International Trade, Economic Growth and Poverty Reduction - Research Proposal Example

International trade, economic growth and poverty reduction – research proposal Rationale and background The importance of international trade with respect to economic growth has been highlighted from the introduction of trade liberalization policies. Liberal set up or opening of barriers are crucial to generate comparative advantage and the less developed countries might “import productivity gains from overseas” (Álvarez-Albelo, Manresa and Pigem-Vigo, 2005, p.2). The Engine of Growth theory suggests that trade or the openness of the economy can generate growth even in a stagnant economy. This growth is sustainable with the help of trade. Now, with the help of trickle down effect this growth can therefore eradicate poverty. However like every theory this connection between trade and economic growth and between trade and poverty might be empirically verified. If such a relation holds true then it will automatically provide a ground for the stagnant economies and the developing nations to remove trade barriers and introduce incentives to facilitate the same. Even the developed countries pursue protectionist policies on products related to agriculture, textiles and steel, which are, imported from the less developed nations. Initially the international organizations were pressuring the developing nations to liberalize their economies on the basis of structural adjustment loans. Currently their policies are changing as their attention shifts more towards the developed nations with respect to the removal of trade barriers in nations like Canada, EU and Japan. (Spanu, May 2003, p.1) The basis of all these lie in the theory of trade as an engine of growth and as a step towards reduction of poverty. Most of the literatures studied are in the context of developing or emerging economies. It will be interesting to study the impact of trade in the context of a developed nation like USA, which has recently undergone a vulnerable state of its economy. Hence it is important to empirically verify this theory through the study. Research question The paper focuses on the following research question: Does international trade fuel growth and reduce poverty for USA? The question is empirically verified in the context of USA’s economy. There are two hypotheses in relation to this: H0: Trade balance/GDP and simple annual growth rate of GDP are insignificantly associated. H’0: Trade balance and number of people living below poverty line (BPL) are insignificantly associated. H’’0: GDP and number of people below poverty line are insignificantly associated With respect to the above null hypotheses the following are the alternate hypotheses: H1: Trade balance/GDP and simple annual growth rate of GDP are significantly associated. H1’: Trade balance and number of people living below poverty line (BPL) are significantly associated with one another. H1’’: GDP and number of people below poverty line are insignificantly associated Literature review Theoretical literature: In Macroeconomics the theory of National Accounting shows the closed economy model as follows: GDP = C+I+G; GDP: Gross Domestic Product; C: Consumption; I: Investment; G : Government expenditure This is the expenditure side of national income. Now with the opening up of the economy the following equation will hold: GDP=C+I+G+X-M X-M: Rf (trade balance) If Rf is positive then the GDP will get a boost. This is possible when exports are more than imports or trade balance is positive. (Turnovky, 1997, p.12) Thus will the help of simple equations it might be shown that trade balance has a positive on the GDP. Next the theory of trade as an engine of growth might be considered at the background of our research as already mentioned before. According to Adam Smith, David Ricardo and their followers, the secret of England’s wealth lay in trade related activities carried out by the ancient sailors. Without the occurrence of trade, the economy would have remained a closed one with poor living standards, which could gradually lead to the downfall of the economy. According to Smith, “trade extended the size of the market, promoted specialization and generated prosperity through its gains.” (Mehmet, 44) In simplified terms the theory emerges from the vent-for-surplus theory of Adam Smith. The idea, which reins this theory, is that national well-being is achieved through the trade gains. First it increases the “productive capacity” of the domestic nation as the surplus is exported to the markets abroad and the earnings obtained from trade leads to expansion in national income (the equation above shows this). This foreign exchange obtained from the excess production of the domestic nation can be used to pay for the imports. It also brings about enhanced allocative efficiency through provision of full employment through trade. Empirical/contextual literature: This section presents the review of various studies and researches which shows the connections between trade and economic growth and between trade and poverty. A report from USAID centers on the “new phase in the evolution of the United States commitment to advance trade-led economic growth in Latin America and the Caribbean” (USAID, 2008, p.1). The idea, which worked behind The United States – Central America – Dominican Republic Free Trade Agreement (CAFTA-DR) treaty, is its potential of being able to reduce poverty to a significant extent and accelerate economic growth via diversification in the