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ICT and Economic Growth in Asia

by Sailesh K. Jha

Exports have been one of the key drivers of economic growth in several Asian DMCs in the 1990s. During this period the composition of exports, in value terms, has become more concentrated in Information, Communications, and Technology (ICT) products. As a result, countries such as Korea, Malaysia, Philippines, Singapore, Taipei-China, and Thailand benefited from the global ICT capital spending boom of 1990-1995, in terms of strong real GDP growth. Symmetrically as global demand for these products slowed in 1996-1998, along with other country specific and regional factors, growth slowed during this period in these countries, only to pick up once again in 1999 as demand began to recover. In 2001 as the global economy slowed, demand for ICT products slowed once again. In the short to medium term, the policy concern is whether the ICT export dependent economies can continue to rely on these narrow product lines for boosting their real GDP growth performance.

Asia’s ICT Exports

The Table shows that there is a significant difference in nominal export shares of ICT products in comparison to their counterpart in real terms. Hence, a distorted view of exposure to ICT exports would emerge if nominal values were taken as the benchmark. For example in Singapore, the nominal share of ICT exports to nominal GDP stood at 80.69 per cent in contrast to the corresponding figure in real terms at 129.20 per cent in 1999. It can be argued that 1999 was a boom year globally for ICT product demand, however data from earlier years also suggests the under representation of ICT exports as a share of GDP when nominal figures are utilized. This finding holds for all the other countries in the sample used in the study. The extent of the actual downturn in GDP growth in 2001 (which was much more severe) in comparison to the forecasts made for these countries in the first half of 2001 may be partially due to the use of nominal ICT export figures. The divergence results from the difference in movements of ICT export prices versus overall prices of exports of goods and services. On average, the findings suggest export prices of ICT products have been falling since the mid 1990s, while that of all goods and services has been quite volatile and no trend is observable. The most highly exposed economy to ICT exports is Singapore, followed by Malaysia, Taiwan, Korea, Thailand, and Philippines. This is consistent with the weak GDP growth performance observed for Singapore, Malaysia, and Taipei-China which ranged from –2 to 0.4 per cent in 2001. While in Korea, Philippines, and Thailand GDP growth ranged from 1.5 to 3.4 per cent in 2001.

To further illustrate the reason (partially) for the divergence in 2001 GDP growth performance across the countries, the contribution of real exports of ICT products to GDP growth is calculated. In Korea, ICT exports contribution to GDP growth historically has been significantly lower in comparison to Singapore, Malaysia, and Taipei-China since exposure as a percentage of real GDP, as mentioned above, has also been lower in comparison. The case of Thailand is interesting since its exposure is similar to that of Korea, however GDP growth in 1999 and 2000 (which were boom years for global ICT product demand) was relatively subdued. Structural factors (related to reforms) and domestic demand conditions may partially explain the divergence in growth performance. However, it may also be that the value added of ICT exports is low in comparison to Korea, partially due to the high import content of exports and the assembly type of products being shipped from Thailand. For the Philippines, this line of reasoning is supported by the evidence presented below for explaining the subdued GDP growth performance in 1999 and 2000, in addition to its relatively lower exposure to ICT exports. However, for Thailand, the common perception that ICT exports are mainly assembly type goods is not supported by the evidence.

Asia’s Comparative Advantage

In terms of comparative advantage, the calculations show that countries, including the PRC, as a whole are relatively more specialized in the manufacture of ICT products as opposed to the common perception that the region has a comparative advantage in mainly assembly operations. This masks intraregional differences in comparative advantage between manufacturing versus assembly type operations.

Korea, Malaysia, Taipei-China and Thailand specialize in primarily manufacturing type operations. In the case of Korea, Malaysia, and Taipei-China their comparative advantage has increased in the exports of PC and office equipment over the last five years, while in other categories such as telecommunications and electrical machinery and components the trend has been on the decline. In Thailand, not much in the way of changes in comparative advantage have taken place across the three product lines until now.

The anomaly is Singapore, where it was ex-ante expected that it would have a strong comparative advantage in final goods production, given its high skill base and involvement in research and development activities, but our calculations show that it has only a mild comparative advantage. It is also of concern that Singapore has been losing comparative advantage across all three product lines.

The Philippines has been moving more towards assembly type operations in the ICT sector, specializing in PC and office equipment and exports of components.

In PRC, the evidence is inconclusive in determining whether specialization is in final goods or assembly type operations. The calculations do suggest that the PRC has been gaining quite rapidly in the production of final ICT goods in the form of PC and office equipment, and telecommunications and sound recording equipment over the last five years.

Asia’s ICT and Growth

There is substantial variance across major Asian economies in terms of the ICT export sector’s ability to serve as a primary engine of growth in the short to medium term. In the case of Korea, Malaysia, and TaipeiChina, which specialize in exports of PC and office equipment, prospects for the ICT export growth remain favorable since comparative advantage has been rising within this product line and mainly in high value added final goods production. The boost to GDP growth will be relatively larger in Malaysia and Taipei-China since their ICT exports to GDP ratio is higher than Korea’s. For Thailand, historically the ICT export sector has not provided much of a boost to GDP growth, even though its exposure to the sector is comparable to that of Korea, although concentrated in electrical machinery and components production. Further research is needed to address this dichotomy between Korea and Thailand. For Singapore, medium to long term prospects for the ICT sector are quite precarious since comparative advantage has been on the decline across product lines. The Singapore government’s new Economic Advisory Committee is in the process of addressing competitive related issues for the island economy, which includes examining future prospects of the ICT sector. For the Philippines, the threat from the PRC and low labor cost economies such as Vietnam is formidable since it engages in mainly assembly type production.

Lastly, the perceived threat from the PRC in terms of its ICT exports out competing Southeast Asia is credible for some countries. For countries such as Malaysia, Thailand, and Singapore which export a substantial amount of final ICT products, the competition from the PRC is severe since the evidence suggest that the PRC is gaining comparative advantage in goods production such as PC and Office equipment. For the Philippines, there may be some positive spillovers from the PRC in the area of PC manufactures. The PRC does not have a comparative advantage in exports of parts and components, while the Philippines does. As PRC PC exports rise, the demand for parts and components will also pick up, which will boost Philippine ICT exports.

Sailesh K. Jha is an Economist with the Macroeconomics and Finance Research Division, Economics and Research Department, Asian Development Bank (www.adb.org). This article is based on his 2002 study ‘ICT Export Prices and Volumes in Select Asian DMCs: Time Series Evidence and Implications for Economic Growth’. The views expressed are those of the author and should not be attributed to the Asian Development Bank or its Executive Director.