Enjoying the Fruits of Their Labor: Redirecting - IA de Investigación especializada en el MIT

Enjoying the Fruits of Their Labor: Redirecting
Exports to Asian Consumers
WILLEM THORBECKE

∗

There has been an explosion in the amount of parts and components traded
within East Asian production networks. The People’s Republic of China (PRC)
has emerged as the ﬁnal assembly point for the goods produced. These goods
then ﬂow primarily outside of the region. When the global ﬁnancial crisis (GFC)
ocurrió, the decrease in Western demand led to a synchronized decline in Asian
exports. If more ﬁnal goods could ﬂow to Asian consumers, it would provide
insurance against another slowdown in the rest of the world. This paper uses a
gravity model to investigate if emerging Asia is importing fewer consumption
goods than predicted. The results indicate that since the GFC, the PRC and the
Association of Southeast Asian Nations (ASEAN) have imported more ﬁnal
goods than expected. Sin embargo, their consumption imports per capita are
orders of magnitude lower than those of developed economies. This highlights
the need for further growth in emerging Asia.

Palabras clave: consumption, gravity models, production networks
JEL codes: F13, F14

I. Introducción

The value of intermediate goods traded among East Asian economies in-
creased 40 times between 1980 y 2012. En 2012, más que $450 billion in intermediate goods was traded within the region.1 This explosion in intraregional trade reﬂects the development of intricate production networks. Firms have exploited a comparative advantage by slicing up production processes and allocating the pro- duction modules to different locations based on variances in factor endowments across the fragmented production blocks. ∗Willem Thorbecke: Senior Fellow, Research Institute of Economy, Trade and Industry. Phone: + 81-3-3501-8248. Fax: +81-3-3501-8414. Correo electrónico: wthorbec@gmu.edu. The author would like to thank Masahisa Fujita, Takatoshi Ito, Masayuki Morikawa, the anonymous referees, the Managing Editor, and the participants at the ADB–Asian Think Tank Development Forum for their comments and suggestions. The author would also like to thank the ADB–Asian Think Tank Development Forum for ﬁnancial support. The usual disclaimer applies. 1These data come from the CEPII-CHELEM database. East Asia includes the PRC; Indonesia; Japón; the Republic of Korea; Malasia; Singapur; Taipéi,Porcelana; y Tailandia. Del $450 billion intermediate goods traded
en 2012, 49% came from electronic components; 20% from engines, vehicle components, and rubber items such as
tires; 11% from miscellaneous hardware; 6% from yarns and fabrics; and the rest from paints, paper, tubes, plastics,
metallic structures, wood articles, and fertilizers.

Asian Development Review, volumen. 32, No. 2, páginas. 95–114

C(cid:3) 2015 Asian Development Bank
and Asian Development Bank Institute

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96 ASIAN DEVELOPMENT REVIEW

This slicing up of the value chain began in earnest after the Japanese yen
appreciated 60% following the Plaza Accord in September 1985. Japanese multina-
tional corporations (MNCs) lost their price competitiveness and responded by shift-
ing labor-intensive activities to the Republic of Korea and Taipei,Porcelana. Sin embargo,
in the late 1980s, both wages and exchange rates in these economies skyrocketed,
and the locational advantage of assembling labor-intensive goods in the newly in-
dustrialized economies declined. En respuesta, Japanese ﬁrms transferred production
to member economies of the Association of Southeast Asian Nations (ASEAN).
Surplus labor in ASEAN member economies held wages down and exchange rates
in these economies were pegged at competitive levels relative to the United States
(US) dollar. After the People’s Republic of China (PRC) joined the World Trade Or-
ganization (WTO) en 2001, there was a surge in foreign direct investment (FDI) y
parts and components exports from East Asian economies to the PRC. The PRC’s
WTO accession gave foreign investors the conﬁdence that the PRC would sustain
an FDI-friendly environment. The PRC quickly became the ﬁnal assembly point of
intricate production and distribution networks. It imported hundreds of billions of
dollars of parts and components from East Asia and exported the ﬁnal assembled
products throughout the world.

