Export instability and economic growth in asian developing countries

VIETNAMESE- DUTCH PROJECT FOR M.A PROGRAMME IN DEVELOPMENT ECONOMICS EXPORT INSTABILITY AND ECONOMIC GROWTH IN ASIAN DEVELOPING COUNTRIES TONG MINH TUAN September 2003 CERTIFICATE I certify that the substance of this dissertation has not already been submitted for any degree and is not being currently submitted for any other degree I certify that to the best of my knowledge, any help received in preparing this dissertation, and all sources used, have been acknowledged in this dissertation Tong Minh Tuan Date: September 91h, 2003 ii ACKNOWLEDGEMENT This thesis IS done under the Vietnamese-Dutch Project for Development Economics The author would like to thank the Netherlands for her Aid and Scholarship A lot of praise goes to Dr Gabrielle Berman and Dr Youdi Schipper for their comments for my thesis I also would like to thank Dr Haroon Akram-Lodhi and Dr Karel Jansen for their worthy academic teaching and methodology in doing thesis Many thanks are also given to all project teachers and staff in HoChiMinh city, especially Mr Tran Vo Hung Son, Michael Palmer, Ms Nguyet, Ms Chi and Ms Dieu for their helping during the time I studied at the project I am deeply indebted to my supervisor, Dr Nguyen Khac Minh, who gave me instructions and comments during the writing of this thesis I also thank to Dr Vu Thieu for his help in providing me a good source of references from VietnameseDutch Project library in Hanoi I have benefited from the discussions with many people and friends, especially my best friends Mr Nguyen Xuan Nam, Dang Tai An Trang, who gave me many supports in doing the thesis I also would like to thank to World Bank's staffs, who helped me in searching and collecting necessary documents in WB library in Hanoi Finally, I wish to express my gratitude and my love to my dad and mum for their spiritual encouragement and material support, they encourage me very much whenever I have difficulties in doing thesis iii a ABSTRACT EXPORT INSTABILITY AND ECONOMIC GROWTH IN ASIAN DEVELOPING COUNTRIES TONG MINH TUAN HCM Economic University · September 2002 In this study, we look at the relationship between export stability and economic growth in Asian developing countries using panel data analysis The database includes annual data for seventeen Asian developing countries over the 1986- 2000 period In theory, this effect is ambiguous, and it is thought that there are no unique and systematic relationships in the causes or effects of export instability Our result found in the case of Asian developing countries is that there is a negative effect of real export instability on the growth Specifically studying in composition of export commodity give us the conclusion that the biggest negative impact falls on countries which export manufacturing products and are relatively heavily concentrated in capitalintensive sectors, rather than on countries which mainly export primary products The impact of export instability on Investment is also examined, and found negative but ambiguous This result will bring some supports for the hypothesis that the negative effect of instability mainly works through reducing the export productivity of capital stock, rather than the level of investment iv TABLE OF CONTENTS CHAPTER 1: INTRODUCTION ! 1.1 PROBLEM STATEMENT 1.2 SCOPE OF THE THESIS AND LIMITATION 1.3 OBJECTIVES OF THE STUDY 1.4 METHODOLOGY AND DATA COLLECTION 1.5 THE STRUCTURE OF THE THESIS CHAPTER 2: LITERATURE REVIEW 2.1 THEORETICAL BACKGROUND OF EXPORT INSTABILITY 2.1.1 EFFECTS OF EXPORT ON ECONOMIC GROWTH 2.1.1.1 Export is one of the sources of economic growth 2.1.1.2 Effects of Primary and manufactured export in Developing countries 10 2.1.1.3 Empirical studies 12 2.1.2 THE ECONOMIC CONSEQUENCES OF EXPORT INSTABILITY IN DEVELOPING COUNTRIES 12 2.1.2.1 Macroeconomic consequences ofExport earnings instability 14 2.1.2.2 Micro consequences of Export earnings instability 22 2.2 EMPIRICAL ANALYSIS 25 CHAPTER 3: 3.1 MODEL SPECIFICATION AND DATA BASE 29 SOME SELECTED MODELS 30 3.1.1 FOSU MODEL 30 3.1.2 OZLER MODEL 32 v 3.1.3 JAME LOVE AND SINHA'S MEASUREMENT OF INSTABILITY 33 3.2 MODEL SPECIFICATION 35 3.2.1 INDEX OF EXPORT INSTABILITY 35 3.2.2 MODELING 35 3.3 DATA DESCRIPTION 39 CHAPTER 4: THE EMPIRICAL RESULTS 43 4.2 DESCRIPTIVE