50
2
7.41
4
6.34
8
4.37
10
8.78
1
6.44
7
6.53
6
6.95
5.01
5.38
7.89
6.74
6.97
3
6
5
1
4
2
Soundness of Banks
(score 1-7)
Data
Rank
4.7
8
5.7
3
5.6
5
6.3
2
5.7
3
4.7
8
5.3
6
6.4
1
4.7
8
5.3
6
5.3
5.2
5.3
4.4
5.0
4.8
1
3
2
6
4
5
Source: The “Market Regulations” data was sourced from Economic Freedom of the World 2010 Annual
Report, available at: http://www.freetheworld.com/2010/reports/world/EFW2010_BOOK.pdf accessed on
26 August 2011. It pertains to 2008. The score on the Economic Freedom of the World ranges from 0 to
10, with higher scores indicating greater economic freedom. The “Soundness of Banks” data was sourced
from the Global Competitiveness Report 2010-2011, Geneva: World Economic Forum, available at:
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf , accessed on 26
August 2011. The score on this index ranges from 1 to 7, with higher scores indicating greater soundness.
The “Soundness of Banks” data was sourced from the Global Competitiveness Report 2010-2011,
Geneva: World Economic Forum, available at:
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf accessed on 26
August 2011.
17
Data for the “Sources of Growth” Component
Asian Countries:
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
China
Hong Kong
Korea
Taiwan
Regions:
ASEAN 6
East Asia 4
East Asia 10
USA
Eurozone
EU
Investment
as % of GDP
Data
Rank
24.34
5
22.57
7
16.80
10
23.76
6
26.42
4
35.57
2
40.51
1
22.56
8
29.85
3
22.04
9
Institutions
(score 1-7)
Data
Rank
3.98
6
4.62
4
3.14
10
6.13
1
3.95
8
3.80
9
4.37
5
5.73
2
3.98
6
4.82
3
24.23
36.90
34.48
19.53
21.30
20.79
4.24
4.39
4.36
4.67
4.83
4.89
3
1
2
6
4
5
11
4
5
3
2
1
Sources: The “Savings” and “Investment” data was sourced from IMF, World Economic Outlook
http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx, accessed on 26 August 2011.
The “Institutions” data was sourced from the Global Competitiveness Report 2010-2011, Geneva: World
Economic Forum, available at:
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf , accessed on 26
August 2011
18
APPENDIX 2: COMPONENTS OF THE MARKET FLEXIBILITY COMPONENT
Market Regulations*
The Market Regulations Index produced by Gwartney at al (2010) as part of the Freedom of the World
Index, contains the three main headings, namely (a) credit market regulations, (b) labour market
regulations and (c) product market regulations. Each heading has a number of components as follows:
1. Credit Market Regulations:
- ownership of banks;
- foreign bank competition;
- private sector credit;
- interest rate controls.
2. Labour Market Regulations:
- hiring regulations and minimum wage;
- hiring and firing regulations;
- centralized collective bargaining;
- hours regulations;
- mandated cost of worker dismissal; conscription
3. Business Regulations:
- price controls;
- administrative requirements;
- bureaucracy costs;
- starting a business;
- extra payments / bribes;
- licensing restrictions;
- cost of tax compliance.
Source: Economic Freedom of the World 2010 Annual Report, available at:
http://www.freetheworld.com/2010/reports/world/EFW2010_BOOK.pdf.
Soundness of Banks
The “soundness of banks” index developed by the World Economic Forum as part of the 8th pillar
“Financial market development” of the Global Competitiveness Index .The index was developed as a
response from experts to the following question: “How would you assess the soundness of banks in your
country? [1 = insolvent and may require a government bailout; 7 = generally healthy with sound balance
sheets].
Source: World Economic Forum (2010). The Global Competitiveness Report 2010-2011, Geneva:
World Economic Forum, available at:
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf .
* The data used in the GWR index pertains to 2008. However, the results would not change significantly
if a chain-linked index over 9 years (since 2000) was to be used as the scores were very similar. However,
the chain-linked index produced by Gwartney et. al. (2010) does not cover all the countries and it was
decided to use the 2008 scores only
19
APPENDIX 3: INSTITUTIONS
The “Institutions” index, developed by the World Economic Forum as the first pillar of the Global
Competitiveness Index (with a weight of 15% of the GCI) is very wide-ranging in its coverage , and
relates to public and private institutions (the former being weight 3 times as much as the latter). The
components of the institutions index are shown below:
A. Public institutions
1. Property rights
- Property rights
- Intellectual property protection
2. Ethics and corruption
- Diversion of public funds
- Public trust of politicians
- Irregular payments and bribes
3. Undue influence
- Judicial independence
- Favouritism in decisions of government officials
4. Government inefficiency
- Wastefulness of government spending
- Burden of government regulation
- Efficiency of legal framework in settling disputes
- Efficiency of legal framework in challenging regulations
- Transparency of government policymaking
5. Security
- Business costs of terrorism
- Business costs of crime and violence
- Organised crime
- Reliability of police services
B. Private institutions
1. Corporate ethics
- Ethical behavior of firms
2. Accountability
- Strength of auditing and reporting standards
- Efficacy of corporate boards
- Protection of minority shareholders’ interests
- Strength of investor protection
Source: World Economic Forum (2010). The Global Competitiveness Report 2010-2011, Geneva:
World Economic Forum, available at:
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf .
