Transcript Openness in Growth Models Development Economics, 14.12.09

Openness in Growth Models
Development Economics, 14.12.09
By Chantelle Blachut & Stéphanie Carret
MADE I, Warsaw University, Faculty of Economics
“Trade which, without force or constraint, is naturally and regularly carried
on between any two places is always advantageous,though not always
equally so…” A. Smith (1776)
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The planning for today
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Introduction
DPRK & OECD’s countries openness
Historical perspective, crisis and protectionnism
Modern theory of trade policy
Trade and inequality
Impact of North-South trade on industrialized economies
The case of South-East and East Asia
Conclusion
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Introduction
• Trade openness, globalization, regional and global integration,
WTO rounds…those terms have provoked vivid reactions,
passions, economic & social papers, reports…
 Empirical studies: trade is one element of the developement path;
foster growth especially with association of right tools: direct or
indirect policies and reforms
 What about the causality link between trade openness and growth?
 On the one hand that trade allows building of C.A, more R&D
efforts and technology spillovers…
 … but also that worldwide trade system and network has been
organized at the advantage of the already developed countries
 Impact on income distribution and poverty reduction?
• Does trade increase dependency of developed country?
 Direction global trade is taking during crisis time?
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Reductio ad absurdum:
Case of the DPRK
• Basic intuition concerning trade/growth correlations: take the
argument to extreme and consider what occurs in a situation of
self imposed international isolation and extreme barriers to
trade
 Political system & Economic Basis of the DPRK post 1953:
• Totalitarianism, one party domination, single ideology
• CPE, Collective Production
• Development characterized by theme of international struggle against imperial
forces
 Post Soviet collapse - extremely poor economic performance:
• Current GDP app. 75% of 1992 (current problems: inflation, black
market)
• Persistent Famine/malnutrition
• Refugee Problem and Human Trafficking along Chinese Border.
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Some Evidence
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The case of OECD’s countries:
Trade/GDP ratio (source: stats.oecd.org)
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Historical perspective
(Vamvakidis, 2004)
• Free trade is a «historical aberration»
 Free trade mainly a post-1970 phenomenon in
20th century where protectionnism has been
the rule
• 1870 & 1920, views are divided and there seem to be
no robust correlation between trade and growth
• 1920-1940: negative correlation with an important
share of protectionnism which ensured the countries to
grow faster
• 1950-1970: no correlation between openness to trade
and growth
• From 1970 & after: positive correlation
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Protectionism as the path to Trade
openness?
• Is free trade “kicking away the ladder”? (F. List 1885)
 Does the protection of infant industries foster growth? Government
interventionas an explanation of the « East Asian Miracle » NIEs.
(eg. post-war Korea, Taiwan, Japan)
 “A great nation surrounded on all sides by wandering savages and poor
barbarians might, no doubt, acquire riches by the cultivation of its own
lands, and by its own interior commerce, but not by foreign trade.” (A
Smith 1776)
• Recent studies have shown that protection & growth can be
positively correlated under certain conditions
 Protection often accompanied by fiscal expansion & goverment
interventions to promote industrialization (Sachs, 1996) in the SR
(not in the LR)
 Building C.A might be more productive under protection: it thus
becomes endogenous, future technological knowledge empowering
from the past & present (Redding, 1999)
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The context of the actual crisis
Trade & Growth: decrease
• Tight credit environment: reduction of consumer demand and
firms’ investment
• Trade finance scarcer and more expensive
 Constraint on exports and imports
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Source: IMF, Fitch Ratings, OECD
Context of the crisis:
Protectionnism as an answer?
