Domestic Demand-driven Growth: Analytical Perspectives and Statistics Needed

Abstract

Given the imbalances in global demand and sluggish growth in the advanced economies, which had absorbed the bulk of world exports before the onset of the 2008/09 global financial crisis (GFC), the shift from export-led growth (ELG) strategies to domestic demand-driven growth (DDDG) strategies appears inevitable for export-oriented economies. In dissecting Malaysia’s growth performance into various demand components and sources, it was found that DDDG in Malaysia had helped to offset the weak export demand it had faced over the last decade and, importantly, during the post-GFC years. Using input-output tables to assess the changes in output structure arising from substituting current export demand with domestic demand, the analysis showed that the country’s high export orientation in a large number of industries precludes its ability to fully offset any sharp decline in exports. The implication is that DDDG can only effect a partial decoupling from external demand and that given the differences in the composition of export and domestic demand, there will be sectoral differences in the impact on industrial capacity, employment and income arising from the ELG-DDDG shift. In cross-country comparisons, Malaysia’s ‘apparent’ under-consumption and low private investment levels, in concert with its narrowing but still positive savings-investment gap, lend further support to the feasibility and desirability of promoting DDDG to support economic growth. Importantly, DDDG is sustainable only if it maximizes economic efficiency and
utilization of resources, skills, human capital, and physical and social infrastructures subject to structural, credit and other constraints. On the consumption side of DDDG, a higher level of spending by the middle and upper income groups will need to be elicited while the income of the low income groups will need to be boosted. Private investment, regardless of domestic or foreign sources or DDDG versus ELG orientation, will be one of the key drivers of DDDG, given the excess savings in the private sector as well as the capacity expansion and productivity growth associated with gross fixed capital formation. Some evidence of lower productivity growth in domestic-oriented industries compared to export-oriented ones reiterates the need for policy measures to boost productivity as part of the DDDG thrusts. Based on a suggested DDDG framework, whereby the fundamental sources of economic growth emanate from output and structural shifts to higher value activities, productivity increases and institutional quality improvements, the statistical needs are examined for each of the four suggested strategic DDDG thrusts. The paper reiterates that DDDG should not be viewed as a substitute for export-led growth (ELG) strategies. Rather, by harnessing the complementarities of the two paradigms, Malaysia can capture the growth opportunities arising from an upswing in external demand while mitigating the adverse effects on output and employment due to volatile export markets by strengthening the resilience of domestic demand.

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