20
APPENDIX 4: THE WEIGHTING SCHEME
Component
Markets (Flexibility)
Credit market regulations
Labour market regulations
Product market regulations
Soundness of Banks
Stability (Room for Manoeuvre)
Inflation
Unemployment rate
Government deficit/GDP
Government gross debt/GDP
Current acc. balance/GDP
Sources of Growth
Investment/GDP
Institutions
21
Weight
33.3%
5.55%
5.55%
5.55%
16.65%
33.3%
6.66%
6.66%
6.66%
6.66%
6.66%
33.3%
16.65%
16.65%
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
ENDNOTES
“Growth with resilience” is the sixth among nine pillars of work pursued by the G20
Development Working Group. This pillar was identified at the G20 Seoul Summit in 2009.
http://www.economicsummits.info/2010/11/seoul-summit-annex-2-g20-action-plan-ondevelopment.
The members of the ASEAN are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myamnar,
Philippines, Singapore, Thailand and Vietnam; Information about ASEAN is available at:
http://www.asean.org/.
In what follows, Brunei, Cambodia, Myanmar and Laos will not be included in the analysis, as
there was missing data for the construction of the GWR Index.
The term ASEAN Plus Three (APT) is often used to refer to the forum that functions as a
coordinator of cooperation between the ASEAN, China, Japan and South Korea. The two other
economies considered in this paper, namely Hong Kong and Taiwan, have developed
economically in a different way from China, though, as is well known, Hong Kong is considered
as a special administrative region of China and the status of Taiwan is contested due to complex
political and legal issues originating during the Chinese Civil War, in the late 1940s.
However, for goods originating within ASEAN (in line with specified rules of origin) there is a
Common Effective Preferential Tariff (CEPT) among member states, with the exception of
Cambodia, Laos, Myanmar and Vietnam, where the application of CEPT has been delayed.
The Commission was chaired by Michael Spence, and consisted of 22 leaders and policy-makers
mostly from developing countries, academics and influential business persons.
It should be noted that the GWR index constructed in this paper does not have separate “good
governance” and “social” components. However the “institutions” and the “soundness of banks”
indicator which are used for the GWR index, is likely to capture these factors.
It should be noted that the “openness” indicator identified by the Growth Commission (2008) as
an ingredient of economic growth shall not be used in the GWR index, developed in the present
study. In the opinion of the present authors, a high degree of openness is not a policy-induced
variable, but is an inherent characteristic of small states. It is essentially an indicator of economic
vulnerability rather than resilience. However, the possible policy-induced factors associated with
openness, identified by the Growth Commission, are probably captured in the “institutions”
indicator introduced in the GWR index. It should be noted also that the “socio-political”
components proposed by Briguglio et al.(2006) will not be utilised in the GWR index, and are
being replaced by the “Institutions” and the “Soundness of banks” components.
When savings as a ratio of GDP was replaced by investment as a ratio of GDP the results did not
change significantly.
Appendix 4 presents more information about the weightings of the sub-components of the three
main components.
Net debt may also be considered as an indicator of indebtedness. However the concept of net
debt ushers in a number of problems. First of all data on net debt across countries is often not
available. In addition there are conceptual problems associated with the choice of assets to
consider when differentiating between gross and net debt. Moreover, governments need to
refinance their gross debt, and therefore gross debt may really matter when one considers
government insolvency.
The current account balances indicator could be added as this may be considered to be a pointer
of the extent to which domestic demand outpaces supply – another cause of instability. The
current account deficit is related to the difference between savings and investment and it was
decided to leave it out so as not to assign excessive weight to the growth resources component.
However if the current account deficit is introduced with equal weighting as the other instability
components, the results would not have changed markedly.
As a matter of fact, a regression relationship between the recession impact on East Asian
countries, as calculated in Table 3 and export dependence, as calculated in Table 2 shows a
highly correlated and statistically significant relationship between the two variables.
22