Empirical Evidence of the Benefits of Openness for Growth - Literature review Example

ASSESS THE THEORETICAL BASIS AND EMPIRICAL EVIDENCE OF THE BENEFITS OF OPENNESS FOR GROWTH Growth is broadly understood as the increase of goods and services produced to improve the accumulation of national wealth viz-a-viz country’s utilization of natural resources within a specified epoch or period of time. Economic growth should technically be reflective of statistical proofs about improved national socio-economic conditions and better standard of living among its constituents (Denison, 1985). Economists’ contend that growth is measured within the continuum of a long-run perspective with evident potential output (Colander, 2001:182) which can be empirically quantified using growth development product (GDP) as indicators. This will discuss the evidences of openness for growth and the theories that are supportive of it. Evidences: Openness Leads to Growth Openness for growth is paradigmatically about borderless economy and the wider acceptance for import-export relations. The 21st century is characterized by trade liberalization and openness to international trade as an impetus for development of emerging economies (Dollar & Kraay, 2001). Economic experts posit that openness for growth is beneficial for poor nations as illustrated by empirical evidences from developed and emerging countries which opted for economic liberalization. They contend that growth is illustrated by (a) narrowed developmental gaps, (b) trade volumes accelerated, (c) proportionate acceleration of household income of the poor, (d) increase of growth rates of emerging countries showed in their respective GDP, (e) evolution of technological advancement and infrastructure developments, and (f) development of regulatory policy for sustainable growth recovery. However, while these are supported by data in the last few years, there are also emerging issues contravening these assertions. Thus, in the question “is there evidences supporting growth? “the answer is, “yes”, but growth also came along with new challenges and paradoxical problems as the international market is also vulnerable to economic changes and intermittent financial conditions (Dollar & Kraay, 2001; OECD, 2011; Rodrigue & Rodrik, 2000). Taking from statistical data, (Dollar et.al., 2001), from a research on growth from open market using 370 spaced panels and 125 developing countries as objects of investigations, its bared that the divergences of rich and developing countries have narrowed developmental gaps. Dollar et.al, (2001) showed that emerging markets has 5.1% per capita while rich economies and the non-globalizers had there respective 1.9 and 1.1 per capita. He concluded that developing nations are coping with advanced economies while those who opted protectionist economy lagged behind. Basing it from observations from two decades of trade relations, Dollar et. al. (2001), pointed that emerging and advanced economies have different tariff standards at 34 points reduction and have incessantly increased its trade volumes for the last two decades—accelerating its growth rates as against the deceleration or decrease of growth rates of rich economies. Using cross-country regression, economists viewed that the development and changes in trade volumes have strong positive correlation to changes in growth rates albeit absence of systematic relationship between changes in trade volumes and that of household income inequality (Dollar et.al., 2001). However, as clear as the relation of supply and demand, the increase of growth rates from trade expansion broadly translates the proportionate acceleration of household income of the poor (Dollar et.al., 2001). Hence, it was safely inferred that poverty in emerging and developing economies is perceived to have regressed in the last two decades. In that context, Dollar (2001) concluded that based on country cases and cross-country analysis, open trade regimes foster faster growth and reduced poverty in economically- challenged countries. Recent statistical data affirmed open economies contribution to growth, however posed a dichotomy of trade relation’s impacts as there is an apparent conflict between reports on growth rates versus financial decline in capitalist nations. For one, OECD (2011) reported that in 2000 there were 83 developing countries that were able to double its capita growth rates compared to 12 countries in 1990s. On the other lens, the report that nearly half of 2 million live with an income of USD 10 to USD 100 couldn’t be interpreted that this is substantive enough to prove that they are living within the minimum standard cost of living. While OECD (2011) bared that about 50 emerging countries have likewise grown at a yearly average of 3.5% in 2000 and based on this baseline, OECD forecasted that populace enjoying a minimum income will increase in the next 10 years. However, OECD