Trade Liberalisation and Growth Case Studies of India and Korea

7/29/2019 Trade Liberalisation and Growth Case Studies of India and Korea

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Trade Liberalisation and Growth: Case Studies of India and KoreaAuthor(s): Prabirjit Sarkar and Brototi BhattacharyyaSource: Economic and Political Weekly, Vol. 40, No. 53 (Dec. 31, 2005 - Jan. 6, 2006), pp. 5635-5641Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4417618 .

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T r a d e Liberalisationn d GrowthC a s e S t u d i e s o f I n d i a a n d K o r e a

Trade liberalisation in developing countries over the last 20 years has often been consideredas a prerequisiteto growth. This article uses the autoregressivedistributed ag modellingapproachto cointegrationand examines the relationshipsbetween growth and tradeliberalisation in the context of the Indian and Korean economy. Using three indicators ofliberalisation, the article finds no meaningfulrelationshipbetween the growthrate of real GDP or per capita real GDP and trade openness.

PRABIRJITSARKAR, BROTOTIBHATTACHARYYA

IntroductionIn the post-second world war period, many less developedcountries (LDCs) followed the path of import-substitutingindustrialisation ISI), guided either by the Prebisch-Singer-Myrdal (PSM) thesis of autarkicdevelopment or by economicnationalism ndependentof the PSM thesis [Prebisch 1950, 1959,1964; Singer 1950; Myrdal 1956; Sarkar 2001]. In most casesthese countrieswere thenpredominantly agriculturalandexporterof primarycommodities.The ISI strategy elicits "rapiddomestic industrialisation" asessential for economic growth. Consequently, LDCs requiredincreased importsof machines and technology and pulled mostnew resources to import-competing activities. It resulted intomore rapid growth in the demand for foreign exchange thatsurpassed he growth in export earnings. In the process theLDCsbeganto face acute balance of payments problems.This situationdemanded an increased export drive to pay for imports.Moreover, to finance the balance of payments deficit, thesecountries became dependent on the rich industrially developedcountries (DCs) and international financial institutions such asthe IMF/World Bank, dominated by the rich countries. Thedistressed LDCs seeking their help are often advised to open uptheir economy not only to tide over their crises but also toexperience a higher rate of growth.An almost universal policy response was that the LDCs leftthe course of inward-looking ISI and startedfollowing outward-orienteddevelopment strategy. In the process the importance offoreigntrade n the level of economic activities of these countrieshas been rising.

The increasedopenness was hailed in IMF/WorldBankcircles.Different WorldDevelopment Reports [World Bank 1987, 1991,1999-2000] tried to show that outward-oriented trade policieshave been more successful in promoting growth than inward-oriented radepolicies. Particularly,World Development Report(1987) argued hat"outwardoriented countries"performedbetterthan"inwardorientedcountries"even under unfavourablemarketconditions. Many scholars, however, questioned this standpoint[see for example, Singer 1987; Singer and Gray 1988].In this perspective, the present study seeks to investigatewhether or not trade liberalisation appears to have "*orked" inthe sense of stimulatinggrowthin India andKorea.Theremainderof this paper is structured as follows: Section II examines the

trend behaviour of the shares of exports and imports in GDPin both the countries since 1956. Section III examines the trendsin both the countries' rate of growth as measured by the growthrates in real GDP and per capita real GDP. Finally, Section IVsets out to address the question: is there any meaningful rela-tionship between increased openness (as measured by the shareof foreign trade in GDP) and growth rates?Section V concludeswith the finding of no evidence of a favourable impact of tradeliberalisation on real growth rates in both countries.IIForeign Trade in India and Korea

There is lack of a globally defined and internationally com-parable measure of a country's trade orientation. The two con-cepts "trade liberalisation" and "tradeopenness", while closelyrelated,are not identical. In therelevant literature"increased radeopenness" is considered in the sense of an increase ih size ofthe country's traded sector in relation to total production as anacceptable proxy for trade liberalisation. It may be noted thatthe World Bank itself, when measuring the success or otherwiseof structuraladjustmentprogrammes, uses the ratio of export toGDP as an indicator of increased openness or outward orien-tation. In the present analysis, on the basis of data available inInternational Financial Statistics Yearbook 1984, 2001, 2002(published by IMF), three indices of liberalisation are calculatedover the period, 1956 to 1999 for India and 1956-2001 for Korea:export/GDP, import/GDPand (export+import)/GDP. Let us usethe symbols, X/Y, M/Y and(X+M)/Y respectively. India's tradeopenness indices are diagrammatically represented in Figure 1and those indices of Korea are represented in Figure 2.

