PROBLEM STATEMENT
Rapid output growth and low inflation are primary objectives of macroeconomic policy, achieved through monetary policies like interest rate adjustments and fiscal policies involving tax and government spending These strategies aim to mitigate inflationary pressures and promote sustainable growth, as inflation negatively impacts both businesses and households Many nations prioritize price stability, though some researchers argue that moderate inflation can have beneficial effects, such as prompting investors to shift their portfolios from cash to capital This shift can lower real interest rates, encourage investment, and enhance labor productivity, as noted by Tobin (1965).
In 1972, Tobin suggested that mild inflation facilitates labor market adjustments, benefiting economic dynamics Additionally, Jarret and Selody (1982) contended that consistent demand growth leads to moderate inflation rates, which can enhance productivity rather than hinder it Consequently, striving for zero inflation may result in immediate costs with prolonged negative effects.
In recent years, inflation has significantly impacted countries worldwide, particularly in developing nations The global economic crisis has exacerbated rising commodity prices, leading to increased difficulties for individuals and households In Asia, energy and food prices have surged, driven by strong domestic demand and rising wages, which further intensify inflationary pressures As a result, households and businesses are grappling with higher living and production costs Despite governments implementing various fiscal and monetary strategies to curb inflation and stabilize the macroeconomy, prices continue to rise, creating ongoing challenges for families and individuals in poorer countries.
Numerous studies explore the complex relationship between inflation and economic growth, yielding varied findings Some research suggests that inflation can positively influence growth, while other studies indicate a detrimental effect Recent investigations highlight a nonlinear relationship, identifying specific thresholds within the inflation-growth nexus However, the evidence remains inconclusive, particularly for developing countries, where consensus on the precise impact of inflation on economic performance is limited.
Inflation impacts economic growth differently in developed and developing countries Developed economies typically experience stable growth and low inflation rates, while developing countries face higher and more volatile inflation This disparity significantly affects both the economy and the overall quality of life for households.
This article examines the relationship between economic growth and inflation in selected developing Asian countries, including China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, during the period from 1990 to 2010 These nations have been chosen due to their rapid economic development in recent years, despite facing challenges from the global economic downturn and rising inflation rates Additionally, these countries are part of the ASEAN group, which shares similarities in economic structure, natural conditions, and growth rates, further highlighting their interconnectedness.
RESEARCH OBJECTIVES AND RESEARCH QUESTIONS
This paper aims to analyze the impact of inflation on economic growth in selected Asian countries, with a focus on understanding the varying effects on developing nations within the sample It also investigates the presence of thresholds in the inflation-economic growth relationship and examines how these thresholds differ among the countries studied Ultimately, the findings will inform policy recommendations for enhancing economic development in Vietnam.
There are four questions raised for the study, comprising the following questions:
(1) Does inflation impact the economic growth in the selected Asia countries?
(2) How are inflation effects on growth different from the countries?
(3) Are there thresholds in the nexus between inflation and growth of the countries? And,
(4) How different are threshold levels captured by the countries?
STRUCTURE OF THE PAPER
The rest of this paper is divided into 5 chapters:
The second chapter examines theories related to the relationship between inflation and economic growth, offering clear definitions of the variables utilized in the model Additionally, it presents empirical studies that support the evidence of a connection between inflation and growth.
The third chapter examines the economic outlooks of selected Asian countries, focusing on key factors contributing to GDP growth and inflation rates from 1990 to 2010 Each country's economic performance will be summarized and illustrated with figures to highlight their respective economic strengths.
Chapter four outlines the theoretical and empirical research models essential for the study, emphasizing the importance of selecting suitable models for effective research It also provides a detailed explanation of the chosen research methodology and data sources utilized for model estimation, ensuring clarity in conveying the thesis's core concepts.
The fifth chapter outlines the empirical findings of the study, beginning with descriptive statistics for each country to provide an overview of the regression predictions It then presents and discusses the regression results obtained using Eviews 4.0 software, focusing on the impact of inflation on economic growth and the identified thresholds within the inflation-growth relationship for each country.
The final chapter will summarize the conclusions drawn from the previous findings and propose policy recommendations aimed at assisting countries in addressing their challenges Additionally, the thesis will highlight the limitations of the research and suggest directions for future studies.
The thesis also consists of four appendices:
Appendix A presents the regression results of the quadratic model, utilizing the fixed-effect method for panel data analysis and employing Seemingly Unrelated Regression (SUR) to mitigate regression-related issues.
Appendix B contains the scatter diagrams between two variables comprising squared-inflation and growth of each country The diagrams are showed for supporting to find out thresholds
The results of testing Heteroscedastiscity via White-test approach for each country will be contained in Appendix C
Appendix D consists of the scatter diagrams describing the correlation between the variables in the model of each country.
THEORIES RELATED TO INFLATION AND GROWTH
According to Azar's (2009) paper on the quantity theory of money, a negative relationship exists between output and the price level when there is a shift along the aggregate demand (AD) curve This relationship is derived from the equation of exchange, which underpins the formation of the AD curve.
The equation suggests that with a constant money supply (M) and velocity (V), an increase in real output (Y) leads to a decrease in the price level (P) to maintain equilibrium However, a shift in the aggregate demand (AD) curve only happens when there is a change in the aggregate supply (AS) curve (Azar, 2009).
According to Mishkin (2001), four key factors can shift the aggregate supply (AS) curve to the left, leading to higher price levels and reduced output Firstly, when output exceeds the natural output rate, increased pressure in the labor market raises wages and production costs, causing the AS curve to shift leftward Secondly, when expected inflation negatively correlates with output, it further contributes to this shift Lastly, negative supply shocks, such as rising oil prices or commodity market volatility, also result in a leftward movement of the AS curve.
This section explores various theories related to inflation and economic growth, including Classical, Neo-classical, Endogenous, Keynesian, Neo-Keynesian, and Monetarist perspectives These theories enhance our understanding of the correlation between inflation and growth while also addressing the influence of additional factors on overall economic growth.