recognized too, that improved health and education services does not guarantee higher life satisfaction, specially in developing countries like the region of Southeast Asia. Further, the OECD’s report on growth rate is contrasted with ongoing advocacies for a global action to support an ailing global economy amid financial crisis in Europe and western countries. OECD (2011) itself is challenged about the prospect of growth as it confront the need to undertake fiscal reforms and prioritization of budget that must generate employment and opportunities too in advanced economies. With widespread debt, fiscal tightening is a must since GDP among OECD members slowed from 1.9% to 1.6 by 2012 (OECD, 2011). Member states hope to bounce back by 2% by 2012 to 2.5% in 2013. European states have also evidently slowed down to 1.6% this year to a sloping 0.2% in 2012 but targeting to pick up a growth rate of 1.4% by 2013 (OECD, 2011). China meanwhile hope to ease at 8.5% next year as it landed a decline from the 9.3% this 2011. It targets to climb back at 9.5% in 2013 amid fluctuation of prices in the markets and easing of fiscal policies (OECD, 2011). OECD perceived that there is a need to adopt structural, labor policy and fiscal reforms to put international economy to a better shape. Ironically, OECD strategically perceived that growth rates can be maintained by non-OECD countries, as depicted in this Table below. Title: Global growth continues be led by the non-OECD economies Subtitle: Contribution to annualised quarterly world real GDP growth, percentage points Date OECD Non-OECD 2007q1 1.801402 3.825287 2007q2 2.013328 3.200654 2007q3 1.597525 2.934961 2007q4 1.480788 3.834035 2008q1 0.552194 2.54212 2008q2 -0.40731 1.943084 2008q3 -1.67354 1.31025 2008q4 -5.01869 -1.19185 2009q1 -5.48357 -0.24718 2009q2 0.466255 2.618642 2009q3 1.433833 3.125797 2009q4 1.974323 3.364295 2010q1 2.101039 3.652346 2010q2 2.164193 3.104357 2010q3 1.344619 2.850497 2010q4 0.988308 3.234275 2011q1 0.772392 2.770165 2011q2 0.689014 2.488123 2011q3 1.230311 2.668581 2011q4 0.582009 2.40242 2012q1 0.606988 2.394971 2012q2 0.844489 2.609633 2012q3 1.086042 2.849968 2012q4 1.037506 3.002552 2013q1 1.13059 3.237083 2013q2 1.194487 3.34995 2013q3 1.284379 3.412441 2013q4 1.182546 3.447804 Note: Calculated using moving nominal GDP weights, based on national GDP at purchasing power parities. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Table 1. Growth sustainably could be assured by non-OECD countries. (OECD, 2011) The internationalization of economy however, requires political innovation that will integrate globalization to domestic market, thus, the need for innovative legislation of laws supportive of free economy and encourage entry of transnational or multinational corporations, thru “international incentives to invest”, under multilateral or bilateral trading relations (Anderson, Dimaranan, Francois, Hertel, Hoekman, & Martin, 2001). Such policies on international trade and foreign investment must be integrative and inclusive of the utilization and resource maximization (Anderson, et.al., 2001) although, partner countries involved must exhibit strong and transparent governance too to balance foreign relations with national interests; responsible utilization and rehabilitation of resources and ecology; and, strong adherence to corporate social responsibility (Anderson, et.al., 2001). John Joseph Puthenkalam, an exponent of endogenous theory, explicated that capital investment require enjoyment of an economic environment where there are values of freedom, respect for human rights and democracy. Assessing Theories Supportive of Growth Dollar et.al (2001) pointed that the factor proportions, otherwise known as Heckschler-Ohlin theoretical model, advocate for wider trade openness to improve the distribution of income among factors of production, although there could be distinction of direction and situation in each of those countries. Dollar et.al. (2001) contended that with capital and labor as factors, open trade intends to provide higher wages in countries with a high number of human capital and lower wages in nation with scarce human resources. Dollar et.al. (2001) expects that market openness will improve household distribution of income but acknowledge that such impact is reliant about the kind of resources abundant in a country and how they are owned by the community. Thus, it can’t be inferred that there is logical and systematic relationship between changes in trade policy and changes in household inequality, although Dollar (2011) maintained that objective for poorer households to benefit proportionally from trade openness. Meanwhile, Rodriguez & Rodrik (2000) worked on empirical evidences sourced from North America and Europe’s economic experiences and adapted by World Bank, International Monetary Fund (IMF) and the OECD. The latter advocated nurturing more social cohesion amongst partner nations as a requisite for better environment of economic relations.