These indicatorsexhibit that the shares of exports andimportsinIndia's GDP were 6.43 percentand 9.90 percent (respectively)in the mid-1950s. So the shareof foreign trade in GDP was 16.33percent. It starteddeclining in an era of ISI underthe plans andexports pessimism, and reached8.92 percent by 1970. Thereafter,it startedrising partly due to the rising share of imports (thanksto the rise of OPEC in the 1970s) andpartlydue to the increasedexport drive to pay for the rising importbill. The tradeopennessindex touched 16.64 per cent by 1980. With the fall of OPECand the declining prices of oil, the share started falling. Withthe introductionof tradeliberalisation in the middle of tlhe1980s,the share of foreign trade in India's GDP started rising andaccelerated under the New Economic Policy (NEP) in the 1990s

Economicand PoliticalWeekly December31, 2005 5635

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Figure 1: Trade Openness in India, 1956-199930 -25

a)6 200)

: 15

1956 1961 1966 1971 1976 1981 1986 1991 1996 1999Years

-0-Export/GDP i Import/GDP* (Export+lmport)/GDPFigure 2: Trade Openness in Korea, 1956-2001

100 _

80

160t '~ \ , .-

40

220

0 ,,, I I I I , .I I .I I .I I I, ; I,; i l,; ;I I I1956 1961 1966 1971 1976 1981 1986 1991 1996 2001Years-C-Export/GDP -_-Import/GDP X-(Export+lmport)/GDP

- it reached25.24 percent in 1998 - of which 11.98 percent wasthe shareof exports and 13.27 percent was the share of imports.On the other hand, Korea's initial condition was a bit worsethan India - exports had averaged only 1.33 per cent of GDP,while imports represented 13.33 per cent of GDP. That is, theshare of foreign trade n GDP accounted for 14.67 percent. Majorpolicy reforms took place in Korea in the early 1960s, whichgreatly increased the return to exports. Consequently, the fruitsof policy reformsbecame apparentas the share of foreign tradereached 37.63 per cent in 1970. Since then it had been risingrapidly and by 1980 it attained the height of 73.71 per cent.Finally, in the wake of the economic crisis in 1997, the shareof foreign trade in.Korea's GDP increased to 83.47 per cent -of which the export share constituted 42.91 per cent while theimport share constituted 40.56 per cent in 2001.To study the trendbehaviour of the tradeopenness series firsttrendstationarity s tested by theAugmentedDicky-Fullar(ADF)tests.1 The order of the test is chosen through Hall's "generalto specific rule."2 This procedure reveals that all the observedtrends are stationary (Table 1).In view of the expected increase in trade openness with theemergence of anexport drive thatwas stimulated.byitb^oil p~eshock of 1973 to payfor import,thepossibility of structuralbreak

Table 1: Stationarity Tests of Trade Openness Indices andGrowth Rates - India and KoreaSeries ADFTest Statistics Perron Perron(LagOrder) Test Statistics- Test Statistics-Structural StructuralShift1973 Shift1969

(LagOrder) (LagOrder)IndiaExport/GDPWithTimeTrend -9.496* -20.057*(9) (9)Import/GDPWithTimeTrend -9.210x* -21.580*(9) (12)WithoutTimeTrend -9.464* -(9)(Export+lmport)/GDPWithTimeTrend -13.057* -33.754*(9) (12)Real GDP GrowthRateWithTimeTrend -5.605* -6.1660*(3) (3)PerCapitaRealGDPGrowthRateWithTimeTrend -5.512* -3.4150(3) (10)KoreaExport/GDPWithTimeTrend -2.379X -3.765(12) (1)WithoutTimeTrend -4.103* -(7)Import/GDPWithTimeTrend -23* -28.122*(12) (11)(Export+lmport)/GDPWithTimeTrend -20.122* -24.483*(12) (8)RealGDPGrowthRateWithTimeTrend -1.826* -4.151 ** -4.435+

