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Openness in Growth Models Development Economics, 14.12.09

Openness in Growth Models Development Economics, 14.12.09. “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). By Chantelle Blachut & Stéphanie Carret

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Openness in Growth Models Development Economics, 14.12.09

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  1. Openness in Growth ModelsDevelopment Economics, 14.12.09 “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) By Chantelle Blachut & Stéphanie Carret MADE I, Warsaw University, Faculty of Economics

  2. The planning for today • 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

  3. 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?

  4. 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.

  5. Some Evidence

  6. The case of OECD’s countries: Trade/GDP ratio (source: stats.oecd.org)

  7. 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

  8. 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)

  9. The context of the actual crisisTrade & Growth: decrease • Tight credit environment: reduction of consumer demand and firms’ investment • Trade finance scarcer and more expensive • Constraint on exports and imports Source: IMF, Fitch Ratings, OECD

  10. 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)

  11. Literature Review: Convergences & Divergences • Convergences • In an early theoratical view it’s accepted that openness to trade can enhance growth BUTunder 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

  12. 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

  13. Trade & Inequality • Economists’ views on globalization impact • 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

  14. Dollar & Kraay (2002): no association between Trade & Inequality

  15. Dollar & Kray’s Globalizers: Trade/GDP (%)

  16. Dollar & Kray’s Globalizers: Real GDP growth/capita (%)

  17. Link between GDP growth/capita and trade/GDP ratio

  18. Changes in Inequality, post-1980 for Globalizers

  19. 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)

  20. China’s regional inequalityGini coefficient: Trade and other contributors

  21. 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

  22. The case of Asia: regionalismAsian Development Outlook 2007 (ADB) • 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

  23. South-East & East Asia: 2006-2008 GDP growth rates

  24. « 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) • 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

  25. Latin America and Asia: growth of GDP and of exports of goods & services, 1991-2003 (% average annual rate of growth)

  26. GDP growth, openness & export diversification, 1980-2003

  27. 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; • “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?

  28. 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)

  29. Final Core Equations: Introduce: 2-stage least squares estimation procedure: Good Instruments..? • Integration (CONST): Frankel & Romer (1999) • Institutions (SM): Acemoglu, Johnson & Robinson (2001) • 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..?

  30. 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.

  31. Findings Institutions are important when explaining cross-country variations in development. BUTcaution 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…

  32. 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 • 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

  33. Sources • “Globalization and Regional Income Inequality: Empirical evidence from 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

  34. 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 cross-national evidence”, by F. Rodriguez & D. Rodrick (1999) • “Openness, Trade Liberalization and Growth in Developing Countries”, by S. Edwards (1993) in Journal of Economic Literature.

  35. Questions? Thank you.

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