Trade Liberalization in South Asian Countries Essay

Introduction Trade and economic growth has a strong relationship, for attaining sustainable growth trade is must. Trade helps countries to use its resources efficiently. Trade is beneficial to all countries weather one country is less efficient in its resource utilization[1]. It is common thinking that trade is only beneficial for developed nation but it is not the true. Throughout the history, civilizations engaged in trade. Trade policy can be categorized into free trade (Liberalized trade) policy and Protectionist trade policies.

There always been a conflict between free trade supporters and protectionists. In history Mercantilists were in favor of protectionists, in mercantilists one of the famous economist was Thomas Munn’s, today’s economist also have some reservation about free trade like Alan S. Blinder, on the other hand Adam Smith and Ricardo gave the idea of free trade. Classical economists also support and think that free trade can be helpful in getting peace in world like Keynes and Cordell Hull. Trade liberalization in South Asian Countries

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For Pakistan the sixth Five-year plan (1983-88) marks the beginning of the process of deregulation and liberalization, which was carried out with much greater forces after 1988 when Pakistan economy became completely subservient to IMF and World Bank directives. [2] For the first time in history Pakistan changed its trade policy. That new policy enhances the efficiency of the industrial sector. This policy was concentrates on exports-led industrialization for the first time. In this period, Pakistan saw a remarkable growth in its economic sector.

It was calculated that the “private sector’s” share in total investment increased from 38 percent in FY83 to 42 percent in FY 88 and in manufacturing sector its share in investment rose from 51 percent to 83 percent. [3] This shows how much Pakistan gain from trade liberalization. India has adopted several waves of far-reaching trade reforms since 1991. The reforms have included sharp reductions in the number of goods subject to licensing and other non-tariff barriers, reductions in export restrictions, and tariff cuts across all industries.

Trade liberalization has resulted in higher levels of competition within the Indian economy, as measured by reductions in price markups over marginal cost (Krishna and Mitra 1998). This change raises an interesting question as to whether greater competition through trade liberalization has affected the wages of male and female workers differently. With less government protection and with increased exposure to competition from abroad, employment and pay patterns in manufacturing changed markedly following the liberalization.

Yet manufacturing industries experienced quite a bit of variation in the timing and extent of tariff cuts during and after the 1991 reforms. These differential rates in trade liberalization across industries provide an excellent opportunity for examining the impact of increasing exposure to international trade on gender wage differentials. [4] The pace of Bangladesh’s trade liberalization is comparable to that of many Countries that are experiencing benefits from their reforms. While faster than some of its South Asian neighbors, Bangladesh has not moved farther than Sri Lanka.

Indeed, the remaining anti-export bias of trade policy is considerable. Some trade-related quantitative restrictions still impede import flows. After a start in the mid-I 980s, Bangladesh’s trade liberalization effort picked up its pace in the early 1990s as an important component of the country’s structural reform program. Since the mid 1990s, however, movement toward a lower and uniform tariff rate has slowed due to concerns for budgetary revenues, the balance of payments, and, in particular, possible adverse effects of trade liberalization on import-competing industries.

Although the direct causal connection of trade liberalization to economic performance in general and to GDP growth in particular is difficult to quantify, Bangladesh’s overall economic performance in terms of export, manufacturing sector and GDP growth rates, and external balances and sustainability– appears stronger in the 1990s than in the 1980s. [5] Literature review: [K Nath and Al Mamun 2004] analyzed time series evidence to establish a link between trade, economic growth and income inequality in Bangladesh using the Vector Auto regression (VAR) model, which suggest that the trade liberalization increases the speed growth in Bangladesh.

Trade openness promotes investment. Sensitivity analysis with change in the sample time period suggests that during the post independence period investment has significant positive impact on trade liberalization. [John Williamson, 1999] negates the studies which concluded that its trade liberalization since 1990 has been a textbook case of success in case of Bangladesh. Exports have increased at double-digit rates, and imports have increased in parallel, leaving the trade balance largely unchanged in dollar terms.

These exports have been heavily concentrated in the garment industry, which is an industry well-suited to Bangladesh’s comparative advantage in view of its heavy use of abundant unskilled labor. GDP growth has accelerated. The study documents the parallel increase in exports and imports, and shows that the share of exports in GDP has more than doubled in the 1990s. [Ahmed and Sattar 2004] demonstrated that the higher average growth experienced by Bangladesh in the 1990s than in the 1980s should be attributed to the success of trade liberalization.

This simple approach is, however, seriously flawed as it does not explains various other events that occurred at once during that period. Therefore, it is not clear whether, after controlling for traditional sources of growth, liberalization would have any distinct impact on growth. In the absence of such analysis, skeptics, could argue that the increased rate of growth in the post-liberalization period arose “despite” rather than “because of liberalization”. [Chand and Sen, 2004] empirically tested whether the trade liberalization in Indian manufacturing has raised total factor productivity (TFP) growth.

