Growth and the current account: Malaysia and Singapore

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. This research has been financed by the Dgicyt under grant PB94-1502, and the Junta de C. y L. under grant SA 35/97. The comments and suggestions of the editor of the journal and an anonymous referee are gratefully acknowledged. The paper has also benefited from the comments of the participants at the Fifty-First International Atlantic Economic Conference, March 13–20, 2001, Athens, Greece, and at the AEA conference on New Financial Instruments and Emerging Markets, Paris, 1998. Any possible remaining errors are the authors.