Foreign direct investment, exports, and economic growth in selected emerging countries: Multivariate VAR analysis

The paper adopts a time series framework of the Vector Error Correction Models (VECM) to study the dynamic relationship between export, FDI and GDP for six emerging countries of Chile, India, Mexico, Malaysia, Pakistan and Thailand. Stationarity of the series with structural breaks is also examined in the model. Given that these countries are at different stages of growth, we will be able to identify the impact of FDI and export on economic growth at different stages of growth. The results suggest that in South Asia, there is evidence of an export led growth hypothesis. However, in the long run, we identify GDP growth as the common factor that drives growth in other variables such as exports in the case of Pakistan and FDI in the case of India. The Latin American countries of Mexico and Chile show a different relationship in the short run but in the long run, exports affect the growth of FDI and output. In the case of East Asian countries, we find bi-directional long run relationship among exports, FDI and GDP in Malaysia, while we find a long run uni-directional relationship from GDP to export in case of Thailand.FDI, Exports, Multivariate VAR, Pakistan, India, Malaysia, Thailand, Chile, Mexico.

Integration, decoupling and the global financial crisis: A global perspective

The recent global recession requires policy makers to identify the relative importance of shock transmission mechanisms in each region and devise counter policy measures against future idiosyncratic shocks. In the last decade, world dynamics have changed considerably due to increased openness and integration requiring considering business cycles at regional levels. This paper analyzes the business cycle movements of the EU, ASEAN+3, NAFTA, MERCOSUR and SAARC regions to investigate why the subprime mortgage crisis of 2007 did not spread globally compared to the crisis that began with the fall of Lehman Brothers in September 2008. Employing a Panel Vector Autoregressive framework (PVEC), this study finds that the subprime mortgage crisis shock originated in the real sector (falling US housing prices) and was transmitted through trade variables. Due to absence of short term trade variables transmission mechanism in all regions except the MERCOSUR and SAARC, the shock did not spread widely to other regions. Even in the MERCOSUR and SAARC, due to limited goods exports exposure to the US, the shock was not significant. Resultantly, these regions exhibited a decoupling phenomenon during the subprime mortgage crisis. In contrast, the second shock originated with the fall of Lehman Brothers in 2008 and was transmitted through financial variables. Due to the presence of the short term causal relationship of the financial variable with GDP in all regions except SAARC, the slowdown contagion spread to most regions. As a result, the slowdown triggered the trade variables shock transmission mechanism and the SAARC region was also affected. Consequently, a business cycle convergence phenomenon was observed in the regions. Therefore, business cycles decoupling and convergence phenomena in the regions depend not only on the origin of the shock but also on the relative importance of the transmission mechanisms in each region.Integration, Decoupling, Financial crisis, EU, NAFTA, ASEAN, MERCOSUR, SAARC, Business cycle, FDI, Exports, Intra industry Trade, Sub prime mortgage crisis, Lehman Brothers, Short term capital flows, Panel Cointegration, Panel stationarity, Panel Vector Error Correction (PVEC)

Foreign direct investment, exports, and economic growth in selected emerging countries: Multivariate VAR analysis

The paper adopts a time series framework of the Vector Error Correction Models (VECM) to study the dynamic relationship between export, FDI and GDP for six emerging countries of Chile, India, Mexico, Malaysia, Pakistan and Thailand. Stationarity of the series with structural breaks is also examined in the model. Given that these countries are at different stages of growth, we will be able to identify the impact of FDI and export on economic growth at different stages of growth. The results suggest that in South Asia, there is evidence of an export led growth hypothesis. However, in the long run, we identify GDP growth as the common factor that drives growth in other variables such as exports in the case of Pakistan and FDI in the case of India. The Latin American countries of Mexico and Chile show a different relationship in the short run but in the long run, exports affect the growth of FDI and output. In the case of East Asian countries, we find bi-directional long run relationship among exports, FDI and GDP in Malaysia, while we find a long run uni-directional relationship from GDP to export in case of Thailand

Foreign direct investment, exports, and economic growth in selected emerging countries: Multivariate VAR analysis

The paper adopts a time series framework of the Vector Error Correction Models (VECM) to study the dynamic relationship between export, FDI and GDP for six emerging countries of Chile, India, Mexico, Malaysia, Pakistan and Thailand. Stationarity of the series with structural breaks is also examined in the model. Given that these countries are at different stages of growth, we will be able to identify the impact of FDI and export on economic growth at different stages of growth. The results suggest that in South Asia, there is evidence of an export led growth hypothesis. However, in the long run, we identify GDP growth as the common factor that drives growth in other variables such as exports in the case of Pakistan and FDI in the case of India. The Latin American countries of Mexico and Chile show a different relationship in the short run but in the long run, exports affect the growth of FDI and output. In the case of East Asian countries, we find bi-directional long run relationship among exports, FDI and GDP in Malaysia, while we find a long run uni-directional relationship from GDP to export in case of Thailand