Using panel data and statistics of the key variables used in the regression analysis, evaluating the impact of trade reforms on TFP growth in India for the seventies and eighties – a period which witnessed significant changes in Indian trade policy. [Ashfaque H. Khan 1998] gives the comprehensive detail of Pakistan trade history. Finding of Ashfaque is same as khan and Qayyum, Pakistan’s exports decreases significantly after adopting the liberalization policy in 1990’s.

Ashfaque conclude that Pakistan trade policy was biased through out the independence, that’s why Pakistan can’t get any thing from trade liberalization. On the other hand East Asian countries get maximum benefits out of it and attain sustainable growth rate because these countries adopted export promotion policies and developed their industries. [Khan and Qayyum 2006] took the effect of trade, financial development and interest rate on growth. Trade liberalization shows negative effect on exports as growth in the 1990s was only 5. percent per annum as compared to 14. 97 percent in the 1970s they used GDP as dependant variable [Bushra, Yasmin, Zainab and Ali 2006] shows the negative relation between trade liberalization and economic growth. They use 2SLS regression technique to see the effect of trade liberalization on economic growth. They use four mutually dependent equations. The dependent variables of these equations, which are endogenous variables of the model, are poverty, the Gini coefficient, per capita income, and the employment level.

The explanatory exogenous variables are inflation, human capital, ratio of investment to GDP, type of government, real wages and lagged value of PGDP and trade liberalization index. This result of this study shows that trade liberalization has no effect on poverty reduction where as employment, GDP and income distribution which are also the development indicator has positive relation with openness of trade. Empirical Framework and Methodology Hypothesis This paper is aimed at weighing the effect of Trade openness through various eterminants of Trade Liberalization and to ensure that Trade liberalization has a positive relationship with economic growth. Macroeconomic theories like Exogenous Growth Theory, Absolute Advantage, Law of Comparative Advantage explained that trade openness have a positive relation with economic growth. Studies mentioned in previous section some of them also show the positive relationship but their poverty reduction variable shows inverse relation. Rationale of Variables FDI FDI is considered to be a catalyst for the economic growth of a nation; it accelerates the process of economic expansion by various mean.

Trade openness and FDI has a positive relation as the trade occurs more foreign direct investment comes in and economy grow. A positive relation is anticipated between Foreign Direct Investment and growth. Employment Trade is process of employing the unallocated or unemployed factor into utilization and earns economic gains out of it. With more trade the unemployed labor force could be engaged in economic activity, the theories suggest like Cobb-Douglas production function suggest a positive relationship between employment and growth; here employment is taken as a determinant of Trade Openness.

Net Exports One of the determinants of trade open the paper employs is Net export, it gauges the trade openness of an economy, higher the level of trade openness greater would be the net exports, and a positive relation of net exports is forecasted. Income distribution The impact of income distribution is ambiguous, it depends upon various economics and social phenomenon’s and is uneasy to predict the behavior of Income Distribution while taking it as component of Trade Openness and gauging the relationship with economic growth.

Income distribution is originated for GINI co-efficient. Exchange Rate Variation in exchange rate determines the volume of trade between the economy and rest of world. Official exchange rate is taken to observe the behavior of exchange rate and growth and to investigate the relationship of exchange rate with growth. Tariff Rate Tariff is one vital determinant to gauge openness of an economy, there are two types of tariffs but the paper is taking mean of all tariffs levied on import or export of all goods in the three economies. Net barter terms of Trade Index

Net barter terms of trade index is calculated as the percentage ratio of the export unit value indexes to the import unit value indexes, an economy’s terms of trade is measures how much a nation pays on imports, a higher terms of Trades shows the well-being or economic advantage, in sense that it pays less to import and earns more in exports. Methodology Time Series data from 1990 to 2005 is taken for all variables affianced by the model, from the World Bank’s online Data source[6] for the three subject economies of Bangladesh, India and Pakistan.