¹ Rodriguez, et.al. (2000) argued that for growth to be feasible, nations should remove protectionist policies because this is considered as barrier for trading relations. However, Rodriguez (2000) posed some academic questions that are significant in verifying or validating the impact of trade relations at the grassroots levels. Rodriguez et. al. (2000) proposed the need to determine strategies that will determine growth, such as, (a) establishing alternative indicators of openness (Dollar 1992) (b) identifying indicators of growth and determining measures of openness using robustness analysis, inclusive of subjective indicators (Edwards 1992, 1998); and (c) appreciating best practices among convergent groups of liberalizing and non-liberalizing countries. Rodriguez (2000) maintained skeptical view about the relation between trade openness and growth, but also conjectured that the relationship is contingent because its reliant to the host country where trading is done and to the conditions surrounding the multilateral or bilateral relations. Rodriguez et.al. (2000) however maintained that these influencing circumstances should be determined to make it as an opportunity for open trade policies and growth. Aside from the character of the economic policies within specific bilateral or multilateral relations, the nature of business performance and other variables in economic relations should be considered. Rodriguez (2000) further explicated that there are major propositions that deserves to be highlighted under open economy. First, in static theoretical models presumed free of distortions, trade restriction reduces GDP at world prices. In case there are market failures, trade restrictions may increase real GDP. Second, in models which extol exogenous technological change and diminishing returns to reproducible factors of production, evident in neo-classical model of growth, trade restriction has no effect to long-run rate of growth of output, and such remain despite market imperfections albeit some growth effects while in transition process—the latter could be either positive or negative. The dynamic models, as in the case of endogenous growth, there remains a need to correlate trade openness and long-run growth to resolve its ambiguity (Colander, 2001). Despite odds, it supposed that forces of comparative advantage aid the economys resources toward the prospect of generating long-run growth. Some of these modern theories took foundations from classic theory of growth from Adam Smith²1 and Jean Baptiste Say2, which is by the way, criticized of the limitations it set for public services because for them government’s intervention to economy in the form of ownership, production and sale of goods and services result to inefficient economic operation and management. This showed that classic growth theory encouraged leaving economic relations to private sectors. However, extolling a vibrant economy would be impossible without the correlation of politics and economy with public and private relations. As a matter of fact, deregulation policies is difficult to tackle without the intervention of policy makers to set policies about how market and trading relations be established that will make its operations mutually beneficial, specially that there is incessant increase on sentiments about fluctuation of prices that favors capitalists more as against poorly-salaried consumers. Further, there is growing recognition of regulatory policies too as critical for fiscal and monetary management of all countries, including advanced economy, for structural reforms, international market openness and less-constriction of business environment. Rule of law remained important to illustrate the economic relation for quality life, social cohesion and transparency. Conclusion Growth cannot be simply understood by a linear scale since the international market is in a constant ebb and flow depending on fiscal conditions and cultivation of each countries’ economic realm. Growth can’t be just understood from the lens of capitalists’ profits, but also from the vantages of government revenue, improved household state, and of environmental security or its rehabilitation thereof in the name of sustainability. Modern economy requires strong and transparent governance to bridge the gaps of trading relations and to evaluate outcomes. This is important to strengthen the empirical proofs from impact assessments to ascertain if there is indeed growth coherence and to also determine the reform priorities for development process that will be sourced from stakeholders. Growth requires institutional leadership that will motivate the perfection of economic roadmap as well as, balance public and private relations that will bolster accountability. Such is significant to point out as the mechanisms for growth demand that there ought to