The surge in ﬁnal goods exports from the PRC has been breathtaking. Its
exports of computers, consumer electronics goods, and telecommunications equip-
ment increased more than 70 times between 1993 y 2012 to reach $500 billion. En 1993, solo 2.5% of the world’s exports of ﬁnal electronics goods came from the PRC, while in 2012, 43% of the world’s exports of these goods came from the PRC. The next leading exporting economy in 2012 exported only 5% of the world’s ﬁnal electronics goods.2 Athukorala (2014) documented that, while the intermediate goods trade in East Asia has exploded, demand for ﬁnal goods produced within production networks comes primarily from outside the region. He found that the PRC did not provide a cushion against export contraction during the global ﬁnancial crisis (GFC). He also observed that the decrease in demand from the rest of the world during the GFC caused a synchronized trade contraction in East Asia. Figure 1a shows the share of ﬁnal electronics goods going to East Asia and the rest of the world.3 More than 80% of these goods ﬂow outside the region, while East Asia’s share has not increased since the 1990s. Figure 1b shows that the share going to North America has increased since the GFC to about 36%, while the share going to Europe has fallen to 23%. The share going to all other economies has increased steadily since the GFC and now exceeds the share going to Europe. 2These data come from the CEPII-CHELEM database. 3East Asia in the ﬁgure includes the PRC; Indonesia; Japón; the Republic of Korea; Malasia; Singapur; Taipéi,Porcelana; y Tailandia. l D o w n o a d e desde h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 2 9 5 1 6 4 1 4 2 5 a d e v _ a _ 0 0 0 5 3 pd . f por invitado 0 7 septiembre 2 0 2 3 ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 97 Figura 1a. Share of the PRC’s Final Electronics Goods Exports to East Asia and the Rest of the World l D o w n o a d e d f r o m h t t p : / / directo . mi t . PRC = People’s Republic of China. Notas: Final electronics goods comprise the following categories: consumer electronics, telecommunications equip- mento, and computer equipment. East Asia includes the PRC; Indonesia; Japón; the Republic of Korea; Malasia; Singapur; Taipéi,Porcelana; y Tailandia. Fuente: CEPII-CHELEM database. Figura 1b. Share of the PRC’s Final Electronics Goods Exports to Regions Outside of East Asia / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 2 9 5 1 6 4 1 4 2 5 a d e v _ a _ 0 0 0 5 3 pd . f por invitado 0 7 septiembre 2 0 2 3 PRC = People’s Republic of China. Notas: Final electronics goods comprise the following categories: consumer electronics, telecommunications equip- mento, and computer equipment. East Asia includes the PRC; Indonesia; Japón; the Republic of Korea; Malasia; Singapur; Taipéi,Porcelana; y Tailandia. The European Union (EU) includes 28 member countries. Fuente: CEPII-CHELEM database. 98 ASIAN DEVELOPMENT REVIEW Figure 2a. Japanese Automobile Parts and Components Exports Source: CEIC database. Figure 2b. Japanese Electronics Parts and Components Exports l D o w n o a d e d f r o m h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 2 9 5 1 6 4 1 4 2 5 a d e v _ a _ 0 0 0 5 3 pd . f por invitado 0 7 septiembre 2 0 2 3 Fuente: CEIC database. Exports within Asian production networks are more sensitive to demand shocks caused by events such as the GFC than to supply shocks caused by events such as the Great East Japan Earthquake or the ﬂooding in Thailand that began in 2011. Figures 2a and 2b present data on the volume of Japanese exports of automobile parts and semiconductors. These are two of the main categories of Japanese parts and components exports within regional production networks. Following the GFC, exports of both categories fell by more than 70% and took almost 2 years to return ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 99 to precrisis levels. Por el contrario, the drops in exports of both categories following the Great East Japan Earthquake and ﬂooding in Thailand were an order of magnitude smaller and the recoveries rapid. Ando and Kimura (2012) have presented careful evidence indicating that the GFC had a prolonged effect on Japanese exports, while the earthquake did not. One lesson of the GFC is that it would be desirable for regional production networks to decouple from ﬁnal demand in the West. The Ministry of Economy, Trade and Industry (METI) (2009) reported that there are 930 million people in Asia in the middle class or above. De este modo, there is huge potential for demand by Asian consumers to function as a second engine of growth. Channeling more ﬁnal goods to the region would also allow Asian workers to enjoy more of the fruits of their own labor. This paper investigates whether the economies involved in East Asian pro- duction networks are importing fewer ﬁnal goods than one would expect. The key economies involved in these regional supply chains are the PRC; Indonesia; Japón; the Republic of Korea; Malasia; Singapur; Taipéi,Porcelana; y Tailandia. To ex- amine whether they are importing fewer consumption goods than expected, the gravity model is employed. This model is a workhorse for estimating bilateral trade ﬂows. Traditional gravity models, as developed by Tinbergen (1962), posit that bilateral trade between two economies is directly proportional to gross domestic product (PIB) in the two economies and inversely proportional to the distance be- tween them. As Leamer and Levinsohn (1995); and Baltagi, Egger, and Pfaffermayr (2014) discussed, gravity models yield some of the clearest and most robust ﬁndings not only in international economics but in all of economics. This model is thus used to predict consumption goods imports by Asian economies. The results indicate that actual consumption imports into the PRC and ASEAN have increased relative to their predicted values and, en 2012, were more than predicted by the gravity model. De este modo, emerging Asia is redirecting ﬁnal goods to the region. The evidence reported below also indicates that more progress is necessary. This paper considers how growth and development in the region can continue. The next section presents the data and methodology. Section III presents the results. Section IV highlights the importance of investing in human capital to promote growth. Section V concludes. II. Data and Methodology The gravity model is a workhorse for estimating bilateral trade ﬂows. As developed by Tinbergen (1962), gravity models posit that bilateral trade between two economies is directly proportional to GDP in the two economies and inversely proportional to the distance between them. In addition to GDP and distance, these l D o w n o a d e d f r o m h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 2 9 