viability of export-driven economy????

The recent issue of The Economist discusses the feasibility of the export driven South east Asian economy.

…South-East Asia's economic performance tend to revolve around trade. A double-digit surge in exports helped to lift the region's growth to 6.3% last year. This year, a slowdown in exports, along with a bigger bill for oil imports, will cut growth to 5% or so. Economists hope that growing demand for electronic components and other exports will put growth on a rising path once more next year. But one thing is clear: “The region remains export-driven.�

It was not supposed to be this way….the Asian crisis of 1997, when plunging currencies, free-falling asset prices and bankrupt banks had brought regional economies to a standstill, various national leaders—most notably Thaksin Shinawatra of Thailand—declared that South-East Asia should not look solely to exports to resuscitate its economic fortunes. Instead, Mr Thaksin argued, governments should try to revive domestic consumption, which would help insulate the region from the vagaries of the world economy….attempted to put this theory into practice by suspending farmers' debts, instituting cheap universal health care and handing out loans to villagers, small businesses and home-buyers….began subsidising all manner of goods, from computers to cows, to increase Thais' spending power…“the grassroots economy�…

…Jesus Felipe of the Asian Development Bank…recently published a study showing that the economies of various Asian countries performed best, naturally enough, when both exports and domestic demand were buoyant. Last year, for example, domestic consumption and investment grew in tandem with exports in much of South-East Asia, propelling the region to its fastest growth since the crisis…he argues that domestic demand tends to grow incrementally, in line with the economy as a whole. His study found that from 1993 to 2003, exports grew more than three times faster than consumption in Thailand, and accounted for over 70% of economic growth. This trend continued after Mr Thaksin came to power in 2001 and began implementing his policies designed to boost domestic demand.

The only country in Mr Felipe's study where exports did not make a significant contribution to growth was the Philippines, where almost all growth was attributable to domestic demand. But this is a sign of the Philippines' economic weakness, rather than strength. Consumer spending in the Philippines is particularly robust thanks to the billions of dollars of remittances that Filipinos working overseas send home to their families. But those workers are overseas in the first place only because the Philippine economy does not grow fast enough to provide jobs for them.

…in South-East Asia, the richer the country, the higher the share of exports in the economy….. exports as a share of output are still rising steadily throughout the region (see chart), despite all the rhetoric about boosting the domestic sector. In the region's richest country, Singapore, they reached 168% of GDP last year. (Exports can be more than 100% of GDP because most of the components used to produce them are imported.) Net exports doubled their share of output in East Asia's richest countries between 1993 and 2003, from 5% to 10%.

….Thailand sells both manufactured goods (cars) and agricultural ones (rice) to both rich countries (America and Japan) and poor ones (the other members of the Association of South-East Asian Nations). Much the same applies in the rest of the region. Malaysia exports palm oil as well as electronic components; the Philippines computer chips and fruit, and so on. Booming China is the region's fastest-growing export market.

Consumption, meanwhile, has faltered throughout South-East Asia in the face of rising fuel prices, which have fed inflation and prompted higher interest rates. Drought and bird flu have taken a toll on farming. Last year's tsunami and the recent terrorist attack in Bali have dented tourism. Governments have cut back spending, trying to balance their budgets. Consumer confidence in Thailand, for one, fell to its lowest level in three years in August. If oil prices started falling, and inflation and interest rates with them, consumption would doubtless improve. But that would also give the world economy a shot in the arm, and boost exports even more.

The question that emanates from the discussion is whether Asian countries can, today, generate enough domestic demand-led growth so as to shift from export growth. And, does this demand process require an active role of the government?