agricultural sector. However the study found that the countries, which implemented the CAFTA-DR, face some obstacles in the path of growth and poverty reduction. There are several factors behind this. First the growth in the industrial sector could not provide enough employment and the employment in agricultural sector also declined due to migration to the urban areas. Secondly these nations were restrained due to the protectionist policies. The rural poverty continued owing to the dominance of the low value base grains in the market, which might yield short-term profit to the producers, but if the tariffs decline then producers will need to add value to the crops in order to survive the competition from cheap imports. The Caribbean Basin Initiative provided attractive opportunity to access the United States market. Despite these opportunities “the CAFTA-DR countries still have low levels of productivity and competitiveness” (USAID, 2008, p.3). Other hindrances include lack of enough capital and access to credit facilities. However the CAFTA-DR nations could not diversify their agricultural products. Hence the producers of these nations failed to compete well with the products of other nations in the US market. Hence the paper points out to the inference that these CAFTA-DR nations cannot make the most of the opportunities provided from the agricultural diversification opportunity led by trade. Decaluwe, Adjovi and Robichaud (2008) shows through their study that the liberalization policies with respect to trade reforms benefit only the urban people while the rural poor section dwell in their problems. Their situation is worsened off. To show this, the study undertakes the case of Benin where policies were undertaken to accelerate economic growth and eradicate poverty issues. The authors here use a computable general equilibrium model (CGE) and a simulation based on household survey based information. The study shows that the domestic market needs to cut prices in order to survive the competition of imported goods. The idea behind the method of approach is to capture the impact of complete and unilateral tariff cuts. Simultaneously a consumption tax was imposed to make up for this loss in revenue. Owing to a fall in tariff the import prices decline that gives tough competition to the domestic producers who therefore move away to the export oriented sectors. Therefore the “rate of import penetration and the level of substitution between local and imported products by sector of activity” (Decaluwé, Adjovi and Robichaud, 2008, p.10) decide the effect of the reforms. The most competitive sectors are food grains and tradable services because in the modern industry sector there is requirement of formal labor, which is not available in adequate amount. Thus the results show that the impact on production of the home country contributed by there is in exports and fall in sale from the domestic sector is as small as -0.2 percent. The incidence and intensity of poverty was found to be more in the rural areas owing to the reform policies. Therefore the study concludes that it is important to undertake measures that will help in fighting the poverty issues rather than simply cutting back tariffs. Anderson (2004) in his study discusses the opportunities and challenges generated by the Doha Development Agenda of WTO. This essentially addresses the agricultural trade liberalization. This is aimed at the nations, which are poor and would resort to trade of agricultural production in order to fight their way out of poverty. However in order to utilize the opportunity provided by this agreement these nations need to ensure that the farmers are able to gain an advantageous position in order to tap the markets abroad. The paper also analyzes the connections between poverty, trade and economic growth. The distortions arising from trade is found to be more in case of agricultural goods compared to other products. The impact of trade reforms on poverty is captured through three stages – impact of reforms on developing nations taken together, different categories of developing nations and lastly on the various kinds of households or families residing in the less developed nations. The research therefore suggests some preventive measures and steps to assure security of food within these less developed nations. The research suggests that in order to increase food security it is better and more economical to impose protections and boosting production instead of imposing consumption tax along with cutting of tariffs. This would reduce the cost and distortions arising from trade activities. Measures oriented towards agricultural research activities, education for the rural people, health and infrastructure of the rural regions are important for the developing nations to gain from the Doha agreement. In order to capture the impact of reforms on emerging economies like China, Montalvo and Ravallion (2009) show how this nation has been able to witness a decline in the poverty rates owing to the reforms, which began in the late 70s. Using a panel data set of the provinces the study shows whether there is a significant relation between growth and poverty. These tests carried out on the basis of econometric analysis suggest that the primary sector, which comprises of the agricultural sector, has led to the reduction in poverty since the 80s. Despite the lack of uniformity in the sectoral growth China managed to eradicate poverty to some extent with the help of economic growth. The non-primary