• Difficulty to constraint protectionnism pressure: main concern =
unemployment
• During 2009: signs of increasing pressure (Global Trade Alert)
• Measures taken by national governments to stabilize their financial
systems & economies have been seen as protectionnist:
 Stimulus packages, bailouts, subsidies
 If too much protectionnism: global recession could become depression
• BUT there has been trade opening measures with developing &
emerging countries
GDP growth (Source: IMF)
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Literature Review: Convergences &
Divergences
• Convergences
 In an early theoratical view it’s accepted that openness to trade
can enhance growth BUT under certain conditions (reforms,
policies): debate on what conditions do relate growth and
openness and what is the causality relation (Harrison, 1994;
Vamvakidis, 2004)
 There could be an agreement on a development strategy: mix
between trade openness, macro policies and efficient institutions
• Divergences
 Problem of data availability before 1970 (Vamvakidis, 2004)
 Choice of the econometric model: cross-country or time-series
regressions? The latter provides more dynamic data
 Differing definitions of how openess is defined, what are the
variables that should also be taken into account
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Modern Theory of Trade Policy
• Rodriguez & Rodrick (1999)
 Consider trade Restrictions & GDP in a small, open
economy (world is taken as given):
 1) Standard Model (neo-classical): Technology exogenous,
DR to reproducable FOP. LR the steady state unaffected by
openness to trade
 2) Static Model: No market imperfections/distortions trade restrictions generally reduce level of GDP
 3) Endogenous Growth Models: Technology endogenous
Growth generated by Non Diminishing Returns to
reproducable FOP (endogenous ∆tech.) & lower trade
restrictions boost output of economy (individual countries
are either winners and losers). Trade openness allows
knowledge spillovers, boosts R&D efforts
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Trade & Inequality
• Economists’ views on globalization impact
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It increases inequality (Stiglitz)
It diminishes inequality (Ben David)
No relation with inequality (Sala i Martin)
U-shaped pattern for the inequality/trade function (Xu)
• Poors are more likely to share gains of globalization when
complementary policies in place (Harrison, 2006)
• There is a positive effect of trade on income, but geography matters market size (Frankel & Romer, 1999)
• Following the Heckscher-Ohlin model, international trade has powerful
positive effect on income distribution for abundant factor countries
• If trade openness enhances growth, if income distribution does not
change, the poor are better off (Dollar & Kraay, 2002)
 But often the poorest are hit in the SR by liberalization process
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Dollar & Kraay (2002): no association
between Trade & Inequality
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Dollar & Kray’s Globalizers: Trade/GDP (%)
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Dollar & Kray’s Globalizers:
Real GDP growth/capita (%)
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Link between GDP growth/capita and
trade/GDP ratio
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Changes in Inequality, post-1980 for
Globalizers
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The case of China:
Regional Inequality but also…
• 30 years of opening
 largest FDI’s receiver and member of WTO since 2001
 From rank 32d to 5th trader in the world economy between 1978
and 2002
 Chinese international trade in 2006 =$600billion, half of its GDP
 BUT end 2008: 4/5 of accumulated inflows (FDI & national) were
in eastern region, especially on the coast
• 3 global regions in China: East, Centre and West
 different pace of globalization catching
 East and Centre lagging behind
• Since 1980, China achieved important rates of economic
growth & poverty reduction: from less than $1000 to
$6000/capita
 But great inequality of income between regions
• i.e: Shanghai($10537), Guanddong($5416), Xinjiang($2865)
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China’s regional inequality
Gini coefficient: Trade and other contributors
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Impact of North-South trade upon an
industrialised economy
•
“Many observers, contemplating the rapid growth of manufactured ex- ports
from low-wage countries, have sounded ominous warnings about the effect of
trade on advanced-country labor markets”. Krugman et. al. (1995)
• Pauper Labour Argument:
 That US trade with LDCs lowers wages of Usk(or all) US workers
• A number of ways to theorise - mostly draw upon HOS Model:
 Sachs & Shatz (2001):
• US Trade confirms above HOS expectations
• Emphasise 1980s: Increased US trade with low-wage countres & same
time US saw widening of wage inequality.
 Krugman & Venables (1995): absolute decline in wage levels of N
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The case of Asia: regionalism
Asian Development Outlook 2007 (ADB)
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PRC, Hong Kong, Indonesia, Republic of Korea, Malaysia, Philippines,
Singapore, Taiwan, Thaïland
« Economies that sustain rapid growth do not simply replicate themselves on a larger scale.
Countries become different as they grow, not only in terms of what they produce, but
also how they produce. And the ways in which they change matter for growth. Countries
that do not change cannot sustain rapid growth ».
• After 3 decades of industrialization change, 1 decade post-crisis
 Annual av. growth rate of 6.5% with big contribution of PRC
• Rising trade regionalism with independent business cycle dynamics:
 Sharing of production processes
 Increased vertical specialization
 Rise of intra-industry trade & trade integration
• But Asia still remains structurally linked to final demand of major
industrial countries
• Double challenge: tackle poverty &create jobs (500 million
unemployed), improve product and factor mobility
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South-East & East Asia: 2006-2008
GDP growth rates
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« Trade and growth: why Asia grows faster than
Latin America » (M.R Agusin)
• Paper shows export growth important to overall
economic growth. But LR & stabilized success is
reached with exports & output diversification (OED)
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Less export & output volatility
Widening of comparative advantage
Knowledge acquisition and spillovers
R&D capacities
• Might increase investment level, which is also a
determinant factor for growth
 Asia has significantly more invested than Latin America
 Diversified exports strengthen linkages between some
exporting activities and rest of the economy
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Latin America and Asia: growth of GDP and of
exports of goods & services, 1991-2003
(% average annual rate of growth)
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GDP growth, openness & export
diversification, 1980-2003
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One last complication…
• We tried to show many different arguments but large majority
of the empirical literature claims a definite link between
trade openness and economic growth
• However Rodrik & Rodriguez (1999) seem somewhat critical
of this approach;
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“Had the negative relationship between trade restrictions and economic growth been
convincingly demonstrated, we doubt that this issue would continue to generate so
much empirical research… the newer papers are habitually motivated by exegeses on
the methodological shortcomings of prior work.”