ANALYSIS 43 4.2 THE ESTIMATED RESULTS OF THE MODEL 47 4.3.1 EXPORT INSTABILITY AND GDP GROWTH 47 4.3.2 EXPORT INSTABILITY AND INVESTMENT 51 CHAPTER 5: CONCLUSIONS ~ 54 vi LIST OF TABLES TABLE SUMMARY OF THE EFFECTS OF VARIABLES IN THE MODELS 37 TABLE SUMMARY STATISTICS OF REGRESSION VARIABLES 44 TABLE CORRELATION COEFFICIENTS OF REGRESSION VARIABLES, 249 OBSERVATION 45 TABLE REGRESSION RESULTS: THE IMPACT OF EXPORT INSTABILITY ON GROWTH - SPECIFICATION : 48 TABLE REGRESSION RESULTS: THE IMPACT OF EXPORT INSTABILITY ON GROWTH - SPECIFICATION 50 TABLE REGRESSION RESULTS: THE IMPACT OF EXPORT INSTABILITY ON INVESTMENT- SPECIFICATION 51 TABLE REGRESSION RESULTS: THE IMPACT OF EXPORT INSTABILITY ON INVESTMENT- SPECIFICATION 52 LIST OF FIGURE FIGURE PLOTS OF SOME PAIRS OF VARIABLES APPEAR IN A SCATTERPLOT MATRIX 46 vii Chapter 1: INTRODUCTION 1.1 Problem statement The issue of export instability m developing countries and less-developed countries has· always been a great field for theoretical and empirical studies Recent events have put the problem of export instability in an important concern Some economists even consider instability as a major item affecting growth in several countries In the past two decades, many development economists have been concerned about the negative effect that instability in export may have on the growth of developing countries (Koomsup, 1978) The sudden change of oil prices by the OPEC countries in 1973-74 causing balance of payments difficulties in most non-oil producing countries was an example Hence the issue of export instability has increased its important in international forums such as UNCT AD IV and the Conference of International Economic Cooperation (Koomsup, 1978:5) A major concern of developing countries is the problem of instability in their export of products (Begg, 1991 ) Many countries in Asia are developing countries, in which Vietnam is one It is often said that export instability in developing countries is more severe than in developed countries, because many developing countries are usually exporters of primary products which are traded in a very volatile and unpredictable world market (Massell, 1964) Primary products also have a tendency to decline in term of international price with increasing fluctuation in price over time (Begg, 1991 :636) Whether export instability has a negative effect on development in these developing countries? In addition, some countries have achieved high average ratio of export over GDP (Malaysia( 57%), Thailand(25%), HongKong(111 %), Korea(30%) in 1970-1994) (Ba,1996) So instability in export may lead to instability in GDP, and thus, in GDP growth in these countries James Love(1992) undertook his study on export instability in developing countries and his conclusion was that Export instability increased between two periods of 1960-1971 and 1972-1984 Whether such mcrease m Export instability deteriorates GDP growth in these countries? Because Vietnam is one of Asian developing countries which export lots of primary products, then what would be drawn for these countries in studying of export instability could also be useful for Vietnam Furthermore, the adverse effects of export instability may be worse than for Vietnam than a developed economy since like a developing country, Vietnam lacks necessary tools and ability to deal the problem effectively If the damage of instability could be easily recognized in Asian developing countries as well as in Vietnam, governments can reduce or eliminate the problem by doing something such as diversifying their export commodities, or reducing their dependence on a few markets Some developing countries can also reduce the adverse effects of export instability on key economic variables by separating domestic price from fluctuations in world prices Recently Vietnamese government has followed a strategy of export-oriented in order to achieve the high economic growth rate like some successful NICs,(Ba, 1996), so this makes export play a more important role in developing the economy Hence there is a need to know what the relationship between export instability and economic growth is Export instability creates the uncertainty about the export eaming, and according to Keynes (1938), it has a negative impact on investment decisions and technological improvements On the