Patterns of trade and payment: South and Southeast Asian Countries, 1970-1985

This study analyzes the patterns of trade and payment of eight South and Southeast Asian countries--Bangladesh, Burma, India, Malaysia, Pakistan, the Philippines, Sri Lanka, and Thailand--during 1970-1980. The study examines (i) the structure of merchandise trade and transfer and services accounts, (ii) the nature, magnitude, and causes of external payments problems, and (iii) the policy reaction of the countries in response to these problems.

The study finds significant structural changes in the commodity composition and the direction of trade for our countries over the study period. Manufacturing exports, particularly the "other manufactured goods" category--which includes the cotton and textile products--increased significantly for all countries. On the import side, capital and intermediate goods imports increased substantially. While the developed countries are still the major trade partners, newly industrializing and oil-exporting countries of the Middle East have become important trade partners for our countries. The structure of the services account is unfavorable for our countries, although one component of it--the travel account-- indicates an encouraging trend. South Asian countries also experienced a large inflow of remittance earnings from the oil-exporting countries of the Middle East.

Except for Malaysia, balance of payments deficits are a regular feature for our countries and the magnitude of the problem is large in most cases. There is some association between the trade orientation and the external deficits of our countries: strongly inwardly oriented countries have more deficits than strongly outwardly oriented countries.

The main causes of the external payment problems are evaluated. Three external factors (terms of trade, economic growth in industrial countries, and real interest rates in the international market) and two internal factors (real effective exchange rates and fiscal position) are analyzed. The study finds that both external and internal factors are responsible for the payments imbalance.

Regression analyses are also used to examine the determinants of balance of payments problems. Reduced form models are estimated with current account deficits as the dependent variable and the external and internal variables as discussed above as the independent variables. Poor results are obtained from both time series study of the individual countries and pooled cross-section and time-series study of the groups of countries.

The policy responses of the countries are also analyzed. It is found that the current account deficits are mainly financed through external borrowing, in particular, through official development assistance. Exchange rates, trade policies, or slowing down of domestic economic growth played minor roles.