be a review of regulatory policies to put at a equilibrium the private and public responsibilities and to further processes that supports social cohesion in developmental intervention e.g. communication, cooperation, coordination and conduct of consultation. Strengthening regulatory policies likewise allow collective and individuated reflection in each nation about how should development and growth be managed across countries through trading relations. Policies supportive of growth should be responsive to the interaction of its variables³ including effects and implications on lessening of custom duties; liberty in repatriation of dividends, matters on profits and income of foreign employees; employment of alien executives or experts; labors forces management by preventing strike; operational cost adjustments by adherence to minimum wages; access to government-based support and business policies that will improve business organization, joint venture of capital, research and resource use. To ascertain that growth will be achieved under multilateral or bilateral relations, host countries must enhance the human resource capabilities through formal educational institutions and system and alternative training centers to meet the transnational corporation’s need for diverse and competitive labor forces for better productive output. However, nurturing the human capital is just part of the mechanisms because generally, in Europe, America and emerging economies in Asia3, the basic measure of growth are best felt if constituents are able to bring foods to their tables, access health services, secure their children’s education, and if economy accord to them the moderate decent lives As growth is founded on developmental framework, economists must likewise concerns on nurturing financial and institutional growth to deepen economic investment, as often showed by financial intermediaries’ roles in economic activities. But this is not enough. It must be determined that investments should accurate translate development plans at as a most observable fact down in to the communities to ascertain that there are evidences that can be used to determine that investments indeed provide positive impacts to lives. The challenge therefore is for entrepreneurs to be far-sighted and to utilize opportunities in exigent and difficult markets4. Thus, there is a need for strategic complementarities and optimization in the reconstruction of economic systems that can withstand rapid changes, possible recessions and random fluctuations in the productivity or market demands. It must be recognized that the world economy has certain unpredictable and peculiarities that affect macro- and micro decision-makings, production and relations. In conclusion, while openness to growth entails collaboration, cooperation, change management, and adaptability, economists in all nations must continually learn from the historic timeline of economic developments among civilizations. Experts for liberalization of economic relation in all nations must be intelligible, fact-bound, objective, systematic and methodological in seizing opportunities despite uncomfortable and unsettling situations of the market. Economists should be innovative and critical in its market forecasts or policy analysis to ascertain potential alternatives of economic model when met with challenges and vulnerabilities amid this call of rebuilding confidence for international growth.5 REFERENCES Anderson, K., Dimaranan, B., Francois, J., Hertel, T., Hoekman, B., & Martin, W. (2001). The cost of rich (and poor) country protection to developing countries. Journal of African Economies 10, 227-257. Colander, David, (2011), Macroeconmics, University of Pheonix (4rth Ed., Special Ed.). McGrawl-Hill Irwin Companies, Inc., New York, New York. Denison, E., (1985), Trends in American Economic Growth, 1929-1982, Brookings Institution, 1985 Dollar, David, and Craig Burnside, "Aid, Policies, and Growth," World Bank Policy Research Working Paper No. 1777, June 1997. Dollar, David, 1992, "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-85," Economic Development and Cultural Change, 1992, 523-544. Edwards, Sebastian, 1998, “Openness, Productivity and Growth: What Do We Really Know?” Economic Journal 108, March 1998, 383-398. OECD (2011), Perspectives on Global Development 2012: Social Cohesion in a Shifting World, OECD Publishing. doi: 10.1787/persp_glob_dev-2012-en OECD, (2011). Growth sustainably could be assured by non-OECD countries. OECD Publishing. Pier Carlo Padoan (2011). The Policy Imperative: Rebuild Confidence summarized by, deputy secretary general and chief economist. OECD. http://www.oecd.org/dataoecd/2/7/49112938.pdf Accessed: December 17, 2011. Rodriguez, F & Rodrik, Dani, (2000). Trade Policy and Economi Growth: Askeptics GUide to the Cross National Evidence. Department of Economics, University of Maryland & Harvard University, MA. Read More