Should weak export performance be a concern?

by: Prof. Yeah Kim Leng, Director of Economic Studies Program at Jeffrey Cheah In­stitute on Southeast Asia

Malaysia’s just released March export performance can be viewed from either a glass half full or half empty perspective. The glass is half full considering that total export value in ringgit rose by a strong 17.4 percent from the previous month. Likewise, the export volume index grew even more strongly at 19.1 percent.

However, from a half-empty look the rise in export value was only marginally 0.2 per cent higher while export volume expanded at a modest 5.7 per cent compared to the corresponding month last year.

The seasonally adjusted data also shows a weak increase of 0.9 per cent, suggesting that the underlying export growth momentum remains weak. The terms of trade, which measures the unit value of exports relative to imports, meanwhile also recorded a 5.7 per cent drop, adding further to the export pessimism.

The half empty viewpoint is reinforced by the anaemic one percent rise for the first quarter, which is well below the average six per cent expansion recorded since the recovery from the 2009 recession caused by global financial crisis.

As export growth slows, the share of exports of goods and services to gross domestic product (GDP) likewise shows a precipitous drop from 87 percent in 2010 to 73 percent in 2015. At the height of the country’s export prowess, this key ratio stood at 120 percent in 2000.

The slowing export performance raises a number of questions on future role of export in the economy and, importantly, the extent to which the decline is attributable to the erosion in the country’s export competitiveness.

Changing role of exports

A declining share of exports in the economy is healthy sign of reduced external dependence if overall growth is unaffected. In a demand-deficient global economy that characterises the post-global crisis environment, the decoupling is desirable to shift to domestic demand-driven growth sources.

For large economies such as China, India, Russia, Brazil and Indonesia, there is greater scope for export demand substitution through greater fiscal spending and private sector development to spur domestic demand.

For a small economy like Malaysia, redirecting export demand to the domestic economy is difficult not just because of the scale involved but also the types of goods and services customised for export markets. As a trade-dependent nation, changes in export competitiveness therefore will have a strong bearing on the country’s future economic and business prospects.

Post-crisis competitive analysis for Malaysia

The International Trade Centre, the joint agency under the United Nations and World Trade Organization, mandated with promoting the internationalisation of small and medium-sized enterprises, produces a global Trade Competitiveness Map that is useful for examining the changes in export performance of individual countries.

Of the 14 major export product categories listed for Malaysia, only four showed a relative gain in world market share between 2010 and 2014. These are basic manufactures, non-electronic machinery, electronic components and minerals. The other categories such as fresh food, processed food, wood products, textiles, chemicals, leather products, IT and consumer electronics, transport equipment, clothing and miscellaneous manufacturing experienced a loss in world market share.

The aggregate value of the four export product groups that experienced an increase in world market share accounted for 55 percent of the total export value. This higher share has allayed somewhat the fears of a pervasive erosion in Malaysia’s competitiveness in the export markets.

Causes of market share gainers and losers

The post-crisis (2010-14) rise in the world market share of Malaysia’s electronic components can be attributed to increased competitiveness, more dynamic markets in the importing countries and the ability of exporters to respond to the changes in world demand. However, the increase in world market share was dampened by less dynamic products as shown by its negative initial product specialisation effects.

Basic manufactures shared a similar pattern, where its competitiveness, dynamic import markets and responsiveness to changes in world demand accounted for its increase in world market share while the product specialisation effects were negative. Non-electrical machinery exports however gained market share through increased competitiveness although the rise was offset by lower dynamism in importing countries, lower ability to adjust supply to changes in world demand and less dynamic product mix.

The loss in world market share in the other export industries have been largely due to erosion of competitiveness despite benefiting from improved market conditions in the importing countries.

Leveraging on AEC and TPP

The regional trade agreements such as the Asean Economic Community and Trans Pacific Partnership when implemented fully will greatly lower both tariff and non-tariff barriers as well as reduce impediments to investment. The trade creation is expected to lead to stronger economic growth and greater prospects and opportunities for businesses to export or expand into new markets.

As businesses leverage on the wider trade and investment opportunities created by the trade pacts, it will likely raise export optimism as well as arrest the declining GDP share of exports in the Malaysian economy.

To reap the benefits of trade liberalisation and closer regional economic integration firms will need to focus on boosting productivity and competitiveness. Only then will more trade translate into market share gains of Made-in-Malaysia products in both the home and world markets.

By Prof. Yeah Kim Leng | 12 May 2017

Professor Yeah Kim Leng is the Director of Economic Studies Program at Jeffrey Cheah In­stitute on Southeast Asia at Sunway University and Professor of Eco­nomics at Sunway University Business School. He is also an external member of Bank Negara Malaysia’s Monetary Policy Committee. The views expressed in this article are his own.

First appeared in the New Straits Times

Modified by Low Wai Sern