sectors drove the economic growth while the primary sector led to addressing of the issue of poverty. In fact it was this unevenness in the growth of various sectors, which led to the reduction of poverty in China. This is also different from the case of India where service sector is the main driving force behind economic growth. Methodology For the purpose of our study quantitative and qualitative research approaches are undertaken. Method of data collection involves secondary research only. To examine the relationship between international trade and economic growth we may take the ratio of trade balance to GDP as the indicator of trade liberalization and the indicator of growth could be the GDP, per capita GDP or simple annual growth rate of GDP. For the purpose of this study we may collect data for balance of payment from Bureau of Economic Analysis for the years 1992-2009 (value in million dollars). Monthly data is given and the yearly data should be obtained from here by adding the 12 months’ data for each year. Now the GDP (Gross Domestic Product) data might be obtained from the same site for the same range of years. The simple annual growth rate (SAGR) of GDP might be calculated as follows: SAGR = [({output in year t}-{output in period (t-1)}) / (output in period (t-1))] * 100 A regression is run with trade balance/GDP (TRGDP) as the independent variable and SAGR as dependent variable and the significance test will give us the degree of association between the two variables. The hypothesis to be tested is H0: Liberalization of trade is not significantly associated with economic growth/ does not affect economic growth For our next analysis we need to run two regressions. An indicator of poverty is taken here. For this purpose the number of people below poverty line (BPL), estimated on yearly basis is obtained from the US Census Bureau. The year range taken is 1960-2004. First, we might regress TRGDP on BPL. Then we might regress GDP on BPL. A significance test will tell us the degree of association or the significance of association between trade and poverty on one hand and also growth and poverty on the other. The following hypotheses might be tested for this purpose: H’0: Liberalization of trade does not affect poverty level. H’’0:Economic growth does not affect poverty. Proposed plan: Abstract: I. Introduction: Gives a background to the theory of the relation between trade and economic growth on one hand and between economic growth and poverty on the other. Hence theory shows that trade might lead to a reduction in poverty via growth and its trickle down effect towards the poor section. Research objectives and aim: the idea is mainly to find the impact of trade on economic growth and poverty in the context of USA. II. Literature review: An assimilation of literatures where the findings of different researchers and authors are listed. The views are both pessimistic and optimistic in this context. III. Methodology: clearly formulates the approach and methods to be adopted to reach our objectives or answer the question IV. Findings and analysis: The results of the research are listed down and interpreted and evaluated against the background of the literatures reviewed. V. Conclusion: the answer to our research question is clearly stated with the help of the results obtained. REFERENCES References 1. Turnovsky, S.J. (1997). Macroeconomic analysis and stabilization policies, New York: Cambridge University Press. 2. Mehmet, O. (1999). Westernizing the Third World, London: Routledge. 3. Álvarez-Albelo, C. Manresa, A. and M. Pigem-Vigo, (2005). The International Trade as the Sole Engine of Growth for an Economy, Journal of Economic Literature, available at: http://www.etsg.org/ETSG2005/papers/alvarez.pdf (accessed on July 28, 2010) 4. Spanu, V. (May 2003). LIBERALIZATION OF THE INTERNATIONAL TRADE AND ECONOMIC GROWTH: IMPLICATIONS FOR BOTH DEVELOPED AND DEVELOPING COUNTRIES, Harvard’s Kennedy School of Government, available at: http://www.cid.harvard.edu/cidtrade/Papers/Spanu.pdf (accessed on July 28, 2010) 5. Bureau of Economic Analysis. (2010). U.S. International Trade in Goods and Services, available at: http://www.bea.gov/newsreleases/international/trade/trad_time_series.xls (accessed on July 28, 2010) 6. Bureau of Economic Analysis. (2010). Current-Dollar and "Real" Gross Domestic Product, available at: http://www.bea.gov/national/xls/gdplev.xls (accessed on July 28, 2010) 7. USAID. (2008). OPTIMIZING THE ECONOMIC GROWTH AND POVERTY REDUCTION BENEFITS OF CAFTA-DR, United States Agency for International Development, available at: http://www.usaid.gov/locations/latin_america_caribbean/trade/CAFTA_T-LAD_Executive%20Summary_9.23.pdf (accessed on July 28, 2010) 8. Decaluwé, B. Adjovi, E. and V. Robichaud. (2008). Trade Policy and Poverty in Benin: a General Equilibrium Analysis, MPIA Working Paper 2008-14. Available at: http://ideas.repec.org/p/lvl/mpiacr/2008-14.html (accessed on July 28, 2010) 9. Anderson, K. (2004). Agricultural trade reform and poverty reduction in developing countries, The Institute for International Integration Studies Discussion Paper Series, Available at: http://ideas.repec.org/p/wbk/wbrwps/3396.html (accessed on July 28, 2010) 10. Montalvo, J.G. and M. Ravallion, The pattern of growth and poverty reduction in China. The World Bank, Policy research Working Paper Series 5069. Available at: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2009/10/06/000158349_20091006163931/Rendered/PDF/WPS5069.pdf (accessed on July 28, 2010) Read More