Adam Smith and David Ricardo are key figures in classical economic theory, advocating the idea that the economy is self-regulating and consistently achieves full employment They emphasize the significant role of technological advancements in driving economic growth (McTaggart et al., 1996).
The theory identifies three key factors that influence economic growth: capital, labor, and technology Capital, represented by investment and savings, plays a crucial role in the relationship between inflation and growth As inflation rises, real interest rates decline, leading to a decrease in savings rates, which negatively impacts investment since savings are a primary source of funding for investments While lower real interest rates may encourage borrowing, a lack of available capital can limit this borrowing capacity (Mc Taggart et al., 1996).
Solow (1956) and Swan (1956) are pioneers in indicating the neo-classical models
Mundell identified a new mechanism linking inflation and economic growth, suggesting that an increase in inflation or inflation expectations would lead to a decrease in people's wealth (Gokal and Hanif, 2004) Building on this, Cass (1965) and Koopmans (1965) developed a neoclassical growth model that incorporates variables such as investment and population growth in growth regression analysis Their model indicates that economic growth is stimulated by higher investment rates coupled with a decline in population growth rates.
According to New Classical theory, inflation acts as a tax on money balances when government spending aims to promote growth Additionally, high inflation is often accompanied by increased variability, leading to higher costs and risks associated with capital, which negatively impacts resource allocation (Paul et al., 1997).
The Endogenous theory, often referred to as the new growth theory, seeks to explain the variations in growth rates among countries and the elevated growth rates observed According to this theory, economic growth is driven by internal factors within the production process (Todaro, 2000).
The theory posits that inflation affects economic growth through two primary channels: investment and capital accumulation Additionally, Endogenous models enhance the understanding of growth by incorporating human capital, suggesting that the growth rate is influenced by the return rates of both human and physical capital (Gokal and Hanif, 2004).
Unlike Classical theory, Keynesian theory posits that the economy requires intervention through fiscal and monetary policies to achieve full employment As part of the Aggregate Demand Theories, it emphasizes the impact of factors like consumption, investment, and government spending on economic growth Additionally, Keynesian theory suggests that fluctuations in aggregate demand are influenced by expectations, often referred to as "animal spirits."
The conventional Keynesian perspective posits that inflation acts as a catalyst for economic growth, primarily illustrated by the short-run Phillips curve, which emerges due to sticky prices and wages This viewpoint suggests that inflation can lead to accelerated real growth in the short term However, as economic agents adapt to price changes, the trade-off represented by the Phillips curve may diminish This theory gained prominence during the 1960s and continued to evolve into the 1980s Furthermore, it is argued that inflation fosters growth by redistributing income from labor to firms, which tend to have higher propensities to save and invest.
Neo-Keynesian theory, rooted in Keynesian principles, posits that inflation is primarily influenced by the levels of real economic growth (GDP) and the natural rate of employment (Mc Taggart et al., 1996).
New Keynesians argue that there is a non-neutral relationship between inflation expectations and changes in the money supply Specifically, when inflation is anticipated to be higher, the money supply tends to increase This expansion leads to a rightward shift in the aggregate demand (AD) curve, resulting in higher production output.
When it comes to the Monetarist theory, we cannot forget two representative
Expectations regarding interest rates, tax rates, technological advancements, and global economic events influence aggregate demand, while aggregate supply is primarily affected by changes in the money wage rate, as noted by economists such as Milton Friedman and Brunner (Mc Taggart et al., 1996) This theory aligns with Classical economics, which posits that the economy is self-regulating and operates at full employment In contrast, fluctuations in aggregate demand are driven by the money supply, whereas aggregate supply is impacted by the money wage rate, in line with Keynesian principles.
GROWTH MODELS
Numerous studies indicate that inflation negatively impacts economic growth, as evidenced by various economic growth models These models demonstrate that capital accumulation and technological progress lead to a sustained increase in per capita income However, high and unpredictable inflation creates uncertainty regarding the rate of return on capital and investments Even when inflation is fully anticipated, it can still diminish capital returns (Bruno and Easterly, 1998; Pindyck and Solimano, 1993).
Inflation adversely affects human capital and investment in research and development, indirectly hindering economic growth Its most significant impact is on the long-term macroeconomic performance of market economies, primarily through the depreciation of total factor productivity (TFP), known as the efficiency channel Although challenging to model theoretically, this channel is crucial in understanding how inflation leads to reduced economic growth, making it an essential factor in estimating the effects of inflation on overall growth.
This section will examine key growth models, including the basic growth model, the Solow model, and the augmented Solow model, highlighting their effects on growth determinants Growth theory identifies three primary processes driving economic growth: the accumulation of assets such as capital, labor, and land; enhancing asset productivity through savings and investments; and technological advancement The objective of analyzing these models is to uncover additional factors influencing GDP growth beyond inflation Furthermore, one of these models will serve as the foundational framework for this paper.
Fundamental economic growth models are grounded in a few key equations that connect saving, investment, and population growth to workforce size and capital stock, ultimately influencing the overall production of goods These models emphasize the importance of investment levels, labor, productivity, and output (Todaro, 2000).
The aggregate production function is fundamental to all economic growth models, reflecting the relationship between production factors like capital and labor and total output Various standard growth models utilize different production functions, which illustrate how a country's total labor force and capital stock correlate with its overall output (Todaro, 2000).
The Solow model addresses the limitations of the Harrod-Domar model by introducing a neoclassical production function that allows for greater flexibility and substitution between production factors Unlike fixed capital-output and capital-labour ratios, the Solow model posits that these ratios are variable, influenced by the economy's comparative endowments of capital and labour It emphasizes diminishing returns to capital within its production function, establishing itself as a foundational framework in economic growth theories, particularly impacting developing countries (Todaro, 2000).
The Solow model posits that decreasing marginal returns to capital are fundamental to economic growth, leading to a steady state where output per capita, capital stock, and consumption all increase at a uniform rate, aligned with the exogenously determined rate of technological advancement.
