An Investigation of Economic Linkages among the ASEAN Group of Countries

Abstract

This study investigates existence of any economic linkages among the five founding members of the Association of Southeast Asian Nations (ASEAN), and explores the nature of these linkages. Based on the Vector Autoregression, variance decomposition and impulse response function analyses applied to quarterly real GDP data for the 1975-93 period, the results show the leading role of Indonesia and the significant economic linkages among them. The direction of causation and transmission is from Indonesia to the Philippines to Thailand to Malaysia and to Singapore. A two-way causation is found between Singapore and Malaysia. The study also finds the economic vulnerability of the ASEAN group of countries to changes in U.S. output, and the competitive nature between the Japanese and the ASEAN economies. These findings have important policy implications. 1. Introduction This article examines the issue of economic linkages among the ASEAN group of countries, and assesses the strength and the direction of these linkages.1 Although much has been written about the growing economic interdependence among these countries, so far no study has been undertaken to quantify and explore the nature of their interdependence. To achieve this objective, we utilize vector autoregression (VAR) techniques used to study regional linkages (Cargill and Morus 1988; Cromwell 1992; Sherwood-Call 1988). We examine the regional and international spillover effects on the ASEAN economies. Specifically, we investigate these questions: Which ASEAN country drives the ASEAN region? Do economic shocks in a member country spill over to other member countries? If yes, what is the direction of shocks transmitted among the ASEAN countries? Are these economic shocks external to the ASEAN economies? Understanding how economic shocks are transmitted among the ASEAN countries is important because of policy implications. If ASEAN economies are susceptible to spillovers from each other (which can be positive or negative) and if we can identify the source of transmission, then the effectiveness of one's macroeconomic policy setting will greatly be enhanced. Under this scenario, policy coordination for the mutual benefit of the ASEAN member countries may be called for. In light of growing intra-ASEAN trade and investments under a more liberal economic environment, the ASEAN countries are expected to share common economic linkages so that a recession in one member country may spill over into other member countries in terms of output and employment decline. The 1985 recession and the 1997 currency crisis, for example, which hit all the ASEAN group of countries, could be a reflection of these economic linkages. The questions of which ASEAN country drives the ASEAN region and how the economic shocks are transmitted among different economies are answered by employing vector autoregression (VAR) techniques using quarterly data on real GDP for ASEAN countries, Japan and the United States for the period of 1975 to 1993. The results can be used to identify leading and lagging relationships between variables and, with further identifying restrictions, to measure the economic importance of these dynamic relationships. Variance decomposition method is used to measure the economic importance of these relationships and impulse response functions are used to trace the direction of the effects of a shock in one country on the other countries. The objective is to examine the extent to which economic fluctuations in a country are driven by its own economy, or by linkages to other countries. This article complements other work that study linkages among the ASEAN economies. Ariff (1996) studies the external effects on financial liberalization in four ASEAN members and finds that external effects induces efficiency in the financial systems. Manzur and Ariff (1995), on the other hand, examine the relationship of prices in five ASEAN economies and find that a long-run relationship holds. …