5 1 6 4 1 4 2 5 a d e v _ a _ 0 0 0 5 3 pd . f por invitado 0 7 septiembre 2 0 2 3 100 ASIAN DEVELOPMENT REVIEW models typically include other factors affecting bilateral trade costs such as whether trading partners share a common language. The model takes the form Exijt = β0 + β1Yit + β2Yjt + β3DISTij + β4LANGij + β5RERijt + ∂i + ωj + πt + εijt (1) where Exijt represents real exports from economy i to economy j; t represents time; Y represents real GDP; DIST represents the geodesic distance between the two economies; LANG is a dummy variable equaling 1 if the economies share a common language and 0 de lo contrario; RER is the bilateral real exchange rate between the two economies; and ∂i, ωj, and πt are economy i, economy j, and time ﬁxed effects, respectively.4 Data on consumption exports are obtained from the CEPII-CHELEM database. These include the following goods: beverages, carpets, carros, cereal prod- ucts, cinematographic equipment, clocks, clothing, consumer electronics, domestic electrical appliances, knitwear, miscellaneous manufactured articles, pharmaceu- ticals, photographic equipment, preserved fruit and vegetable products, preserved meat and ﬁsh products, soaps and perfumes (including chemical preparations), sports equipment, toiletries, toys, and watches.5 Gaulier, Lemoine, and ¨Unal (2011) noted that automobile imports into the PRC largely reﬂect purchases by rich Chinese consumers. Many of these are luxury cars imported from Germany. In one speciﬁcation, these predominantly high-end imports are excluded. Data on real GDP and real exchange rates are obtained from the CEPII- CHELEM database. The real exchange rate is the Consumer Price Index (CPI)- deﬂated bilateral real exchange rate between the exporting and importing economies measured in levels. Data on distance and common language are obtained from www.cepii.fr. Dis- tance is measured in kilometers and represents the geodesic distance between eco- nomic centers. Common language is a dummy variable equaling 1 if two economies share a common language and 0 de lo contrario. The gravity model is estimated as a panel using annual data for 31 economies over the 1988–2012 sample period. The economies are Australia; Austria; Brasil; Canada; the PRC; Dinamarca; Finland; Francia; Alemania; India; Indonesia; Irlanda; Italia; Japón; Malasia; México; Los países bajos; Norway; the Philippines; Poland; Saudi Arabia; Singapur; the Republic of Korea; España; Suecia; Suiza; Taipéi,Porcelana; Tailandia; Pavo; the United Kingdom; and the US. 4anderson, Vesselovsky, and Yotov (2013) have shown that exchange rates can exert real effects in the context of a gravity model when there are incomplete pass-through or scale effects. 5The category optics is not included in consumption imports because in the case of the PRC, many optical imports are inputs into the production process rather than ﬁnal consumption goods. These inputs include unworked lens blanks of plastic, unworked lens blanks of glass, ﬁber optic cable for live transmission of images, and photolithography equipment for the manufacture of semiconductors. l D o w n o a d e desde h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 2 9 5 1 6 4 1 4 2 5 a d e v _ a _ 0 0 0 5 3 pd . f por invitado 0 7 septiembre 2 0 2 3 ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 101 Mesa 1. Estadísticas descriptivas (1) (2) Minimum Maximum Variable Consumer goods excluding cars ($ millón)
Consumer goods including cars ($ millón) (Log of) Real GDP (Log of) Distance (Log of) Bilateral real exchange rate Common language GDP = gross domestic product. Fuente: Author’s calculations. Value 0 0 10.61 5.75 −1.76 0 Value 91,887 93,389 16.47 9.84 1.76 1.00 (3) Significar 714 1,004 13.14 8.59 0 0.10 (4) Standard Deviation 2,626 3,678 1.18 0.93 0.62 0.30 Ecuación (1) has often been estimated as a log-linear model using panel least squares methods. Santos Silva and Tenreyro (2006) showed that this approach can lead to biased estimates when there is heteroskedasticity in the data-generating process. They reported simulation results indicating that Poisson pseudo-maximum likelihood (PPML) estimators perform better both in terms of bias and efﬁciency in several cases. PPML techniques are thus used to estimate equation (1). Anderson and van Wincoop (2003) have argued that exports should depend on outward and inward multilateral resistance terms. These terms capture the fact that exports and imports between two economies depend not only on trade costs between the two, but also on changing trade costs between third economies. Por ejemplo, exports from economy i to economy j can be affected if economy i enters into a preferential trade agreement with a third economy k. Models based on Anderson and van Wincoop’s (2003) approach can be esti- mated by the equation lnExijt = β0 + β1lnDISTij + β2LANGij + β3RERijt + ∂i + ωj + πt + εijt (2) where the variables are as deﬁned above. Aquí, the distance and language variables capture trade costs for exports between economies i and j, and the exporter and importer ﬁxed effects variables capture the multilateral resistance terms. Time- varying ﬁxed effects can also be included. Ecuación (2) is estimated as a sensitivity check for the results from equation (1). Mesa 1 presents descriptive statistics for the variables. Since the data cover 31 economies over a 25-year period, there is a lot of variation in the data. The ﬁrst row presents basic statistics for consumption exports excluding cars and the second for consumption exports including cars. The minimum value is zero. These zero values indicate that in some years, one economy in the sample did not export consumption goods to another. These zero values occur in less than 0.4% of the observations. It is not surprising that some of the economies do not trade consumption goods with each other in some years, especially for economies that are small and located far l D o w n o a d e d f r o m h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 2 9 5 1 6 4 1 4 2 5 a d e v _ a _ 0 0 0 5 3 pd . f por invitado 0 7 septiembre 2 0 2 3 102 ASIAN DEVELOPMENT REVIEW apart. This should not affect the ﬁndings since Santos Silva and Tenreyro (2006) reported that the PPML technique used here is robust to the presence of zero values of the dependent variable. The ﬁrst row of Table 1 also indicates that the maximum value for con- sumption exports excluding automobiles exceeds $90 billion. For consumption ex-
ports excluding automobiles, there are eight observations where the values exceed
$60 billion. These are for the PRC’s consumption exports to the US in 2005–2012. Similarmente, for consumption exports including automobiles, the eight largest obser- vations are for the PRC’s exports to the US in 2005–2008, and these all exceed $60 billion.