According to Solow's model, economic growth is analyzed through diminishing returns to capital within a standard neoclassical production framework He emphasizes that saving rates and population growth are exogenous factors that determine the steady-state level of income per capita A key advantage of the Solow model is its ability to provide clear, testable predictions regarding the impact of saving rates and population growth on income levels Specifically, countries with higher saving rates tend to be wealthier, while those with higher population growth rates may experience a decline in wealth (Mankiw et al., 1992).
Nevertheless, the Solow model’s assumptions are not completely right; the model has no accurate prediction about the magnitudes of the saving rates and population growth
The augmented Solow model enhances our understanding of the interplay between saving, population growth, and income by incorporating the accumulation of both human and physical capital Omitting human capital from the traditional Solow model significantly distorts the impact of saving and population growth on income Furthermore, the augmented model demonstrates that the accumulation of human capital is closely linked to saving and population growth rates, indicating that neglecting human capital accumulation leads to biased estimates of these coefficients (Mankiw et al., 1992).
The augmented Solow model adding human-capital accumulation to the textbook Solow model (Mankiw et al., 1992) is given as follows:
Where: Y denotes for the total output, K is the physical capital, H is the stock of human capital, A is technology level and L represents for labour force.
VARIABLE DEFINITION
The growth rate can be understood through various definitions, particularly in relation to gross domestic product (GDP), as outlined by Blanchard (1997) GDP represents the total value of final goods and services produced within an economy over a specific timeframe Additionally, it can be viewed as the aggregate of value added across the economy during that same period Lastly, GDP is also defined as the total sum of incomes generated within the economy over the designated timeframe.
In macroeconomic theory, economic growth is represented as an outward shift in the production possibilities frontier (PPF) McTaggart et al (1996) emphasize that real gross domestic product (GDP) is a key measure of this growth GDP can be determined using two approaches, with the first being the total expenditure on goods and services This approach defines real GDP demanded (Y) as the sum of consumption expenditures (C) by households, real investment (I) by firms, government expenditures (G), and net exports (X-M) (McTaggart et al., 1996).
The equation Y = C + I + G + X – M represents the components of a nation's economic output, where Y is the total income generated from producing goods and services, also known as real GDP supplied This total income includes all payments for production factors such as wages, interest, rent, and profit (McTaggart et al., 1996) Real GDP supplied is quantified through the aggregate production function, which illustrates the relationship between inputs and outputs in the economy.
Y = F (L, K, T) Where: L is labour, K denotes for capital, and T stands for technology
Inflation rate refers to the annual percentage change in a price index, primarily the consumer price index, indicating the increase in the average level of prices It represents a process of rising prices, quantified as the percentage change in both the average price level and the overall price level According to Thirlwall (1974), inflation can be defined in this context.
“rise in the general price level whatever its cause” According to the view of Mishkin
Inflation, as defined by Dornbusch et al (1999), refers to "the rate of change in prices," while a broader definition from 2001 describes it as "a continual increase in the price level." Despite the various definitions of inflation, they all share a common theme: the focus on changes in price levels.
The Consumer Price Index (CPI) serves as a vital indicator of price levels, reflecting how average prices of goods and services purchased by households fluctuate over time (Gerber, 1999) Its primary functions include assessing changes in the cost of living and evaluating the value of money, with the inflation rate being a key measure of these variations The inflation rate is calculated using a specific formula that captures these economic shifts.
The inflation rate can be measured using various methods, with two notable alternatives to the Consumer Price Index (CPI): the Producer Price Index (PPI) and the GDP deflator The PPI tracks changes in the prices that producers pay for inputs, while the GDP deflator is derived by comparing nominal GDP to real GDP for a specific year.
The Consumer Price Index (CPI) offers several advantages over the Producer Price Index (PPI) and the GDP deflator, making it a more commonly used measure Research indicates that CPI helps mitigate the adverse effects of inflation on economic growth, although it is not a direct result of inflation itself Additionally, CPI is preferred over GDP deflators, as growth rates tend to have a negative correlation with fluctuations in GDP deflators (Gerber, 1999).
Despite the scarcity of theoretical models outlining the long-term effects of inflation, numerous researchers have sought to evaluate its economic costs Many argue that inflation negatively impacts economic growth by complicating decision-making for economic agents, as it obscures the predictability of relative price fluctuations (Harberger, 1998) Additionally, Feldstein (1982) identified that inflation imposes significant costs that distort relative prices, ultimately hindering investment decisions and resource allocation, thereby further undermining economic growth.
Inflation negatively impacts tax reductions for depreciation and increases rental costs for capital, leading to decreased capital accumulation and production growth (Clark, 1982) According to Friedman (1977), higher inflation rates result in greater inflation volatility, which significantly hinders economic growth The expectations-augmented Phillips curve suggests that expected inflation aligns with actual inflation in the long run, stabilizing the unemployment rate at its natural level Therefore, while nominal variables like inflation do not influence real variables such as unemployment and growth in the long run, other nominal factors can adversely affect these real economic indicators.
Inflation significantly affects economic decision-making by introducing menu costs and shoe-leather costs, which can lead to forecast errors due to biased market price information This necessitates that economic agents invest additional time and resources to gather accurate information, prompting them to seek measures to protect themselves against the adverse effects of inflation.
2 At a high level of inflation gives rise to a gradual change in prices is costly for companies
Price instability diminishes the efficiency of consumer cash holdings, leading to detrimental effects on resource allocation In cases of hyperinflation, inflation variability rises, complicating the task of accurately forecasting inflation This unpredictability can result in poor decision-making by savers and investors, ultimately hindering economic growth Additionally, inflation can undermine the confidence of both domestic and foreign investors in the future of monetary policy.
High inflation has numerous detrimental effects on society, primarily leading to welfare costs and constraining financial development by making intermediation more expensive It disproportionately impacts the poor, who lack financial assets to combat inflation Additionally, inflation hampers international trade by raising export costs, adversely affecting the balance of payments and hindering long-term economic growth Furthermore, inflation can distort the tax system by causing inaccurate lending and borrowing decisions, which increases the cost of capital and limits investment, ultimately stunting economic growth.