Integration, decoupling and the global financial crisis: A global perspective

The recent global recession requires policy makers to identify the relative importance of shock transmission mechanisms in each region and devise counter policy measures against future idiosyncratic shocks. In the last decade, world dynamics have changed considerably due to increased openness and integration requiring considering business cycles at regional levels. This paper analyzes the business cycle movements of the EU, ASEAN+3, NAFTA, MERCOSUR and SAARC regions to investigate why the subprime mortgage crisis of 2007 did not spread globally compared to the crisis that began with the fall of Lehman Brothers in September 2008. Employing a Panel Vector Autoregressive framework (PVEC), this study finds that the subprime mortgage crisis shock originated in the real sector (falling US housing prices) and was transmitted through trade variables. Due to absence of short term trade variables transmission mechanism in all regions except the MERCOSUR and SAARC, the shock did not spread widely to other regions. Even in the MERCOSUR and SAARC, due to limited goods exports exposure to the US, the shock was not significant. Resultantly, these regions exhibited a decoupling phenomenon during the subprime mortgage crisis. In contrast, the second shock originated with the fall of Lehman Brothers in 2008 and was transmitted through financial variables. Due to the presence of the short term causal relationship of the financial variable with GDP in all regions except SAARC, the slowdown contagion spread to most regions. As a result, the slowdown triggered the trade variables shock transmission mechanism and the SAARC region was also affected. Consequently, a business cycle convergence phenomenon was observed in the regions. Therefore, business cycles decoupling and convergence phenomena in the regions depend not only on the origin of the shock but also on the relative importance of the transmission mechanisms in each region

Pakistan’s potential trade and ‘behind the border’ constraints

Institutions are source of comparative advantage or disadvantage in international trade. Socio-economic and political constraints also matter for creating comparative advantage and affect the trade pattern of a country. These diverse ‘beyond the border’ and ‘behind the border’ constraints are often not fully captured in the literature on international trade and institutions. The existence of such institutional, socio-economic, and political constraints to Pakistani exports is empirically investigated in this paper through a cross-sec-tional analysis employing a trade Stochastic Frontier Gravity Model. Aggregate data for 2006-08 and 2009-11 show lower exports in the latter period. This is attributed to demand-suppressing effects emanating from the 2008 global financial crisis and supply-suppressing effects emanating from energy shortfalls and input constraints, due to floods, in Pakistan. The model estimation then demonstrates that behind the border con-straints in Pakistan are statistically significant in explaining total exports during 2009-11. The estimation is also presented for four single-digit SIC categories of products for this period. Behind the border constraints are evident for SIC 0 (agriculture, forestry and fish products) and SIC 2 (manufactured products) that com-bined account for approximately 80 percent of Pakistan’s exports. The estimation results by country further demonstrate that behind the border constraints affect the pattern of trade through the non-realization of bilateral trade potential. In the post-financial crisis era, Pakistan needs to further develop its institutional capacity to promote competitive exports given the explicit and implicit beyond the border trade barriers it faces and work to remove political obstacles to regional trade.Non-PRIFPRI1; CRP2; PSSPDSGD; PIMCGIAR Research Program on Policies, Institutions, and Markets (PIM

Channelizing Afghanistan to Pakistan informal trade into formal channels

This paper focuses on assessing the possibility of bringing informal trade from Afghanistan to Pakistan into the legal channels by reducing tariff and tax differentials between Pakistan and Afghanistan. A basic model and illustrative example are presented that encompass the monetary incentives of smugglers and shows possible tariff/tax reductions that bring profits from informal trade below the breakeven point. The effects of price discounting of informally traded products in the Pakistan market and possible under-invoicing by traders are also taken into consideration.Non-PRIFPRI1; CRP2; PSSP; Capacity Strengthening; DCA; C Improving markets and tradeDSGD; PIM; MTIDCGIAR Research Program on Policies, Institutions, and Markets (PIM

