Growth and the current account: Malaysia and Singapore

Abstract

A foreign trade model is estimated for two South East Asian countries, selected because they represent two extremes as far as the current account balance is concerned-- Malaysia, deficit, Singapore, surplus. The specification highlights, (a) the simultaneous interdependence of exports and import flows--a result of what Krugman [1995] denotes as the slicing up of the production process--and, (b) the impact of investment on imports as a result of productivity shocks on the current account. The estimation results point to the instability of the market for foreign exchange. Using an intertemporal framework, a methodology to derive the external long run equilibrium is applied to the estimated model. The implied constraint on domestic growth turns out to be mild.