Rows 3 a través de 6 report descriptive statistics for (the logs of) PIB, distancia,
and the real exchange rate, and for the common language dummy variable. El
means and standard deviations indicate that the values are spread over a wide
range. The large degree of variation in the independent variables should help make
the parameter estimates more precise. For the real exchange rate, the distribution
is symmetric and centered around zero. This occurs because the log of the real
exchange rate for exports from economy A to economy B equals minus the log of
the real exchange rate for exports from economy B and economy A, and because
both sets of exchange rates are included. For a common language, the results indicate
eso 10% of the economy pairs in the sample share a common language.

III. Resultados

Mesa 2 presents gravity estimates. columnas (1), (3), y (5) present results
using consumer goods excluding cars; columnas (2), (4), y (6) present results
including cars. columnas (1) y (2) present results including importer and exporter
PIB; columnas (3) a través de (6) present results excluding the GDP variables. En
columnas (3) y (4), time-varying exporter ﬁxed effects and importer ﬁxed effects
are included; in columns (5) y (6), exporter and importer ﬁxed effects are included.
The coefﬁcients on exporter and importer real GDP are large and statistically
signiﬁcant. They are larger in column (2), where the dependent variable includes
carros, than in column (1), where it excludes cars. This indicates that higher incomes
tend to be associated with more car imports.

The coefﬁcients on distance and common language are the expected signs and
statistically signiﬁcant in all cases. The results in every speciﬁcation indicate that
distance is an important deterrent of trade and that sharing a common language is an
important facilitator of trade. The coefﬁcient on the real exchange rate is negative
in four cases and positive in two. En general, the gravity models perform well.

The discussion that follows focuses on the estimations in columns (1) y
(2) that include exporter and importer GDPs. The relation between the size of real
GDP and the amount of consumption imports is something that will be discussed

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ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 103

Mesa 2. PPML Gravity Estimates, 1988–2012

Exporter GDP

Importer GDP

Distance

Common

idioma
Bilateral real
exchange rate
Constant

Dependent
variable

Fixed effects

especificación

No. de

(1)
0.71∗∗∗
(0.05)
0.69∗∗∗
(0.05)
−0.75∗∗∗
(0.01)
0.09∗∗∗
(0.03)
−0.10∗
(0.06)
−5.68∗∗∗
(1.16)
Consumer
goods
a excepción de
carros
Exporter,

importer,
tiempo
23,249

(2)
0.87∗∗∗
(0.04)
0.84∗∗∗
(0.03)
−0.80∗∗∗
(0.01)
0.08∗∗∗
(0.03)
−0.25∗∗∗
(0.06)
−9.98∗∗∗
(0.90)
Consumer
goods

(3)

(4)

(5)

(6)

−0.76∗∗∗
(0.00)
0.27∗∗∗
(0.00)
−0.10∗∗∗
(0.00)
15.0∗∗∗
(0.00)
Consumer
goods

−0.88∗∗∗
(0.00)
0.27∗∗∗
(0.00)
−0.04∗∗∗
(0.00)
15.0∗∗∗
(0.00)
Consumer
goods
a excepción de
carros

−0.81∗∗∗
(0.01)
0.09∗∗∗
(0.03)
0.04∗∗∗
(0.07)
18.3∗∗∗
(0.12)
Consumer
goods

−0.75∗∗∗
(0.01)
0.10∗∗∗
(0.03)
0.16∗∗∗
(0.06)
17.5∗∗∗
(0.11)
Consumer
goods
a excepción de
carros

Exporter,

Time-varying Time-varying Exporter,

Exporter,

importer,
tiempo
23,249

exporter,
importer
23,249

importer,
tiempo
23,249

1988–2012

observaciones
Sample period
1988–2012
GDP = gross domestic product, PPML = Poisson pseudo-maximum likelihood.
∗∗∗ = signiﬁcant at 1%, ∗∗ = signiﬁcant at 5%, and ∗ = signiﬁcant at 10% nivel.
Notas: The table contains PPML estimates of gravity models. Bilateral exports from 31 major exporters to each of
the other 30 economies in 1988–2012 are included. Huber-White standard errors are in parentheses.
Fuente: Author’s calculations.

1988–2012

in the next section. The results in columns (3) a través de (6) reveal similar patterns to
those discussed below; eso es, consumption imports in emerging Asia are increasing
relative to predicted values.

Figures 3a and 3b present the percent difference between actual and predicted
imports for the PRC and the three emerging ASEAN economies that are most in-
volved in regional production networks: Malasia, the Philippines, y Tailandia.
Figure 3a presents results for consumption imports excluding cars, and Figure 3b
for consumption imports including cars. Both ﬁgures indicate that actual consump-
tion imports have risen relative to predicted consumption imports between 2005
y 2012. For the ASEAN economies in 2012, consumption imports excluding
cars were 12%–13% greater than predicted and consumption imports including cars
were 12%–15% greater. For the PRC in 2012, consumption imports excluding cars
eran 10% greater than predicted and consumption imports including cars were
20% mayor que. For all four economies, actual imports have been growing relative to
predicted imports since the GFC.