contrary, Friedman (1954) say that Export instability may lead to a decline in consumption and then, an increase in savings, thus economic growth may be higher Previous empirical studies so far also give different results: some studies find a positive relationship between export instability and economic growth, some other studies find a negative relationship between export instability and economic growth while some other studies find no relationship between export instability and economic growth (Sinha, 1999) While there is no consensus in generally finding of export instability effects on economic growth, it is therefore interesting to study this issue in Asian developing countries The result obtained for Asian developing countries will help us to know (i) first: what is the relationship between export instability and economic growth in countries which export lots of primary commodities like Asian developing countries, (ii) if is found that export instability does have a negative impact on economic growth, so we will know the significance of export, and the government has to follow a policy whereby such fluctuations can be smoothed out, (iii) which theoretical school is appropriate for the case of Asian developing countries Therefore beside all of empirical studies listed above we need more research to know exactly the relationship in Vietnam and Asian developing countries 1.2 Scope of the thesis and limitation Empirical studies have also checked the existence of a negative relationship between export instability and economic growth, and some have provided support for a positive relationship Almost all previous studies have used a cross-countries approach alone, though in some studies researchers have relied on time-series approach In this study we use an instability index that varies over time as well as across countries We then investigate the impact of export instability on GDP growth by employing annual data for seventeen Asian developing countries over the period 1986- 2000 This research will focus on Asian developing countries and estimate over period of 1986-2000 to conclude that there is a negative effect which is sufficiently large for export instability to be a serious problem for developing countries Our study will then rely on panel data of 17 developing countries over the most recent period of 1986-2000 The study uses mostly secondary data collected from Word Bank or IMF statistics On general problem with cross-country appro11ch is that it estimates average relationship and does not provide much information on th~ specific countries The result of the study, therefore, will give only the general and common relationship which can be apply for Asian developing countries instead of a specific relationship in a given country like Vietnam It may be a limitation of this study However, it is reason to believe that the conclusions drawn in our study may provide general guidelines of Table Regression results: The impact of export instability on growthSpecification Source I ss df MS Number of obs F( 4, 244) -+ 249 20.03 Model 970 711389 242.677847 Prob > F 0.0000 Residual 2956.43657 244 12.1165433 R-squared 2472 -+ -Total I GQ I 3927.14796 Coef 248 15.835274 Std Err t P>ltl Adj R-squared 0.2348 Root MSE 3.4809 [95% Conf Interval] -+ -GX 0719763 017932 4.01 0.000 036655 1072976 GL 1220861 1425039 0.86 0.392 -.1586087 402781 GK 0797029 0135609 5.88 0.000 0529916 1064143 0.903154 0399884 -2.26 0.025 -.1690819 4.541293 4653013 9.76 0.000 3.624773 I cons - - 0115489 5.457812 Diagnostic Tests ******************************************************************************* F Version Test Statistics * LM Version * * * ******************************************************************************* * * * * 1, 243)= 2.4842[.115]*F( 2.4045[.122]* * A:Serial Correlation*CHSQ( 1)= * * * * 1, 243)= 4.0186[.045]*F( 3.9492[.048]* *CHSQ ( 1)= * B:Functional Form * * * * Not applicable *CHSQ ( 2)= 5.3185[.072]* * * C:Normality * * * * 1, 247)= 61492[.434]* 1)= 61836 [ 432] *F ( * D:Heteroscedasticity*CHSQ( ******************************************************************************* A:Lagrange multiplier test of residual serial correlation B:Ramsey's RESET test using the square of the fitted values C:Based on a test of skewness and kurtosis of residuals D:Based on the regression of