Empirical studies based on endogenous, neoclassical, and neo-Keynesian growth theories often struggle to identify a definitive list of explanatory variables, highlighting a common challenge in model development To address this issue, three strategies can be employed: utilizing a macroeconomic theoretical framework, selecting explanatory variables from the augmented Solow model, and drawing insights from empirical growth literature The total output of a nation is influenced by the availability of capital, labor, and asset productivity Neoclassical growth theory identifies key factors for output growth, including labor quantity and quality improvements through population growth and education, capital accumulation via saving and investment, and technological advancements Research indicates that besides labor force growth, critical determinants of economic growth are investments in physical and human capital, open trade policies, and low inflation rates Additionally, the ability to adopt technological advancements is crucial for output growth, particularly in developing countries where agriculture predominates, as supply shocks in this sector can adversely affect overall growth.
Economic growth is driven by several key components, including capital accumulation through investments in physical assets and human capital, which encompasses advancements in health and education Additionally, population growth enhances the labor force, serving as a significant factor in promoting economic development Furthermore, technological improvements provide effective strategies to achieve these growth objectives (Todaro, 2000).
EMPIRICAL STUDIES
Drukker et al (2005) outline four key predictions regarding the relationship between inflation and economic growth The first prediction suggests that inflation has no effect on growth, aligning with Sidrauski's (1967) view of money as super-neutral In contrast, the second prediction, based on Tobin's (1965) theory, indicates a positive relationship between inflation and long-term growth, as money acts as a substitute for capital Furthermore, both Tobin and Stockman argue that the impact of inflation on growth extends beyond the balanced-growth rate of output.
According to Stockman (1981), money is complementary to capital within the cash-in-advance model, indicating that inflation negatively impacts long-run economic growth Utilizing the endogenous growth framework from Lucas (1996) and Gomme (1993), research by Gillman and Nakov (2001) demonstrates a significant adverse effect of inflation on growth However, newer models proposed by Huybens and Bruce (1998) suggest that inflation will only adversely affect long-run growth if it exceeds a certain threshold level.
Recent perspectives on economic growth models suggest that inflation may have a short-term positive impact on growth; however, its long-term effects are generally negative Fischer (1993) highlights that sustainable long-term growth is positively influenced by sound fiscal policies and stable foreign exchange rates, while being adversely affected by inflation Moreover, Levine and Renelt indicate that the relationship between inflation and growth may not be consistent when analyzed across different datasets.
Recent studies in the new growth literature indicate that there is a statistically significant negative relationship between inflation and economic growth This conclusion is supported by the analysis of panel data, which includes various options such as decade averages, five-year averages, and annual data (Bruno and Easterly, 1998).
In the 1960s, the global economy experienced high growth and low inflation, challenging the conventional belief that inflation was a significant threat to economic stability During this time, the Phillips curve gained prominence, illustrating a positive short-term relationship between inflation and economic growth, a concept further supported by economist James Tobin.
Research by Sidrauski (1967) and others in 1965 indicates that inflation can positively influence long-term economic growth, even at elevated inflation rates This phenomenon occurs because, during high inflation, wealth tends to be invested in physical capital rather than held as cash This aligns with development theories that consider inflation a beneficial mechanism for reallocating resources towards capital accumulation (Bruno and Easterly, 1998).
Research on the relationship between inflation and economic growth has evolved significantly over time While contemporary economists largely agree that inflation negatively affects growth, earlier studies from the 1950s and 1960s, including those by IMF researchers, found no evidence of such negative impacts Additionally, research conducted in the 1970s suggested that inflation's effect on growth could be insignificant or even positive Mubarik (2005) argues that moderate inflation rates can stimulate economic growth In the short term, inflation may promote growth through expanded macroeconomic policies, but its long-term effects are not sustainable.
The relationship between inflation and economic growth has been a topic of debate, particularly highlighted during the high inflation crises of the 1980s Research indicates that this relationship is complex, showing a strong correlation in the short run but a weaker one in the long run (Bruno and Easterly, 1998) The persistent inflation experienced in many countries during the 1970s and 1980s prompted a reevaluation of previous studies Additionally, the lack of comprehensive data and the failure to recognize thresholds in the relationship between inflation and growth contribute to the understanding that inflation may positively impact growth under certain conditions.
Research from the 1990s, including studies by Fischer (1993) and Barro (1995), indicates that a 10% increase in the average inflation rate can reduce the real growth rate by 0.2 to 0.3 percentage points annually Higher inflation diminishes the marginal value of consumption, leading to reduced work effort and a decline in the marginal product of capital, ultimately slowing capital accumulation (Gomme, 1993) Additional studies, such as those by Marquis et al (1995) and Haslag (1997), show that rising inflation rates negatively impact the returns on deposits, resulting in slower deposit growth, which in turn hampers capital accumulation and economic growth Furthermore, Barro (1996) highlights that inflation influences growth through the investment channel.
There is a strong consensus among economists regarding the negative relationship between inflation and economic growth, as supported by studies from Barro (1995), Fischer (1993), and Bruno and Easterly (1998) Although Barro (1996) and Sala-i-Martin (1997) did not include inflation in their analyses, new growth theorists have highlighted its significance, suggesting that inflation acts similarly to a tax on capital, particularly in models requiring cash-in-advance for investment The new growth literature consistently demonstrates that inflation adversely affects growth, with earlier studies, such as one from 1985, also confirming this negative impact Additionally, Fischer (1993) noted a reverse link between growth and inflation, reinforcing the understanding of this detrimental relationship.
Research indicates a nonlinear relationship between inflation and economic growth, highlighting the importance of threshold levels Studies by Sarel (1995) and Ghosh and Phillips (1998) suggest that when inflation exceeds a certain threshold, it negatively impacts growth; conversely, lower inflation rates may either positively influence growth or show no clear effect Ignoring structural breaks can significantly bias the perceived impact of inflation on growth, potentially by a factor of three, emphasizing the critical role of thresholds in understanding this relationship.