Figures 4a and 4b present the percent difference between actual and predicted
imports for ASEAN; the PRC; Japón; the Republic of Korea; and Taipei,Porcelana.

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104 ASIAN DEVELOPMENT REVIEW

Figura 3a. Difference between Actual Consumption Imports (excluding Cars) y el
Values Predicted by a Gravity Model

PRC = People’s Republic of China.
Nota: Consumption goods comprise the following categories: beverages, carpets, cereal products, cinematographic
equipo, clocks, clothing, consumer electronics, domestic electrical appliances, knitwear, miscellaneous manufac-
tured articles, pharmaceuticals, photographic equipment, preserved fruit and vegetable products, preserved meat and
ﬁsh products, soaps and perfumes (including chemical preparations), sports equipment, toiletries, toys, and watches.
Fuente: CEPII-CHELEM database and calculations by the author.

Figura 3b. Difference between Actual Consumption Imports and the Values Predicted
by a Gravity Model

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PRC = People’s Republic of China.
Nota: Consumption goods comprise the following categories: beverages, carros, carpets, cereal products, cinemato-
graphic equipment, clocks, clothing, consumer electronics, domestic electrical appliances, knitwear, miscellaneous
manufactured articles, pharmaceuticals, photographic equipment, preserved fruit and vegetable products, Preservado
meat and ﬁsh products, soaps and perfumes (including chemical preparations), sports equipment, toiletries, toys, y
watches.
Fuente: CEPII-CHELEM database and calculations by the author.

ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 105

Figura 4a. Difference between Actual Consumption Imports (Excluding Cars) y el
Values Predicted by a Gravity Model

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ASEAN = Association of Southeast Asian Nations, PRC = People’s Republic of China.
Notas: ASEAN refers to Indonesia, Malasia, the Philippines, y Tailandia. Consumption goods comprise the
following categories: beverages, carpets, cereal products, cinematographic equipment, clocks, clothing, consumer
electronics, domestic electrical appliances, knitwear, miscellaneous manufactured articles, pharmaceuticals, photo-
graphic equipment, preserved fruit and vegetable products, preserved meat and ﬁsh products, soaps and perfumes
(including chemical preparations), sports equipment, toiletries, toys, and watches.
Fuente: CEPII-CHELEM database and calculations by the author.

Figure 4a presents results excluding car imports and Figure 4b including car im-
ports. Imports into Japan and the Republic of Korea are close to their predicted
valores; imports into the PRC and ASEAN are well above their predicted values. Para
Taipéi,Porcelana, por otro lado, consumption imports in both ﬁgures are far below
their predicted values in every year. In Figure 4a, ellos son 18% below their predicted
value in 2012 and in Figure 4b, ellos son 22% below in the same year.

The important implication of the results presented here is that emerging
Asian economies involved in regional production networks are rebalancing. Más
and more ﬁnal goods are ﬂowing to consumers in these economies.

Por otro lado, more progress is necessary. Cifra 5 shows consumption
imports per capita in 2012: $2,026 for Germany; $1,755 for France; $198 for ASEAN; y $36 for the PRC.

IV. Discusión

Cifra 5 indicates that emerging Asia’s consumption imports are orders of
magnitude smaller than consumption imports in advanced economies. Mesa 2 muestra
that there is a strong relationship between an economy’s consumption imports and

106 ASIAN DEVELOPMENT REVIEW

Figura 4b. Difference between Actual Consumption Imports and the Values Predicted
by a Gravity Model

ASEAN = Association of Southeast Asian Nations, PRC = People’s Republic of China.
Notas: ASEAN refers to Indonesia, Malasia, the Philippines, y Tailandia. Consumption goods comprise the fol-
lowing categories: beverages, carpets, carros, cereal products, cinematographic equipment, clocks, clothing, consumer
electronics, domestic electrical appliances, knitwear, miscellaneous manufactured articles, pharmaceuticals, photo-
graphic equipment, preserved fruit and vegetable products, preserved meat and ﬁsh products, soaps and perfumes
(including chemical preparations), sports equipment, toiletries, toys, and watches.
Fuente: CEPII-CHELEM database and calculations by the author.

its level of real GDP. Thorbecke (2011) reported statistically signiﬁcant income
elasticities exceeding unity for consumption imports into Malaysia, the Philippines,
the PRC, and Thailand in the context of the Bickerdike–Robinson–Metzler imperfect
substitutes model. These ﬁndings imply that the populations of ASEAN and the PRC
will be able to consume more if their economies continue to grow and develop. Este
section considers a few steps toward achieving this goal. Since innovation is crucial
for growth, especially as economies develop, and since investing in education can
promote innovation, the discussion below highlights human capital formation. En
this regard, Rozelle (2010) emphasized that nurturing highly productive workers in
poorer rural areas is essential for the PRC’s development.

