The effect of Balassa-Samuelson in South-East Asia

• Main Authors: Mohamad, Saadiah, Jusoff, Kamaruzaman, Nair, Mahendhiran, Zaghlol, Azlul Khalilah
• Format: Article
• Language: English
• Published: Canadian Center of Science and Education 2008
• Online Access: http://psasir.upm.edu.my/id/eprint/7611/1/7611.pdf; http://psasir.upm.edu.my/id/eprint/7611/; http://www.ccsenet.org/journal/index.php/ass/article/view/1204

High growth in the South-East Asian countries for the past three decades should imply high increases in productivity to reveal the Balassa-Samuelson (BS) effect of high growth accompanied by real exchange rate (RER) appreciation. This paper examines the effects of productivity increases by developing a robust unrestricted error correction model (UECM) of RER based on a class of theories of time-varying equilibrium exchange rates as opposed to the conventional PPP-based theory. An empirical study was carried out on four selected Southeast Asian countries: Indonesia, Malaysia, Singapore, and Thailand. This work suggests that the effects of productivity increases may be more complicated than what the theory suggests and points to the possibility that the Balassa-Samuelson is affected by the stage of economic development rather than mere productivity increases.