Numerous studies have explored the relationship between inflation and economic growth, revealing complex findings Sarel (1995) analyzed data from 87 countries, both developed and developing, from 1970 to 1990, utilizing OLS with fixed effects, and identified a nonlinear correlation with a threshold of 8% inflation In a follow-up study, Ghosh and Phillips (1998a) found a lower structural break point of 2.5% in the annual inflation rate Conversely, Christoffersen and Doyle (1998) reported a turning point of 13% for transition countries, but when they included four Asian transition economies in their analysis, the threshold decreased to approximately 8% This indicates that while inflation negatively impacts growth in Asian transition countries, exceeding a specific inflation rate does not necessarily exacerbate this negative effect.
Intermediate inflation rates significantly influence economic growth, yet their effects often remain overlooked Research indicates that understanding the inflation-growth relationship requires identifying threshold levels; below 2-3% inflation, growth benefits, while rates exceeding 10-20% result in detrimental effects on growth This dual threshold approach highlights the complexity of inflation's impact, emphasizing the need for a nuanced understanding of its role in economic performance.
Khan and Senhadji (2001) conducted a study on the inflation-growth correlation, revealing two key thresholds: 1-3% for developed countries and 11-12% for developing nations, with a general threshold of 8% across all samples Li (nd) further contributed to this discussion, identifying nonlinear relationships and establishing thresholds of 14% and 38% for developing countries, while finding a single threshold of 24% for developed countries Additionally, Sepehri and Moshiri (2004) applied Sarel’s model, uncovering three thresholds: 15% for lower-middle-income countries, 11% for low-income countries, and 5% for upper-middle-income countries.
In her study, Le (2011) applied the Khan and Senhadji (2001) method to explore the threshold in the inflation-growth relationship for Vietnam, identifying an optimal inflation threshold of 9.2 percent that promotes economic growth She noted a negative relationship between inflation and growth, with growth responding more significantly to inflation changes than inflation does to growth elasticity This paper similarly employs the Khan and Senhadji method to investigate thresholds, but it differs in scope, model application, variable selection, and regression approach, as it will analyze 12 countries divided into developing and developed categories.
Economic Outlook of Vietnam
Between 1990 and 2010, the Vietnamese economy experienced a high inflation rate coupled with low GDP growth The inflation rate frequently reached double digits, while growth remained in single digits In 2008, the global economic crisis exacerbated this situation, causing inflation to surge above 20% Although inflation decreased in 2009, it rose significantly again in 2010, while the growth rate showed a modest recovery.
The Vietnamese economy grew quickly in 2010; it is thanks to recovery in exports and an efficient monetary policy However, inflation reached to double-digit by lately
In 2010, governments prioritized macroeconomic stability by implementing a mix of tightened monetary and fiscal policies, leading to a moderation in GDP growth for that year, with an expected rise in 2011 Additionally, inflation is forecasted to decrease in 2011 The immediate challenge lies in effectively executing these tightened policies, while the long-term goal is to invigorate structural reforms (Mellor et al., 2011).
In 2010, Vietnam's economy grew by approximately 5.66%, driven by a recovery in the global economy and effective domestic fiscal and monetary policies implemented in 2009 A notable consumption increase of 9.7% fueled private sector investment, while industrial growth of 7.7% contributed around 3.2% to GDP Strong external demand further boosted manufacturing growth by 8.4%, and investments in public infrastructure led to a 10.1% rise in construction Additionally, the services sector was estimated to grow by 7.5%, enhancing overall economic performance.
3.1% in GDP growth However, agriculture sector decreased, despite of rising up 2.8% in 2010, because of suffers from weather disasters like flooding in central regions (Mellor et al., 2011)
Growth rate of GDP (% per year)
Figure 0-1: A comparison between inflation and growth rate of Vietnam from 1990-2010
Robust economic growth in Vietnam contributed to a decrease in unemployment and a reduction in poverty from 12.3% to 10.6% in 2009 However, inflation surged to 11.8% in late 2010, averaging 9.2% for the year, the highest in Southeast Asia By early 2011, inflation reached 13.9%, driven by rising food prices and school fees Although credit growth increased by 32.4%, surpassing the official target of 25%, it was lower than the previous year Concerns about declining purchasing power and a significant depreciation of the dong led to increased purchases of gold and US dollars Consequently, the State Bank of Vietnam devalued the dong by 9.3% in early 2011, responding to mounting depreciation pressures.
Monetary policy has faced challenges due to a lack of clarity, as the central bank (SBV) began phasing out its monetary stimulus package at the end of 2009, raising the base rate and eliminating interest rate subsidies In 2010, banks sought adjustments to increase lending rates, which were necessary due to rising inflation Despite tightening policies, inflation remained high, reaching double digits, and the dong faced depreciation pressures The SBV's efforts to support the dong were limited by foreign exchange reserves However, exports showed signs of recovery, reducing the trade deficit to $7.1 billion, double that of 2009 With all fiscal stimulus measures expiring at the end of 2009, the fiscal deficit decreased to 8.0% of GDP in 2010, while government revenues and grants increased by approximately 10% (Mellor et al., 2011).
In January 2011, the Communist Party of Vietnam set a target for average GDP growth of 7%-8% in its Socioeconomic Development Strategy for 2011-2020 However, in February, the government shifted focus to prioritize stable growth in the near future To achieve this stability, Resolution 11 was enacted, which implemented tighter fiscal and monetary policies aimed at reducing inflation and maintaining a stable external position (Mellor et al., 2011).
Economic Outlook of Philippines
From 1990 to 2010, the Philippines experienced significant fluctuations in both GDP growth and inflation rates, as illustrated in Figure 0-2 Throughout this two-decade period, the inflation rate consistently surpassed the growth rate, mirroring trends seen in Vietnam The country faced economic crises in 1991, 1998, and 2008, which resulted in high inflation and low growth However, by 2010, the Philippine economy showed signs of recovery, with a marked increase in the growth rate.
