Does trade benefit growth? – evidence from thailand

TS Nguyễn Minh Đức 2006 1 prepared by Nguyen Minh Duc 2006 1 DOES TRADE BENEFIT GROWTH? – EVIDENCE FROM THAILAND Duc Minh Nguyen Dept. of Economics, Auburn University, USA prepared by Nguyen Minh Duc 2006 2 Introduction • Any nation hopes to get benefits from globalization. • The easiest part of global integration to observe is increasing trade • Nations that have learned to export manufactured goods/services seem to develop much faster than those produce mainly for their own home markets • The effect of trade on economic growth is a recurring issue in economics BAIYOKE HOTEL (Bangkok, Thailand) prepared by Nguyen Minh Duc 2006 3 Trade-led growth • Vohra (2001): exports have a positive impact on economic growth when a country pursues export expansion strategies. • Lee and Pan (2000): little evidence of causal relations from exports to GDP on eight East Asian developing countries (Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand). prepared by Nguyen Minh Duc 2006 4 Or not? • Ekanayake (1999): no strong evidence for causality from export growth to economic growth in eight Asian countries India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Sri Lanka and Thailand) • Siddique and Selvanathan (2002): – refute a positive relationship between exports and economic growth – economic growth leads to exports increase – export growth causes import growth – import growth causes economic growth TS Nguyễn Minh Đức 2006 2 prepared by Nguyen Minh Duc 2006 5 Introduction • This study examines the example of Thailand, a developing country with the time span of 1950-2000 prepared by Nguyen Minh Duc 2006 6 THAILAND BRIEF • Located in Southeast Asia • population: about 65 million • a free-enterprise economy • one of the most diverse economies in South-east Asia in the 25 years to 1998, based traditionally on agricultural products export • Recovered from financial crisis 1997-1998, it maintains the export surplus in recent years prepared by Nguyen Minh Duc 2006 7 Thailand brief • In the 1970s, its industrial sector was started based on import substitution • in the 1980s the export-oriented manufacturing sector, based on labor-intensive output such as textiles and garments • after 1990 the fastest growth was in higher-technology goods as computer accessories and motor vehicle parts • import capital goods, intermediate goods and raw materials, consumer goods and fuels prepared by Nguyen Minh Duc 2006 8 Theoretical basis 100*(%) Y MX T + =• Trade openness • Y = GDP • X = X(e, Y*) = export revenue • M = M(e, Y) = import expenditure Inverse the above function to get Y function ⇒Y = f(T, e, Y*) e: exchange rate, Y*: foreign GDP => T= f (e, Y, Y*) TS Nguyễn Minh Đức 2006 3 prepared by Nguyen Minh Duc 2006 9 Theoretical basis Assume Y* is constant, Y = f (T, e) For per capita measure, y = f (T, e) (1) • Neo-classical economic growth theory y = f(k) = Akα (2) y: per capita GDP k: per capita capital Combine (1) and (2), getting y = f (T, e, k) prepared by Nguyen Minh Duc 2006 10 real capita GDP ($/year) 0 1000 2000 3000 4000 5000 6000 7000 8000 1950 1960 1970 1980 1990 2000 Real per capita GDP of Thailand prepared by Nguyen Minh Duc 2006 11 • Per capita capital of Thailand capital ($/person/year) 0 5000 10000 15000 20000 25000 30000 35000 40000 1950 1960 1970 1980 1990 2000 prepared by Nguyen Minh Duc 2006 12 Trade of Thailand Trade Openness (%) 0 20 40 60 80 100 120 140 1950 1960 1970 1980 1990 2000 100*(%) Y MX T + = TS Nguyễn Minh Đức 2006 4 prepared by Nguyen Minh Duc 2006 13 Exchange rate of Thai currency (baht/US$) exchange rate (bath/$) 0 10 20 30 40 50 1950 1960 1970 1980 1990 2000 prepared by Nguyen Minh Duc 2006 14 Results (1950-1980) dlnyt = 0.07 – 0.16dlnTt + 1.44dlnkt – 0.72dlnkt-1 + 1.23dlnlnet (1981-2000) dlnyt = 0.07 + 0.07dlnTt + 1.44dlnkt – 0.72dlnk t-1 – 0.65dlnlnet prepared by Nguyen Minh Duc 2006 15 Results • Effect of exchange rate on per capita GDP – Before 1980: Devaluation by 10% would have raised per capita income by 3.92%. – After 1980: a 10% depreciation would lower per capita income by 2.07%. • Effect of capital on per capita GDP εyk = 0.72 over 2 periods of the current and one year lag. ►The very important role of capital in growth of Thailand. ► A 10% increases in capital raises the GDP 7.2%. prepared by Nguyen Minh Duc 2006 16 Trade effect on per capita GDP Before 1981, εyT = -0.16 an increase of 10% in trade lowers per capita income by 1.6% Reasons: - decrease in exported agri-products - oil dependence and oil shock 1973-1979 TS Nguyễn Minh Đức 2006 5 prepared by Nguyen Minh Duc 2006 17 • After 1981, εyT = 0.07 ► the shift from exported agri-products and import substitution to exported manufactured goods ► The terms of trade declined from 102 in 1982 to 77 in 2003 as shown in Figure 3 suggesting the increased export revenue only offsets rising import prices, especially oil price. Trade effect on per capita GDP Figure 3. Terms of trade of Thailand 1981-2000 80 85 90 95 100 105 110 115 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 Immiserizing growth? prepared by Nguyen Minh Duc 2006 18 • Doric and Golley (2004) state – specialization in primary exports is bad for growth – since 1980 the benefits of trade accrued mostly to the richer economies, with little benefit to the less developed economies. Discussion prepared by Nguyen Minh Duc 2006 19 • Adams, Ichino and Prazmowski (2000): an energy balance model found that growth in Thailand is based on export promotion so that foreign earnings tend to offset the cost of imported fuel. Discussion prepared by Nguyen Minh Duc 2006 20 Thai trade 1981-2000 Figure 4. International trade of Thailand 1981-2003 (million baht) Source: ADB -1000000 -500000 0 500000 1000000 1500000 2000000 2500000 3000000 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 Exports, fob Imports, cif Trade balance TS Nguyễn Minh Đức 2006 6 prepared by Nguyen Minh Duc 2006 21 • Yamada (1998): – capital flows from agriculture have not been as large as is typically assumed. – Since the 1970s, Thai government has adopted an export-oriented policy emphasizing labor-intensive light industry, and investments to promote labor- intensive industries in rural areas have created jobs for rural people. – developing industrial sectors is an effective policy to boost the economy of Thailand since 1980s. Discussion prepared by Nguyen Minh Duc 2006 22 The role of foreign investment The role of FDI in economic growth • Marwah and Tavakoli (2004): – Thai production elasticity of foreign capital is 0.044 – 20.3% of the productivity of total capital stock is generated by growth in FDI in Thailand. • Kohpaiboon (2003):the growth impact of FDI tends to be greater under an export promotion trade regime compared to an import-substitution regime. As FDI is included in import expenditure, import will create positive effects to GDP growth of Thailand. prepared by Nguyen Minh Duc 2006 23 Does trade benefit economic growth of a country? prepared by Nguyen Minh Duc 2006 24 THANK YOU !