Trade exposure and the dynamics of regional integration

An export-led growth strategy is considered as a sustainable path to growth, and yet many countries are not exporting to their full potential. A country's inability to export to its potential is a reflection of institutional and structural impediments and rigidities at home as well as in its trading partners. As a strategy to overcome these socio-political and institutional barriers, countries engage with each other to improve the exporting environment through negotiating trade agreements. In order to highlight a country's obstacles in realization of its export potential and strategy to overcome these socio-political-institutional barriers through regional agreements, this thesis explores empirically the presence of such barriers and tests the dynamics of regional integration by carrying out four empirical studies. The first study deals with estimating Australia's export potential as it is relatively open among the resource-based developed economies for empirical testing. A major link between export growth and trade agreements is the flow of Foreign Direct Investment (FDI), mostly from the developed economies. Therefore, in order to find the impact of FDI on economic growth, the second study conducts an empirical analysis of six FDI recipient emerging countries. The third and fourth studies gauge the positive and negative impacts of regional integration on economic growth of member countries. The third study analyses the long-term impact of exports and FDI on output growth among the Association of Southeast Asian Nations (ASEAN), ASEAN plus 3 and ASEAN plus 6 groupings. The fourth study identifies the relative importance of shock propagation channels in EU, NAFTA, ASEAN plus 3, MERCOSUR and SAARC and tests the empirical findings for each region by observing the regions' responses to the recent idiosyncratic shocks of 2007 and 2008. The first study examines Australia's export potential and explores whether Australia is realizing its full export potential. A country's inability to realize its full potential is an indication of presence of 'behind the border' constraints influencing negatively a country's exports. The empirical analysis indicates that even in the case of Australia, which is relatively open among the resource-based developed economies, 'behind the border' factors are important to explain the reasons why it does not export its full potential. The impact of FDI on economic growth is found in the second study by conducting an empirical analysis on six FDI recipient emerging countries, Chile, India, Mexico, Malaysia, Pakistan and Thailand, as FDI flows mostly from the developed economies. The study explores the dynamic relationship between exports, FDI and GDP and given that these countries are at different stages of growth, the impact of FDI and exports on economic growth is identified at different stages of growth in both the short and long-term. The third study examines the long-run impact of exports and FDI on output growth among the Association of Southeast Asian Nations (ASEAN), ASEAN plus 3 and ASEAN plus 6 groupings as despite having bilateral and multilateral trade agreements, most of the countries are also linked directly or indirectly as members of regional trade blocs. However, each regional grouping has different characteristics due to the interplay of the forces of regionalism and regionalization. The study indicates the presence of positive impact of FDI and export on output growth in ASEAN and ASEAN plus 3 countries and finds no long-run relationship between FDI and export on GDP growth in the ASEAN plus 6 grouping. As there are risks associated with increased regional and global integration that result in the exposure of economies to shocks from external markets, the fourth study explores the relative importance of shock propagation channels in various regions, namely MERCOSUR, EU, ASEAN+3, NAFTA to the recent idiosyncratic shocks of 2007 and 2008. Trade and financial integration are identified as the two most important idiosyncratic shock transmission mechanisms. The empirical analysis shows that in the EU, ASEAN+3, NAFTA and MERCOSUR, GDP has a short term causal relationship with financial variable and any reversal in financial flows could affect the regions GDP negatively. In addition, only in the MERCOSUR and SAARC regions, GDP has a causal short term relationship with goods exports and any negative goods export shocks affects only these two regions GDP and that too depends on the level of exposure to the shock-originating country. Therefore, economic integration not only helps promote export growth and attract FDI but may also lead to greater volatility in output from negative shocks. The response of each region to these shocks may differ depending on the special characteristics of each region, type of shock and shock transmission mechanisms. The thesis highlights that besides benefits of enhanced growth due to regional agreements, there are also risks associated with regional integration. Furthermore, each region has special characteristics that needs to be identified and this thesis highlights the weak links in different regions due to which the recent financial crisis spread to different regions by analysing the idiosyncratic shocks of 2007 and 2008

Australia's export potential: An exploratory analysis

A country's inability to export to its potential is a reflection of institutional and infrastructural impediments and rigidities that exist at home as well as in its trading partners. Distinguishing these rigidities as 'behind the border' factors and 'beyond the border' factors, respectively, this paper examines the impact of 'behind the border' factors on Australia's export potential. The hypothesis tested in this paper is that the 'behind the border' factors are important in almost all exporting countries and exert negative effects on export potential of the countries. Australia, which is relatively open among the resource-based developed economies, is chosen for testing the hypothesis by estimating a stochastic frontier gravity model using bilateral data from 2006 to 2008 on trade with its key trading partners. The empirical analysis indicates that even in the case of Australia, which is a developed country, 'behind the border' factors are important in explaining the reasons for its failure to export to its full potential