In 2010, the economy experienced a robust recovery driven by rising private consumption, a rebound in exports, and increased investment, while maintaining moderate inflation and a healthy external status However, the pace of growth was insufficient to significantly reduce poverty and generate jobs Looking ahead, the economy is projected to achieve sustained and stable growth in 2011 and beyond, with government policies and reforms anticipated to further stimulate investment (Mandoza and Usui, 2011).
In 2010, the Philippines experienced a robust GDP growth of approximately 7%, driven by significant increases in private consumption, exports, and investments Private consumption, which constituted 60% of the total growth, rose by 5.3%, largely supported by remittances from overseas workers that grew by 8.2% Investments accounted for around 40% of the GDP, marking the highest increase in a decade, with fixed capital rising by 17.1% This growth was particularly notable in sectors such as agriculture, construction, and transport, contributing to a remarkable 15.7% boost in GDP, the highest in six years The surge in investments was fueled by strong consumption, rising exports, increased enterprise revenues, and low interest rates (Mandoza and Usui, 2011).
Growth rate of GDP (% per year) Inflation rate (% per year)
Figure 0-2: A comparison of inflation-growth relationship of Philippines from
The commitments of the new president have instilled optimism among businesses, positively impacting the overall business environment During the global recession, net exports contributed to GDP growth, while government expenditure initially increased in early 2010 but later declined to address the fiscal deficit The industrial sector surpassed services as a key contributor to production, with manufacturing rebounding by 12.3% after a slowdown in 2009 Notably, industries such as petroleum products, textiles, and food processing played a significant role in this growth Additionally, low-interest rate incentives boosted the construction sector by 10.5% (Mandoza and Usui, 2011).
In 2010, the services sector significantly boosted the economy, contributing approximately 50% of GDP with a growth rate of 7.1% Conversely, agriculture faced challenges due to dry weather conditions, resulting in a decline in its contribution to GDP growth, which fell below 17% Despite this downturn, agriculture remains one of the three key sectors of the economy (Mandoza and Usui, 2011).
In 2010, the Philippine economy experienced a strong recovery, yet the inflation rate remained stable at approximately 4.5%, within the government's target range of 3.5% to 5.5% This low inflation rate allowed the central bank to maintain its monetary policy without tightening measures, resulting in unchanged low interest rates Looking ahead, inflation is projected to rise to 4.9% in 2011, with a recorded rate of 3.9% in the first two months of the year.
Economic Outlook of Malaysia
It is similar Vietnam and Philippines, supported by domestic demand and increases in exports, the economy of Malaysia recovered significantly in 2010 The forecast in
In 2011, domestic demand is expected to remain stable, contributing to sustained economic growth Inflation rates are anticipated to stay low and manageable The primary goal is to attain high-income country status by 2020, which hinges on the structural reform program established in 2010 (Sidgwick, 2011).
Between 1990 and 2010, Malaysia experienced significant fluctuations in its GDP growth and inflation rates, as illustrated in Figure 0-3 Unlike other countries, Malaysia's growth rate consistently surpassed its inflation rate during this period However, the nation faced economic crises in 1998 and 2009, resulting in a growth rate that dipped below zero percent Despite these challenges, Malaysia's economy rebounded in 2010, showcasing a remarkable recovery and acceleration in growth.
Following the global crisis of 2009, which saw a 1.7% decline in economic growth, the economy rebounded in 2010 with a notable increase of 6.7% This resurgence was driven by robust domestic demand and a recovery in exports, alongside a 6.6% rise in private consumption fueled by a favorable working environment and increased credit availability for households and businesses However, public consumption decreased in 2010 due to the government's fiscal consolidation efforts Additionally, investment, including gross fixed capital and public investment, rose by 9.4%, significantly contributing to the overall growth in 2009.
An expansion in production of domestically-oriented manufacturing brought a benefit to rising in private investment (Sidgwick, 2011)
A robust recovery in services, manufacturing, and construction has driven output growth from the supply side The manufacturing sector, contributing over 25% to total output, has seen impressive growth in domestically-oriented industries, particularly in electrical and rubber products, which have boosted manufacturing-oriented exports Notably, services have accounted for more than half of total output, with significant contributions from real estate, business services, and transportation, all of which have dramatically fueled this growth (Sidgwick, 2011).
Growth rate of GDP (% per year)
Figure 0-3: A comparison between inflation and growth rate of Malaysia in the period of years 1990-2010
Agriculture is projected to decline, leading to increased natural rubber production while crude palm oil and cocoa output decrease Mining production remained stagnant due to a 3.3% drop in crude oil production In 2010, inflation averaged 2.2%, driven by rising prices in food, beverages, and nondurable goods By early 2011, inflation rose to 2.4% due to escalating global oil and commodity prices, along with a surge in sugar prices contributing to higher inflation rates Despite fluctuations in food and drink prices, underlying inflation steadily increased, reaching 4.3 times the short-term external debt by early 2010.
In 2009, an expanded fiscal policy, including two stimulus packages, raised the federal budget deficit to 7.0% of total growth However, in 2010, the deficit decreased to 5.6% of GDP due to a modest increase in revenue and cuts in operational spending By mid-2010, direct subsidies had risen to approximately 11% of operational spending, with fuel subsidies comprising a significant portion To offset these costs, the government increased sugar and fuel prices by over 10% in 2010.
This method has significantly contributed to reducing the budget deficit, resulting in a decrease in the federal government's debt ratio from 54.0% in 2009 to 51.3% in 2010 Additionally, public debt represented 3.5% of the total external debt (Sidgwick).
Over the past three decades, Malaysia has made significant strides in poverty reduction, infrastructure development, and becoming a major exporter Despite this progress, the country remains classified as a middle-income nation, with a GDP per capita of approximately $7,350 in 2009 The current strategies to maintain this status are inadequate for advancing to the next economic phase Private investment has stagnated at below 25% of GDP for the past decade, a stark contrast to the over 30% seen in the 1990s, indicating challenges in the business environment Consequently, Malaysia, once viewed as an ideal investment destination, is gradually losing its appeal.
