How worrying is the fall in exports?

By P. GUNASEGARAM

Accurate analysis and diagnosis is absolutely necessary to prescribe the right cure for economic difficulties

Sometimes, even during these trying, troubled times, things don’t seem as bad as they look at first sight. If one takes the trouble to dig a step or two below the top headlines, the bad news becomes less bad and almost tolerable.

One key figure that we look at for the health of the economy is exports of goods. In January, for instance, exports plunged 28% from a year ago to RM38.3bil. That large plunge has been cited as a harbinger of very worrying times. Is that really so?

Not necessarily. We are a trading nation. We import and export a lot of goods which are not produced domestically. Exports typically exceed over two times the gross domestic product, GDP, or sum of goods and services produced locally.

That means one thing – a lot of stuff that we import does not stay in the country but gets exported out. And so, even as exports contracted 28%, imports contracted a larger 32% to RM29.5bil, giving a trade surplus of a still healthy RM8.8bil, a contraction of 9% from the figure in January 2008.

Yes, that’s bad but it is still a good trade balance and it is not anywhere near what the 28% contraction in exports indicates. And why is that, one might ask? How come we are so insulated compared to other countries?

The reason is that a huge chunk of our imports are intermediate goods – nearly 70%. That means about seven-tenths of goods imported into Malaysia are subsequently exported. In other words, a lot of these imported goods become parts of goods subsequently exported.

Much of these are electronics and electrical items, where goods are imported, assembled or otherwise processed and than exported for a higher value. What adds to economic value is the difference in price between the exports and the imports, the so-called value-added in exports.

Because of the low value-added in manufactured items such as electronics and electrical equipment, the export values of these goods don’t represent the economic value of the goods exported because the export values do not net off the import content in the manufactured items.

The figures bear these arguments out. One of the biggest drops in exports for January came from electrical and electronics products which fell some RM7bil or about a third to RM13.7bil. Imports of such products amounted to RM10.3bil, implying a value-add of RM3.4bil (13.7bil minus 10.3bil), much smaller than the export impact of RM13.7bil.

Unlike commodities such as oil and palm oil where exports have 100% local value-added, electronics items have as little as 15% to 25% local value-added and their contribution to the overall economy is therefore extremely overrated by many analysts.

The right way to look at the impact of exports on the economy of the country as a whole is to look at the overall impact on the trade balance, that is exports of goods less imports.

That takes out the distortion caused by imports which are used in the production of exports, better reflecting the actual impact on the domestic economy than what the export figures by themselves would indicate.

Yes, times are worrying. But often they are not as worrying as what some people paint them out to be. We need some circumspection and to look behind and beyond the headline figures to ascertain a clearer picture of things.

Clarity of the magnitude and severity of the problem ensures that we don’t swing a sledgehammer to kill a fly when a gentle flick of the wrist will do the job far better.

- THE STAR