Figures 4a and 4b indicate that in 2012, the PRC and ASEAN imported much
more than predicted and Taipei,China imported much less. One reason for the diver-
gent results is presented in Figure 6, which shows that the real effective exchange rate
(REER) has appreciated 34% in ASEAN and 38% in the PRC since 2005, mientras que la
REER of Taipei,China depreciated 21% during this time. The exchange rate ap-
preciations increased the purchasing power of ASEAN and the PRC consumers,
allowing them to import more consumption goods (Thorbecke 2011).

The depreciation of the REER in Taipei,China occurred despite the fact that
its current account surplus averaged almost 9% of GDP between 2005 y 2013.

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ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 107

Cifra 5. Consumption Imports per Person

ASEAN = Association of Southeast Asian Nations, PRC = People’s Republic of China, US = United States.
Notas: ASEAN refers to Indonesia, Malasia, the Philippines, y Tailandia. Consumption goods comprise the fol-
lowing categories: beverages, carpets, carros, cereal products, cinematographic equipment, clocks, clothing, consumer
electronics, domestic electrical appliances, knitwear, miscellaneous manufactured articles, pharmaceuticals, photo-
graphic equipment, preserved fruit and vegetable products, preserved meat and ﬁsh products, soaps and perfumes
(including chemical preparations), sports equipment, toiletries, toys, and watches.
Fuente: CEPII-CHELEM database and calculations by the author.

Cifra 6. Real Effective Exchange Rates in ASEAN; the PRC; and Taipei,Porcelana

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ASEAN = Association of Southeast Asian Nations, PRC = People’s Republic of China, REER = real effective
exchange rate.
Notas: ASEAN includes Malaysia, the Philippines, y Tailandia. The exchange rate values in 2005 igual 75.4 para
Taipéi,Porcelana; 51.9 for ASEAN; y 52.8 for the PRC.
Fuente: CEPII-CHELEM database.

108 ASIAN DEVELOPMENT REVIEW

Foreign exchange reserve accumulation by the central bank kept the NT dollar from
appreciating. The PRC also increased its holdings of foreign reserves by $508 billion in 2013 solo, and by $3 trillion between 2006 y 2013. The rates of return on these
external reserves are low compared to the private and social rates of return available
from investments in the domestic economy. Summers (2006) reported that returns
on US Treasury securities are close to zero when measured in Asian currencies.
Fang et al. (2012), por otro lado, reported that the return to an additional year
of education in the PRC equaled 20% per year.

Investing in education is especially crucial in the rural sector. Today’s rural
Chinese students will be the urban workers of the future. Their families are often
poor and cannot afford to send their children to school. Making education available
to them would yield high returns to society.

Investing in education is also necessary because the appreciation of the ren-
minbi and ASEAN currencies shown in Figure 6 caused a large decrease in labor-
intensive exports such as furniture, footwear, toys, and sporting goods (Thorbecke
and Zhang 2009). To offset this, emerging Asia needs to assimilate new tech-
nologies and move up the value chain. Urata, Matsuura, and Wei (2006) reported
that technology transfer from MNCs to workers in emerging economies increases
when the workforce becomes better educated. Investing in education will help com-
panies in emerging Asia to assimilate new technologies and move up the value
cadena.

Rozelle (2010) underscored the importance of education in promoting inno-
vation and productivity growth. To accomplish this goal, he noted that students in
the PRC need to acquire skills in mathematics, ciencia, Inglés, and computers.

Rozelle (2010) also observed that the PRC should begin investing when chil-
dren are young. Most rural children cannot afford preschool, and elementary school
attendance is hampered by poor accessibility and long, dangerous commutes. Bad
salud, sanitation, nutrition, and psychology management also restrict students’
ability to learn. Prevalent problems such as anemia, vitamin deﬁciencies, visual dif-
ﬁculties, and worms can be remedied inexpensively. Por ejemplo, one multivitamin
with iron can address both anemia and vitamin deﬁciencies, and only costs about
$0.03 per student per day (Rozelle 2010).

High school tuition in the PRC is expensive at 20 times the per capita annual
income of the rural poor and little ﬁnancial aid is available. Because of this, solo
one in four rural students ﬁnishes high school. In neighboring economies such as
Japón; the Republic of Korea; and Taipei,Porcelana, almost 100% of students ﬁnish high
escuela. College tuition in the PRC is prohibitively expensive at 60 times the annual
per capita income of the rural poor. Solo 3% of rural students are able to attend a
tier 1 or tier 2 university (Rozelle 2010). Facilitating education would help the PRC
to keep climbing the ladder of comparative advantage.

Investing in human capital in ASEAN is also essential to foster creative indus-
intentos. These economies need to progress from labor-intensive assembly operations

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ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 109

to the engineering and design aspects of production. To achieve this, it is necessary
for children to receive adequate nutrition, healthcare, and primary education. Es
also desirable that high school students receive high quality education in science
and math, and that university students receive scientiﬁc and engineering training.
The educational system should focus on providing students with marketable skills
that businesses need. ASEAN governments can help coordinate this process.

De este modo, there is a signiﬁcant need to invest in education. Rather than channeling
trillions of dollars into investments in US securities, the returns to Asia and its
people would be higher if they invested in rural education, nutrition, and healthcare.
Además, as the Asian Development Bank (ADB) has often argued, consumption
would grow if precautionary reasons for savings, such as inadequate provision of
education and healthcare, were remedied.