The country primarily concentrates on electrical and electronic products, positioning itself within industrial markets characterized by fragile demand and volatile prices for key commodities such as petroleum and palm oil Exports are of low value and predominantly rely on low-skilled labor, resulting in minimal wages Despite a rise in labor productivity, the pace is insufficient to foster creativity and innovation In response to these challenges, the government is making efforts to reform its structural programs (Sidgwick, 2011).
Economic Outlook of Indonesia
Between 1990 and 2010, Indonesia experienced steady economic changes compared to Malaysia, as illustrated in Figure 0-4, which compares GDP growth and inflation rates Notably, during the 1998 Asian financial crisis, Malaysia faced severe challenges, with inflation soaring to nearly 60% and growth plummeting below -10% By 2010, following the economic crisis, Indonesia's economy exhibited slow growth, with both inflation and growth rates remaining relatively stagnant.
In 2010, a notable rise in investment and private consumption contributed to a rapid economic growth, with GDP increasing by 6.1% compared to a decline in 2009 However, the economy faced significant challenges, including rising inflation rates and the need to manage increasing capital inflows (Ginting and Aji, 2011).
Private consumption rose by 4.6%, driven by a strong employment market and increasing agricultural prices, contributing 2.7% to GDP Fixed capital investment grew by 8.5% in 2010, adding 2 percentage points to GDP, primarily due to investments in machinery and equipment rather than buildings The remarkable recovery in investment was influenced by improvements in both domestic and global investment conditions, alongside an appreciation of the national currency and easier credit access Additionally, a rebound in export demand and a significant expansion in services, which contributed 3.8 percentage points, further fueled robust economic growth.
In 2010, the industrial sector experienced modest growth of 4.7%, while agriculture lagged significantly with only a 2.9% increase over the past five years This decline can be attributed to adverse weather conditions and inadequate infrastructure, which negatively impacted food supply Consequently, food prices surged, contributing to a rise in inflation from 4.8% in 2009 to 7.0% in 2010, exceeding the central bank's target range of 4.0% to 6.0% (Ginting and Aji, 2011).
Growth rate of GDP (% per year)
Figure 0-4: A comparison between inflation and economic growth of Indonesia from 1990-2010
The central bank of Indonesia implemented measures such as increasing reserve requirements for commercial banks and raising interest rates after maintaining them for six months These actions contributed to the country's economic achievements, including a trade surplus driven by rising exports Additionally, the capital and financial accounts experienced growth due to increased inflows from portfolio investments and foreign direct investment (FDI), highlighting an attractive investment climate As a result, unemployment decreased in 2010 due to the creation of new jobs, while the poverty rate significantly declined Overall, Indonesia's success in fiscal consolidation stands out as a remarkable outcome of its economic policies.
The new government aims to achieve a 6% growth in real GDP over the next five years through effective expenditure management by the Ministry of Finance To support this goal, attracting both foreign and domestic investments is essential (Ginting and Aji, 2011).
Despite facing ongoing challenges, Indonesia maintains a strong position in economic growth, with a projected GDP increase of 6.4% in 2011 The country's gross national income per capita has shown consistent growth, rising from $2,200 in 2000.
$3,720 in 2009 For macroeconomic stability, the country has attempted to achieve the fiscal targets, consisting of dramatically reducing debt ratio to GDP from 61% in
From 2003 to 2009, Indonesia's budget deficit decreased significantly from 27.5% to a planned 0.4% of GDP by 2011 The country has outlined a long-term development plan spanning from 2005 to 2025, structured into five-year phases, each with distinct strategies The current phase, from 2009 to 2014, focuses on enhancing the quality of human resources, advancing science and technology, and boosting economic competitiveness (Ginting and Aji, 2011).
Economic Outlook of Thailand
In 2010, Thailand experienced a robust economic recovery similar to other Asian nations, driven by substantial increases in private consumption and investment following the global recession However, economic growth is anticipated to moderate in 2011.
2012 as a result of reducing external demand and suffering from a base effect The forecast of inflation will increase in 2011, immediately the central bank responds to keeping a tightened monetary policy
Between 1990 and 2010, Thailand's economy experienced significant fluctuations in GDP growth and inflation rates, as illustrated in Figure 0-5 Unlike Indonesia, Thailand faced notable challenges during this period, particularly during the economic crises of 1998 and 2009, which resulted in negative rates for both inflation and economic growth Nevertheless, the Thai economy demonstrated resilience and rebounded rapidly following these crises Overall, Thailand's inflation rate consistently outpaced its growth rate during this timeframe.
In 2009, a decline in GDP growth hindered recovery, but a 7.8% rebound in 2010 was driven by a surge in export demand, which boosted manufacturing and enhanced consumer and business confidence However, political tensions in mid-2010 constrained economic recovery Investment growth significantly contributed to demand, adding 5.2% to GDP, with private fixed investment rising by 13.8% and export-oriented manufacturing playing a key role As export ratios increased, industries such as automobiles and electrical machinery saw a rise in equipment investment, reaching 14.7% Private consumption, which had decreased in 2009, grew by 4.8% in 2010, contributing 2.5% to GDP growth, supported by a robust labor market and rising agricultural prices (Attapich, 2011).
Growth rate of GDP (% per year)
Figure 0-5: A benchmark between inflation and growth of Thailand in the years of 1990-2010
Since the implementation of government fiscal stimulus packages in 2009, Thailand has experienced economic growth driven by increased public consumption spending However, the public fixed investment ratio has declined compared to previous years, largely due to reduced investment in state-owned enterprises following the launch of the Strong Thailand infrastructure program The Gini coefficient indicates a high level of income inequality among Thai households, currently at 0.51 In response, the government has increased investments in transport infrastructure to generate jobs and support business expansion (Attapich, 2011).