The Data is taken from 1990-2005 an era of Trade liberalization in all the three focused economies. An OLS model is applied to find out the influence of the independent variable on dependent variable. The Model GDP= ? +? FDI+? Emp+? NX+? IDis+? Ex+? TaR+? ToT The model is developed to gauge the impact of Trade Liberalization on growth; the independent variables are proxies for Trade liberalization, illustrating the level of trade liberalization. A regression was run on SPSS16 which rendered the following results. Results For Bangladesh GDP= 4. 71+0. 725FDI+-8. 392Emp+-0. 004NX+1. 566IDis+-9. 03TaR+2. 490ToT (T-ratios) (2. 417) (0. 686) (2. 507) (0. 014)(2. 054) (0. 719) (0. 157) Model Summary |R |R Square |Adjusted R Square |Std. Error of |Durbin-Watson | | | | |the Estimate | | |(Constant) |4. 357E |2. 601 |1. 675 |0. 122 | |FDI US $ |0. 7 |12. 602 |1. 524 |0. 156 | |Employment Rate |0. 348 |4. 57 |-1. 652 |0. 127 | |NX |-1. 134 |4. 494 |-2. 31 |0. 041 | |GINI index |-0. 106 |10. 80 |-1. 269 |0. 231 | |Exchange Rate |-0. 77 |4. 5 |2. 972 |0. 013 | |Tariff Rate |-0. 534 |2. 2 |2. 013 |0. 069 | |ToT |0. 023 |1. 99 |0. 179 |0. 861 | The t-ratios of some of the variable are indicating the insignificance of the concerned independent variable; some of the variables are not behaving as they were expected. It is due to presence of multicollinearity and autocorrelation in the investigated data. Model Summary R |R Square |Adjusted R Square |Std. Error of the |F -Statistics | | | | |Estimate | | |(Constant) |8. 09 |85320000000 |0. 949 |0. 363 | |FDI US $ |4. 58 |2. 107 |2. 225 |0. 246 | |Employment Rate |4. 68 |1. 76 |2. 96 |0. 925 | |NX |-0. 568 |0. 597 |-0. 951 |0. 362 | |GINI index |-7. 05 |7. 07 |-0. 996 |0. 341 | |Exchange Rate per US $ |5. 79 |2. 05 |2. 813 |0. 017 | |Tariff Rate |-1. 34 |3. 008 |-0. 447 |0. 663 | |ToT |-5. 5 |1. 589 |-0. 324 |0. 752 | Model Summary |R |R Square |Adjusted R Square |Std. Error of the Estimate |Durbin-Watson | |0. 989 |0. 978 |0. 964 |33. 17 |1. 262 | Conclusion The paper investigated Trade Liberalizations impact on growth by employing various determinants of Trade Openness The results rendered by the investigation shows that trade by all mean accelerates the process of development.

South Asia economies must adhere to the policies those results in liberalization of trade like opening the boarders and evasion of trade hostile policies of Tariffs and imposing quotas. Barriers to competition produce the opposite effect—less efficient domestic industries; higher costs, poorer quality, and fewer choices of goods and services; less innovation; and slower economic growth that’s why govt should promote national and international competitive environment. Reform in domestic policies and agricultural trading rules will create incentives to remove the anti-agricultural bias existing in the region.

This should lead to significant increases in agricultural production in the sub-continent, where average yields are well below the world average. Likewise, South Asia’s manufacturing sector, especially textiles and apparel, is estimated to be poised for major expansion with the impending open trade environment. Increased food production, and rising economic growth brought about by trade liberalization. Asia has given more attention to trade liberalization through the global trading arrangements.

Though the region has several regional trade agreements notably the Asian Free Trade Area (AFTA) of the Association of Southeast Asian Nations, and the South Asian Preferential Trading Arrangement (SAPTA) most are political in origin and emphasize broader issues of regional cooperation rather than concrete actions in trade liberalization. Reference: • Satish Chand & Kunal Sen, 1996. “Trade Liberalization and Productivity Growth: Evidence from Indian Manufacturing,” Trade and Development 96/11, Australian National University, Department of Economics. • Ahmed, N. (1999), Trade Liberalization in Bangladesh, Dhaka: University Press Limited. Bakht, Z. (1998),” Trade Liberalization, Exports and Growth of Manufacturing Industries in Bangladesh. ” Dhaka: Bangladesh Institute of Development Studies • Anwar, Tilat (2002) Impact of Globalization and Liberalisation on Growth, Employment and Poverty: A Case Study of Pakistan. • Muhammad Arshad Khan & Abdul Qayyum, 2006. “Trade Liberalisation, Financial Sector Reforms, and Growth,” The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45 • Bushra Yasmin, Zainab Jehan, Muhammad Ali Chaudhary “Trade Liberalization and Economic Development: Evidence from Pakistan” The Lahore Journal of Economics 11 : 1 ———————- [1] International Economics By Dominick Salvatore [2] Issues in Pakistan’s Economy By S. Akbar Zaidi [3] World bank, Pakistan: medium-term Economic policy Adjustment, reports No 7591, Washington, 1988 [4] Rodgers, Menon The Impact of Trade Liberalization on Gender Wage Differentials in India’s Manufacturing Sector 2007 [5] Begum, Shamshad and Abul F. M. Shamsuddin (1998), “Exports and Economic Growth in Bangladesh,” Journal of Development Studies, 35: 89-114.


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