The investment climate in ASEAN is also plagued by corruption. The World
Economic Forum (2013) surveyed more than 10,000 executives and found corruption
as one of the two biggest concerns in doing business in Malaysia, the Philippines,
y Tailandia. For the Philippines, respondents also singled out poor infrastructure as
among their biggest concerns. MNCs have shifted production out of the Philippines
to other locations because of poor infrastructure and the high cost of electricity.
Improving the investment climate in ASEAN could help attract and retain MNCs
and lead to more technology assimilation by local workers. A detailed discussion on
improving the investment climate in emerging Asia is available in Kawai and Lee
(2015).

The discussion above focused on promoting economic growth as a means
of increasing consumption imports.6 Another question is whether per capita con-
sumption imports are less than one would expect given the level of income. Mesa 3
presents data on consumption imports per person relative to GDP per person for all
84 economies included in the CEPII-CHELEM database. En 2012, the PRC ranked
the lowest out of all 84 economies with a ratio of 0.0059, or less than 10% del
average of 0.059 for the other 83 economías. The PRC is thus an outlier.

This suggests that structural factors are leading to underconsumption and
underimporting of ﬁnal goods. One factor is tariffs on consumption imports into
the PRC and other protectionist obstacles. En el 2014 Asia Paciﬁc Economic
Co-operation (APEC) Summit, the PRC’s President Xi Jinping proposed a Free
Trade Agreement for the Asia Paciﬁc (FTAAP). This would promote freer trade
among the 21 Paciﬁc Rim nations that are members of APEC. By lowering the level
of import protections, it would enable Chinese consumers to purchase more from
abroad.7

6I am indebted to two anonymous referees for the discussion in this paragraph and the two following

párrafos.

7Other free trade initiatives such as the Regional Comprehensive Economic Partnership among 16 East Asian

economies would have a similar effect.

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110 ASIAN DEVELOPMENT REVIEW

Mesa 3. Consumption Imports per Capita
Relative to GDP per Capita

(Consumption
Imports per Capita)/

Economy

(GDP per Capita) Rango

Kyrgyz Republic
Malta
Estonia
Bélgica
Cyprus
Latvia
Eslovaquia
Bosnia and Herzegovina
Paraguay
Slovenia
Lithuania
Los países bajos
Viet Nam
Czech Republic
Hong Kong, Porcelana
Hungary
Macedonia
Bulgaria
Irlanda
Albania
Austria
Suiza
Serbia and Montenegro
Ucrania
Croatia
Iceland
Poland
Romania
Portugal
Dinamarca
Luxembourg
Tunisia
Uruguay
Kenya
Bolivia
Singapur
Cote d’Ivoire
Malasia
Belarus
Alemania
Finland
Libya
Reino Unido
Kazakhstan
Francia
España

0.461
0.153
0.152
0.150
0.134
0.126
0.121
0.106
0.102
0.0975
0.0975
0.0928
0.0923
0.0899
0.0897
0.0893
0.0866
0.0832
0.0803
0.0746
0.0744
0.0729
0.0716
0.0713
0.0667
0.0625
0.0577
0.0570
0.0567
0.0556
0.0550
0.0535
0.0529
0.0516
0.0511
0.0506
0.0492
0.0490
0.0486
0.0484
0.0448
0.0448
0.0447
0.0445
0.0442
0.0439

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46

Continuado.

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ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 111

Mesa 3. Continuado.

(Consumption
Imports per Capita)/

Economy

(GDP per Capita) Rango

47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84

0.0434
0.0419
0.0405
0.0388
0.0378
0.0366
0.0366
0.0363
0.0356
0.0353
0.0351
0.0346
0.0339
0.0316
0.0302
0.0286
0.0286
0.0284
0.0280
0.0278
0.0276
0.0274
0.0252
0.0247
0.0226
0.0217
0.0214
0.0202
0.0193
0.0192
0.0192
0.0189
0.0138
0.0124
0.0120
0.00951
0.00762
0.00588

Suecia
Greece
Cameroon
Tailandia
Chile
Taipéi,Porcelana
Canada
Philippines
Morocco
Ecuador
Italia
New Zealand
Brunei Darussalam
Israel
Saudi Arabia
Gabon
Sri Lanka
Russian Federation
Algeria
Norway
Egypt
Venezuela
Republic of Korea
Peru
Australia
Nigeria
México
Pavo
United States
Japón
Bangladesh
Colombia
Argentina
Indonesia
Pakistán
Brasil
India
People’s Republic of China
GDP = gross domestic product.
Notas: The table presents data on consumption imports per capita
divided by GDP per capita. Consumption imports comprise the
following categories: beverages, carpets, cereal products, cinemato-
graphic equipment, clocks, clothing, consumer electronics, dome-
stic electrical appliances, knitwear, miscellaneous manufactured
artículos, pharmaceuticals, photographic equipment, preserved fruit
and vegetable products, preserved meat and ﬁsh products, soaps and
perfumes (including chemical preparations), sports equipment, toi-
letries, toys, and watches.
Fuente: CEPII-CHELEM database.