squared residuals on squared fitted values 48 The coefficient on I indicates that deviations from five year moving average of export earning increasing by one percent would cause GDP growth to fall from its mean of 5.4% per year to about 5.31% And if percentage increase by 10% in instability it would cause GDP growth to fall to about 4.5% per year Therefore this effect is quite substantial and this is consistent with our earlier expectation about Asian developing countries Our results about relationship between export instability and economic growth are also similar to the previous findings for developing countries by Fosu, Knudsen, Parnes, Ozier, Moran, and thus support the view of negative effect of instability From this test, we also found that most of the explanatory variables are statistically significant, excluding GL This mean that capital formation growth, export growth and export instability are significantly influence economic growth in Asian developing countries And any increase in labour supply would be not clear in affecting economic growth Diagnostic tests prove that the regression has no problem about autocorrelation, normality and heteroscedasticity However it has a little problem with Ramsey's RESET test about Function form Maybe there exists omitted variables in our equation (*), but it is not much significant so we can neglect this problem Next, we allow the effect of instability to differ across countries We will consider the composition of exports, and take two another instability variables of 1/Agraw and 1/Manuf into account The test results for this are shown in Table From this test we see that the estimated export instability impacts in both overall and separated composition are still negative and significant Moreover, entering the 1/agraw and 1/manuf into the equation increases the adjusted R a bit, providing support for the impotiance of the independent role of the export sector for growth Although the overall effect of instability is still negative, but the biggest negative impact is on countries whose exports are relatively heavily concentrated in the manufactured sectors which have capital intensive 49 Table Regression results: The impact of export instability on growth Specification Source I ss df MS Number of obs F( 6, 242) -+ -Model Residual I I I GQ I 14.37 1031.76589 171.960982 Prob > F 0.0000 2895.38206 242 11.9643887 R-squared 0.2627 Adj R-squared 0.2444 -+ -Total 249 3927.14796 Coef 248 15.835274 Std Err t Root MSE P>ltl 3.459 [95% Conf Interval] -+ -GX 0745719 0179667 4.15 0.000 0391807 109963 GK 084238 0136306 6.18 0.000 0573881 1110878 GL 1237154 142028 0.87 0.385 -.1560536 4034844 -.0802808 0401921 -2.00 0.047 -.1594519 -.0011098 I/agraw -.0400487 034555 -1.16 0.248 -.1081156 0280183 I/manuf -.1086504 0580542 -1.87 0.062 -.2230064 0057055 cons 5.375469 597443 9.00 0.000 4.198617 6.552321 I I characteristics, with the estimated coefficient of 0.108 while the coefficients of overall export instability (I) and Agriculture and Raw material export instability (1/Agraw) are -0.08 and -0.04 respectively This result will bring some supports for the hypothesis that the negative effect of instability mainly appears through reducing the export productivity of capital stock This argument means that an imperfection in the international credit markets will not be able to secure developing countries from fluctuations, especially fluctuations in foreign exchange earning once known as an arising of a crisis~ In addition, as saying in previous chapters, producers who produce more intensive good will rely on large amounts of imported capital and intermediate goods, while agricultural and raw material productions generally require less 50 imported inputs Therefore countries with high level of intermediate impmi will be more negatively affected if they have limited ability to smooth out fluctuations Briefly, the results presented in tables and show that country differences are important in examining the effect of export instability on economic growth Our results point out that countries with a large share of exports in capital intensive industries which are related to manufacturing goods are affected more negatively than countries which concentrate their exports in agriculture and manufacturing goods 4.3.2 Export instability and Investment Tables and