The People's Republic of China as an Engine of Growth for Developing Asia? Evidence from Vector Autoregression Models

Donghyun Park,Kwanho Shin

doi:10.2139/ssrn.1617131

Abstract

Developing Asia has traditionally relied on exports to the United States (US) and other industrialized countries for demand and growth. As a result, the collapse of exports to the US and other industrialized countries during the global financial and economic crisis has sharply curtailed gross domestic product (GDP) growth across the region. The emergence of the People’s Republic of China (PRC) as a globally influential economic force is fueling hopes that it can supplement the US as an additional source of demand and growth. The central objective of this paper is to use vector autoregression (VAR) models to empirically investigate whether exports to the PRC have a significant and positive effect on the GDP of nine developing Asian countries. The study’s results from a three-variable VAR model indicate that PRC’s imports have a significant positive effect on the GDP of regional countries. However, the study’s results from a four-variable VAR model indicate that the PRC’s apparently positive impact reflects the US’ demand for Asian goods, rather than independent demand from the PRC. Therefore, overall, the study’s evidence suggests that the PRC is not yet an engine of growth for the rest of the region.

Highlights

The Global Financial Crisis and Developing Asia’s Trade CrisisThe global financial crisis and the ensuing global slowdown have severely curtailed the growth of developing Asia’s exports and output
The central objective of this paper is to empirically investigate whether trade with the People’s Republic of China (PRC) can serve as an engine of recovery and growth for developing Asia
While the PRCas-a-competitive-threat hypothesis reflects legitimate deep-seated concerns and fears of other Asian countries, which rely on exporting manufactured goods to the outside world, the PRC-as-an-engine-of-recovery-and-growth is gaining greater ground, as those same countries look for ways to revive their economies amid continuing uncertainty about the trajectory of the United States (US) recovery

Summary

Introduction—The Global Financial Crisis and Developing Asia’s Trade Crisis

The global financial crisis and the ensuing global slowdown have severely curtailed the growth of developing Asia’s exports and output. Greatest shock to the world economy in the last 4 decades has been the stunning rise of the PRC as an economic force of global significance In view of this trend, the PRC has increasingly come to be seen as potential engine of recovery in the short run and growth in the long run by other countries in the region. This paper was motivated by the widespread concerns and fears within the region precipitated by the collapse of exports and trade in the aftermath of the global financial crisis, and the pronounced impact of that collapse on the region’s short-run growth and prospects. While the PRCas-a-competitive-threat hypothesis reflects legitimate deep-seated concerns and fears of other Asian countries, which rely on exporting manufactured goods to the outside world, the PRC-as-an-engine-of-recovery-and-growth is gaining greater ground, as those same countries look for ways to revive their economies amid continuing uncertainty about the trajectory of the US recovery.

Evidence from VAR Regressions

Evidence from Three-Variable VAR Model

Evidence from Four-Variable VAR Model

Findings

Concluding Observations