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112 ASIAN DEVELOPMENT REVIEW

The PRC’s regulatory distortions also favor investment at the expense of
consumption. The central government, en el 2013 Third Plenum blueprint, vowed
to change this incentive structure. Por ejemplo, the PRC caps the interest rate that
households can earn on deposits. These and other banking sector regulations have
resulted in an artiﬁcially low cost of capital to large ﬁrms, stimulating investment. En
al mismo tiempo, as Muellbauer (2014) noted, the value of savings accounts equals four
times annual disposable income and the interest rate caps suppress household income
and spending. The government is determined to liberalize deposit rates.8 As another
ejemplo, large parts of the services sector are shielded from competition. Allowing
open markets to play a larger role will help increase labor-intensive employment
and thus raise incomes and consumption for many workers. El 2013 Third Plenum
blueprint proposed that markets play a “decisive role” in allocating resources. Como
a third example, external costs associated with pollution in the PRC have not been
internalized. Firms produce more pollution than the socially optimal amount. El
PRC’s citizens pay huge costs in terms of health problems and a lower life expectancy
due to pollution.9 The central government has recently attached a high priority to
reducing pollution. By following through with their proposed reforms, the PRC can
help to change the incentive structure that favors ﬁrms and production at the expense
of consumers and consumption.

V. Conclusión

East Asia is characterized by intricate production and distribution relation-
buques. MNCs in ASEAN; Japón; the Republic of Korea; and Taipei,China produce
sophisticated, technology-intensive intermediate goods and ship them to the PRC
for assembly by low-skilled workers. The ﬁnished products are then exported dis-
proportionately to Europe and the US.

The GFC showed the danger of depending on the West as an engine of
growth. When demand in Europe and the US plummeted after Q3 2008, Asia’s
exports collapsed. De este modo, Asia was not able to decouple from the West.

ADB and others have noted the importance of channeling ﬁnal goods not only
to Europe and the US, but also to Asian consumers. This would provide a second
growth locomotive and reduce the exposure of Asian economies to slowdowns
outside of the region. It would also allow Asian workers to enjoy more of the fruits
of their own labor.

8Huang, li, and Wang (2015) noted that before interest rates can be liberalized, commercial bank reform is

necessary to prevent the emergence of reckless competition.

9Researchers at Peking University have found that air pollution in the PRC reduces people’s life expectancy
por 5.5 años (Kaiman 2013). Others have reported that pollution has contaminated between 8% y 20% del
PRC’s arable land and led to “cancer villages” where citizens die young because of exposure to toxins (Chin and
Spegele 2013).

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ENJOYING THE FRUITS OF THEIR LABOR: REDIRECTING EXPORTS TO ASIAN CONSUMERS 113

This paper investigates whether Asian economies are importing fewer ﬁnal
consumption goods than one would expect. Para hacer esto, it uses the gravity model,
which is a workhorse for estimating bilateral trade ﬂows.

The results indicate that the PRC and ASEAN are now importing more ﬁnal
goods than predicted by the model. Por otro lado, emerging Asia’s consumption
imports are far less than the imports of developed economies. To channel more goods
to consumers in the region, Asia needs to continue developing.

One key step in accomplishing this would be to invest in human capital, ser-
ginning at a young age. Private and social returns are much higher for these domestic
investments than for investments in US Treasury securities. Further accumulation of
foreign exchange reserves would thus lead to a misallocation of resources. If Asian
central banks reduced their interventions in foreign exchange markets, any resulting
exchange rate appreciations would increase the purchasing power of Asian citizens
and allow them to consume more.

The Chinese character for country is a jade (a precious stone) surrounded by
a boundary. We can think of the precious stone as representing the people of the
PRC and the boundary the borders of the country. The PRC would receive a higher
expected return and face lower risks in renminbi terms by investing in the health,
education, and welfare of the people within its borders rather than by investing
further in foreign exchange reserves and other external assets. The government
should focus especially on rural education and on remedying economic deﬁciencies
in ways that would beneﬁt the nontradable sector.

References∗

anderson, j. and E. van Wincoop. 2003. Gravity with Gravitas: A Solution to the Border Puzzle.

Revisión económica estadounidense. 93 (1). páginas. 170–92.

anderson, J., METRO. Vesselovsky, and Y. Yotov. 2013. Gravity, Scale, and Exchange Rates. NBER

Working Paper No. 18807. Cambridge: National Bureau of Economic Research (NBER).

Ando, METRO. and F. Kimura. 2012. How did the Japanese Exports Respond to Two Crises in the
International Production Networks? The Global Financial Crisis and the Great East Japan
Earthquake. Asian Economic Journal. 26 (3). páginas. 261–87.

Athukorala, PAG. C. 2014. Global Production Sharing and Asian Trade Patterns: Implications for
the Regional Comprehensive Economic Partnership (RCEP). Departmental Working Papers
2014-dieciséis. The Australian National University, Arndt-Corden Department of Economics.

charcos, B., Egger, PAG., y M. Pfaffermayr. 2014. Panel Data Gravity Models of International Trade.
CESifo Working Paper No. 4616. Munich: IFO Institute, Center for Economic Studies.

Chin, j. y B. Spegele. 2013. China’s Bad Earth. The Wall Street Journal. 27 Julio.
Fang, h., k. Eggleston, j. Rizzo, S. Rozelle, y r. Zeckhauser. 2012. The Returns to Education
in China: Evidence from the 1986 Compulsory Education Law. NBER Working Paper No.
18189. Cambridge: NBER.

∗ADB recognizes “China” as the People’s Republic of China.

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