present the estimated results from equation (**) Table Regression results: The impact of export instability on InvestmentSpecification Source I ss df Number of obs F( 2, 246) MS -+ -Model Residual I I 2218.01527 1109.00764 67054.4947 246 272.579247 -+ -Total I 69272.51 GK I Coef 248 Std Err t Prob > F R-squared 0.0183 Adj R-squared 0.0241 Root MSE 279.324637 P>ltl 249 4.07 0.0320 16.51 [95% Conf Interval] -+ -GKlag I -.0931345 0628834 -1.48 0.140 -.216993 030724 I I -.4622514 1829055 -2.53 0.012 - 8225119 -.1019908 10 12501 1.524913 6.64 0.000 7.121456 13.12856 cons 51 Table Regression results: The impact of export instability on InvestmentSpecification Source I ss df MS Number of obs F( 4, 244) -+ -Model Residual I I 3746.4506 936.61265 65526.0594 244 268.549424 Prob > F -+ -Total I 69272.51 GK I Coef 248 279.324637 Std Err t P>ltl 249 3.49 0.0086 R-squared 0.0541 Adj R-squared 0.0386 Root MSE 16.387 [95% Conf Interval] -+ -GKlag I -.0763287 0628136 -1.22 0.225 -.2000548 0473974 I I -.4880848 1826542 -2.67 0.008 -.847865 -.1283047 Iagraw 2285058 162704 1.40 0.161 -.0919777 5489893 Imanuf 5033551 2719325 1.85 0.065 - 0322796 1.03899 cons 5.407615 2.501632 2.16 0.032 4800662 10.33516 The results show that when country differences are neglected, Export instability has negative relationship with the growth of capital stock through the negative coefficient, as expected This impact of instability on the growth of capital stock is also significant The coefficient of I indicates that deviations from five year moving average of export earning increasing by one percent would cause the growth of capital stock to fall from its mean of 7% per year to about 6.51% per year This effect is quite normal, for the cases of developing countries When the export composition is taken into account, the regression still gives us the negative relationship between overall export and the growth of capital stock But it is different for separated kind of export goods In these results we can see both coefficients of I/agraw and 1/manuf are negative while the coefficient of overall export instability is positive This suggests that 52 instabilities, in primary and manufacturing export sectors while impacting on capital stock, may not happen simultaneously in the case of Asian developing countries A shock in a sector in a certain period may be compensated by earnings from other sector This result of effect of instability on the growth of capital stock is also different form the result of the growth regression In previous regression results both kinds of export instability of each commodity contribute to a negative effect of instability However, this impact on the growth of capital stock is not significant for each coefficient of 1/agraw and 1/manuf Briefly, the effect of instability on the growth of capital stock is the same direct but more ambiguous than its effect on growth Generally, the effect of instability on both growth and capital stock are negative The insignificancy and ambiguity of this effect on capital may relate to the interpretation that the effect of instability on growth mainly work through reducing the efficiency of investment, rather than directly through the level of investment 53 Chapter 5: CONCLUSIONS This thesis is an attempt at studying the effects of export instability on economic growth using panel data due to the lack of fully available data, particularly time-series data, in Asian developing countries In theory, this effect is ambiguous, and it is said that there are no unique and systematic relationships in the causes or effects of export instability Thus, it is more fruitful and meaningful to make a case study of some Asian developing countries where countries tend to depend more heavily on export as a source of income than industrialized countries The models have been constructed and estimated to empirically examine the effects and causes of export instability in 17 Asian developing countries over the period of 1986-2000 Specifically, we analyze the response of investment, or capital stock growth and GDP growth to instability Our primary result is that there is a negative effect of export instability on economic growth of developing countries Although still ambiguous, the effect of instability on capital stock is also generally negative This impact appears to be through