The industrial sector significantly contributed to GDP growth, adding 6.0 percentage points, with manufacturing production rising by 8% at the end of 2010, accounting for 5.4 percentage points of the overall growth In contrast, the services sector saw a modest increase, contributing 2.0 percentage points to total output Despite a general recovery and robust growth across various sectors, agriculture experienced a decline of 2.2% in 2010 due to adverse weather conditions negatively impacting production (Attapich, 2011).
Economic Outlook of China
Between 1990 and 2010, China's GDP growth rate consistently outpaced its inflation rate, as illustrated in Figure 0-6 Unlike Thailand, China experienced higher growth rates compared to inflation However, during the economic crises of 1992 and 2008, inflation surged while growth rates declined significantly.
2010, China has signal of recovery and increase again in growth rate and inflation rate, but the output growth rate still gains a high rate
Since 1980, the People's Republic of China (PRC) has experienced significant economic growth, with per capita income rising at an impressive rate of 8.2% annually from 1981 to 2007, transforming it from an economically weak nation to a leading global economy Projections indicated a real GDP growth of 9.3% in 2011 and 8.7% in 2012 However, challenges such as inflation and pressures in the real estate market necessitate maintaining macroeconomic stability for continued growth According to Ardo Hansson, a Lead Economist in China, strong corporate investment and a robust labor market are essential for navigating the headwinds posed by macroeconomic normalization, inflation, and a gradual slowdown in global growth.
China's macroeconomic stability policy during the global crisis was significantly supported by extensive fiscal and monetary stimulus packages Although consumption growth declined in early 2011, overall domestic demand remained stable due to a robust increase in investment Property investment thrived, bolstered by strategies aimed at managing housing prices Additionally, a key policy focus was addressing the rising inflation rate, which had reached 5.4%, primarily driven by higher food prices (Lommen and Zhuang, 2011).
Growth rate of GDP (% per year)
Figure 0-6: A comparison between inflation and growth rate of China from 1990-2010
Since transitioning from a centrally planned economy to a market-oriented one in the late 1970s, China has become a dominant force in the global economy, emerging as the largest exporter by 2010 The country has restructured its state-owned sectors deemed vital for "economic security," enhancing its competitiveness on the world stage In mid-2005, China shifted its currency policy, depreciating the yuan by 2.1% against the US dollar and linking it to a basket of currencies instead This economic transformation, which has seen China's GDP increase more than tenfold since 1978, has led to significant achievements, positioning China as the second-largest economy globally by purchasing power parity (PPP) in 2010, surpassing Japan and following only the United States (Lommen and Zhuang, 2011).
In 2009, the global economic downturn led to a decline in foreign demand for Chinese exports, marking a significant shift; however, China rebounded swiftly, achieving a remarkable GDP growth of approximately 10.5% in 2010, outpacing all major economies This strong growth trajectory is expected to continue into 2011, reinforcing the effectiveness of the stimulus policies implemented during the financial crisis The government, through the 12th Five-Year Plan adopted in March 2011, committed to ongoing economic reforms and highlighted the importance of boosting domestic consumption to reduce future reliance on exports for GDP growth.
In 2011, China is expected to achieve only limited progress in its rebalancing efforts due to two significant economic challenges: inflation, which exceeded the government's 3% target by late 2010, and escalating local government debt This debt, largely a consequence of stimulus policies, remains off-the-books and is considered to be of potentially low quality (Lommen and Zhuang, 2011).
Economic Outlook of India
India's economic growth has been significantly influenced by capital stock expansion throughout the 1980s, 1990s, and 2000s During the 1980s, both labor and total factor productivity (TFP) contributed equally to GDP growth, each accounting for approximately 25% annually In the 1990s, labor growth played a more prominent role in driving economic expansion compared to TFP growth However, in the 2000s, TFP growth emerged as the primary driver of GDP growth, overshadowing the contributions from labor growth (Hasan, 2011).
Between 1990 and 2010, India's economy experienced significant fluctuations in GDP growth and inflation rates, as illustrated in Figure 0-7 The period was marked by a high inflation rate relative to economic growth, particularly during crises in 1992, 1998, and 2008, which negatively impacted both growth and inflation Although India saw a rebound in GDP growth in 2010, inflation surged dramatically, surpassing the growth rate.
In 2010, India's economy demonstrated remarkable resilience, achieving a growth rate of 9.67% This growth was primarily driven by a robust recovery across agriculture, industry, and services Notably, the agriculture sector experienced a significant increase, soaring from a mere 0.4% in 2009 to an impressive 5.4%.
2010, is thanks to helping with a supportive weather (Hasan, 2011) It is not too bad in comparison to agriculture; industry is assessed to impressively increase at 8.1% in 2010, a healthy growth (Hasan, 2011)
Growth rate of GDP (% per year)
Figure 0-7: A comparison between inflation and economic growth rates of India in the period 1990-2010
In the first half of 2010, consumer durables and capital goods played a significant role in driving GDP growth, alongside key sectors such as crude oil, electricity, and steel The services sector experienced a growth rate of 9.6%, although this was lower than the previous year's performance On the expenditure side, private consumption, investment, and exports were the main contributors to growth; however, total consumption growth declined from 8.7% in 2009 to 7.3% in 2010, primarily due to a sharp decrease in government expenditures impacting private consumption As the global recovery began, investment emerged as a crucial factor for growth, with notable increases in the business investment sector.
The prime challenge in India’s economy is surging of inflation in 2010 Inflation edged up double-digit in the mid of 2010 and estimated at 13.2% in the end of year
Rising food prices are a significant contributor to inflation, with adverse weather conditions causing food inflation spikes as seen in 2010 To combat this inflation, the government implemented various measures, including increasing the report rate, reverse rate, and cash-reserve ratio.
Authorities have recognized that current measures are insufficient to address supply-side pressures, which are fundamental drivers of inflation Additionally, the continuous rise in oil prices is contributing to expectations of further inflation increases in the near future.
In 2010, the Indian rupee maintained stability despite a higher inflation rate compared to neighboring countries, contributing to a modest increase in the real effective exchange rate This stability was supported by a notable rebound in India's economic growth, which also facilitated some progress in key reforms (Hasan, 2011).