• If not this then what?
• Rodrick, Subramanian & Trebbi (2002):
 Looks at relative contribution of 1. Institutions, 2.
Geography, 3. Trade (integration) to growth
 How much power do they have in describing large variations
in income we see worldwide…and who trumps?
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First some basic technicalities:
• Ec. Performance Measure: GDP/Capita (PPP basis) 1995
• Institutional Quality Measure: Mix of elements capturing
protection of property rights & strength/rule of law
• Integration Measure: ratio trade/GDP
• Geography Measure: distance from equator (degrees)
• CORE EQUATION 1:
• Concern: size, sign, significance of 3 coefficients
• Difficulty of causality relationships between factors (int. & inst.
Both endogenous)
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Final Core Equations:
Introduce: 2-stage least squares estimation procedure:
Good Instruments..?
• Integration (CONST): Frankel & Romer (1999)
• Institutions (SM): Acemoglu, Johnson & Robinson (2001)
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AJR Settler mortality (SMi) measure as instrument for institutions & FR measure (CONSTi) of constructed trade
shares (exclusion restrictions that these 2 do not appear in the first equation)
• First Stage Regression: INS and INT regressed on ALL
exogenous variables.
• Now that all determinants have an equal chance who is the
strongest..?
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Institutions trump
Dependent Variable: Log GDP/capita 1995
Find “pareto” domination of results and SM (ie.
AJR) appears to have more explanatory power
than language (re. institutions)
RULE is significant and impact is large
* s@5% ** s@10 *** s@15%
DISTEQ & LCOPEN are -ve but insignificant.
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Findings
Institutions are important when explaining crosscountry variations in development.
BUT caution and humility
These results offer no solution for policy makers wanting to
improve economic performance!
 Eg. of property rights: does not imply a form of desired
embodiment. I.e China (non-formal) Russia (formal)
• “Economies that adopt the formal rules of another economy will have very
different performance characteristics than the first economy because of different
informal norms and enforcement. The implication is that transferring the formal
political and economic rules of successful Western economies to third-world and
Eastern European economies is not a sufficient condition for good economic
performance.”
(D. North: Quoted in RST (2002)
All that we have done is only raise more questions…
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Conclusion
« Instead, developing economies should look carefully, not at what the US says, but
at what it did in the years when it emerged as an industrial power, and what it
does today. There is a remarkable similarity between those policies and the
activist measures pursued by the highly successful east Asian economies over the
past two decades ». (Stiglitz, 2003)
• How to implement trade policy paralel to given country’s particularities?
Empirical studies have been highly influential in the shaping of policies (Edwards
1993)
• Developed countries promoting free trade among developing countries &
subsidizing their farmers to protect national market? i.e, bad effect on African
productivity levels and import dependent
• What about export dependency & volatility of commodities’ prices: i.e, 43
LDC’s depend upon only 1 commodity (FAO, 2003)? The FDI dependency
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Cartel of LDC’s around commodities?
Link between trade openness & growth, but also link between trade openness &
social welfare
Trade: accelerator of growth: a source of convergence when associated with
reforms and market policies
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Sources
• “Globalization and Regional Income Inequality: Empirical evidence from
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within China”,Paper by Guanghua Wan, Ming Lu and Zhao Chen.
“Growing World Trade: Causes and Consequences », by Paul Krugman,
Richard N. Cooper, T. N. Srinivasan, in Brookings Papers on Economic
Activity, (1995)
« Accounting for growth: comparing China and India », by B.Bosworth and
S.Collins, in Journal of Economic perspectives, Winter (2008)
« Trade and growth: why Asia grows faster than Latin America », by M.R
Agusin
« Disparities in Socioeconomic Development in Divided Korea: Indications
and Implications » by N. Eberstadt, in Asian Survey (2000)
“Analysis of the Situation of Children and Women in the Democratic
People’s Republic of Korea”, by UNICEF DPRK, (2003)
“DPRK survey confirms deepening hunger for millions”, WFP (2008)
“Workshop on Developing countries and the global crisis”, by Raed Safadi,
OECD
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Sources Cont’d
• “Globalization and the Inequality of Nations” by P. Krugman &
A.J. Venables (1995) in Quarterly Journal of Economics.
• “International Trade and Wage Inequality in the United States:
Some new results”, by J.D. Sachs & H.J. Shatz (1998) in
Globalization and Labour Markets Vol. 1 (2001).
• “The National System of Political Economy”, by F. List (1885).
• “An Inquiry into the Nature and Causes of the Wealth of
Nations”, by A. Smith (1776).
• “Trade Policy and Economic Growth: A skeptics guide to crossnational evidence”, by F. Rodriguez & D. Rodrick (1999)
• “Openness, Trade Liberalization and Growth in Developing
Countries”, by S. Edwards (1993) in Journal of Economic
Literature.
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Questions?
Thank you.
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