reducing efficiency of investment rather than through the level of investment When we consider the country specifics, m each specification we see that country differences are important It is not the case that the effect of export instability mainly falls on countries where they export large share of primary goods, but on countries where they export much manufacturing goods Thus countries with a large share of exports in capital intensive industries are more affected It is a bit in contrast to the results of Fosu (991), Love (1987), or Gyimah-Brempong (1991), who found that LDCs and countries which heavily depend on primary production are hurt much more than developed countries However, no matter what the specification is, our results suggest that the effects of export instability on economic growth in Asian Developing countries are negative, and it is enough to be a source of concern for policymakers Because the effects of instability mainly work through reducing efficiency of investment instead of through the level of investment, the first consideration is 54 that policymakers have to improve financing for the developing countries./ Therefore, as discussed in literature review, the problem of management of income instability for developing countries is considered again Therefore the existing of international institutions is important Besides, policymakers also have to try to reduce the magnitude of instability Diversification may be a solution, even not always true since the relationship between export instability and diversification is ambiguous 55 Appendix 1: Summary of 17 Asian Developing countries Mean GQ Mean GX Mean GK Mean GL Mean I Bangladesh 4.33 8.47 7.57 1.69 3.80 Cambodia 4.05 6.03 6.04 2.73 5.23 China 9.37 11.73 9.67 1.21 3.96 Fiji 2.97 3.56 -0.68 1.21 5.92 Hongkong 5.34 10.81 6.27 1.39 4.53 India 5.76 10.47 6.11 1.98 4.18 Indonesia 5.10 4.18 13.98 1.63 4.05 Korea 7.00 8.79 8.27 0.99 5.13 Malaysia 7.01 12.58 7.24 2.39 4.88 Myanma 3.04 -9.87 5.02 1.57 12.80 Nepal 4.30 8.71 5.18 2.37 8.69 Pakistan 4.70 7.95 3.99 2.76 3.66 Philipine 3.52 18.47 5.38 2.44 6.90 Singapore 7.73 8.19 8.14 3.48 4.64 Srilanca 4.61 5.50 3.48 1.28 3.22 Thailand 6.80 13.88 9.47 1.30 4.11 Vietnam 7.94 16.16 17.58 2.33 6.96 Country 56 Appendix 2: Table of Data Country Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia Cambodia China China China China China China China China China China China China China ··············· ·············· Fiji Fiji Fiji Year GQ GX GK GL I 1/AgRaw 1/Manuf 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 4.71 4.18 2.89 2.52 6.63 3.40 4.23 4.48 4.21 4.45 5.35 5.89 5.66 5.15 1.28 5.81 5.37 4.07 3.41 4.28 2.00 4.04 5.38 5.80 5.21 2.06 3.43 3.31 3.32 3.21 8.86 11.57 11.28 4.06 3.83 9.20 14.24 13.48 12.67 10.55 9.54 8.81 8.02 -10.33 12.35 15.46 -3.07 29.53 0.49 27.46 7.13 12.67 10.03 3.74 14.44 -0.14 0.82 6.40 41.03 -12.29 4.31 8.27 12.30 2.55 -7.18 -0.07 15.30 16.19 2.28 6.35 -7.25 4.39 4.27 11.07 22.86 15.83 5.49 12.13 11.11 14.64 4.03 29.68 19.57 -1.28 18.19 -1.14 3.99 32.99 2.48 8.11 4.45 -4.45 10.46 19.65 0.02 25.25 11.23 -9.25 0.09 -9.01 17.59 16.30 3.57 16.16 -5.02 -4.70 -13.15 7.66 29.13 53.93 -0.59 -4.35 -4.87 -13.25 -0.53 10.27 10.81 15.88 10.19 -12.80 1.78 18.00 31.61 32.78 8.11 6.24 7.83 7.00 -1.80 2.25 0.88 1.92 1.89 3.05 0.11 3.04 1.43 1.44 1.49 1.56 1.62 1.60 1.52 1.50 4.89 1.87 1.83 10.18 1.92 2.06 2.02 1.98 1.94 1.82 1.97 1.93 1.92 2.68 1.99 1.54 1.61 1.60 1.54 1.41 1.28 1.15 1.08 1.04 1.05 0.87 0.95 1.07 11.25 3.13 2.77 10.44 2.91 8.07 3.13 0.64 0.84 1.20 2.54 5.57 0.85 2.97 0.62 15.66 2.42 7.00 1.67 6.19 6.01 5.59 11.43 1.71 5.65 2.62 4.89 4.49 2.03 1.01 8.86 1.46 3.93 2.67 2.44 0.83 0.93 12.95 2.23 7.30 4.21 5.60 1.00 21.89 4.75 15.21 14.42 12.30 2.30 37.25 4.39 0.92 9.50 5.60 3.91 1.70 14.75 0.01 8.30 5.52 5.63 0.39 7.63 10.25 12.27 21.65 14.95 14.74 21.04 19.11 10.63 3.17 25.23 1.29 11.30 10.20 5.60 12.46 2.59 5.24 2.35 4.09 6.08 10.42 13.10 9.35 7.60 0.84 4.19 7.41 5.60 4.50 3.28 11.83 5.42 5.48 9.50 4.52 4.32 4.03 4.01 5.60 2.75 11.72 0.87 16.11 15.86 11.27 10.28 8.41 4.23 1.39 2.30 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Economic consequences of Export instability in Developing countries The issue of export instability The issue of export instability m less developed countries (LDC's) and developing countries has always