(11) (10) (10)WithoutTimeTrend -2.619** - -(11)PerCapitaReal GDPGrowthRateWithTimeTrend -1.922x -4.201 * -4.303+(11) (10) (10)WithoutTimeTrend -2.622** - -(11)

Notes:(1) The fitted quation or hree "TradeOpenness" ndices orADF eststatistics:kLogY(t)= a+b.t+ADF.Log (t-1)+XTiAY(t-i)+u(t)i=1

TheADF -ratiosreportedare the t-statisticsof testing'ADF=1'ortheappropriateag k determinedon the basis of the suggestion of Ng-Perron 1995).The fittedequationfor three"TradeOpenness" ndices to derive thePerron est statistics:kLogY(t)=a+b.t+P.LogY(t-1)+ c.Dt+d.(SDt)+e.SPDt z r iAY(t-i)+u(t),i=1

whereDr=0or < or=TB timebreak) andDt=1 fort >TB; ccordinglySDt= 0 & , andSPDt=1 for t = (TB+1)&0 otherwise.The Perron eststatisticsreported ret-statisticsoftestingtheestimate of 'P=1' or heappropriateagk.(2) Theappropriatemodelof ADF est, ie, inclusion fintercepta)andtimetrend t) s consideredonthebasis of t-statisticscorrespondingo'a' and 't'.(3) The fittedequationsfor "GDPgrowthrate"and "PerCapitaGDPGrowthRate" eries for ADF eststatisticsandPerronest statisticsarethesame as "TradeOpenness"ndices,excepting hat heseries are nottaken nlogarithmicorm.(4)Appropriateagorder schosenbyHall's GeneraloSpecific"riteria.(5)Thesymbolx denotestime rend s notsignificantn heADFmodel.(6) Thesymbol 0 denotes structural reaksarecnot ignificant.(7)Thesymbols , +and**denotes significanceat the 1 percent,5 percent and 10percentlevels ofrejectinghe unit oothypothesis nfavourofthestationary lternative.

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in the Indian series is explored in 1973. With similar contem-plation a structuralbreak in the Korean series is considered in1973. There are two ways to model structural break- "additiveoutlier" (AO) model and "innovational outlier" (10) model. Incase of the formermodel, only the level of aparticularobservationis affected, while the effect of a structural change perpetratedthe remaining process through the dynamics of the model inthe latter case.Perron (1989) developed a test of unit root against the alter-native of a "trend-stationary"process allowing the presence ofa one-time change in the level and/or in the slope under boththe null and alternativehypothesis on the basis of "AO" as wellas 1'IO" odel. To proceed, structuralbreakanalysis Perrontest3(1989) is conducted in the context of "10" model to be consistentwith the notion that liberalisation is likely to influence theeconomic system gradually from its inception, considering 1973as an exogenous break. The postulate of Perron's exogenousbreakpointhas been criticised, most notably by Christiano(1992)who argued that the choice of this date had to be viewed, to alarge extent, as being correlated with data. It is not verymeaningful to search for a break over the entire period ignoring

priorinformation Maddalaand Kim 1997]. The appropriateorderof thetest is decidedby Hall's"generalo specificrule".Theresultyieldsevidenceof astatistically ignificant tructuralbreak in all the observed trends. The Perron test confirmsstationarityf all the seriesof tradeopenness ndicesapartromX/Y in case of Korea(Table 1).Inview of deterministicrends n theseries,a trend-stationary(TS)model4 s a befitting pecification.Accordinglyhis modelhasbeen itted oeach serieswithoneexceptionof X/Y of KoreawhereadifferencetationaryDS)model ncorporatingtructuralshift is fitted.5To takecareof the autocorrelationroblem 12-orderLagrangeMultiplier LM)test is conducted o ascertaintheappropriaterrorprocessand thecquationsare re-estimatedthrough he Gauss-Newton terative echnique.Throughhe TS approachndia's radeopenness ndicesovertheentireperiod fanalysis1956-1999are ound ogrow; urtherelevationof studyrevealsa declineatalmostaround percentrateperannumupto 1972andgrowth hereafterTable2). In thecaseofKorea,heexport hare howsnogrowthfTS model with-out structuralhift is taken nto consideration. n view of non-stationarityf thisseriesafter ncorporatingtructuralhift,the

Table 2: Analysis of Trends of India's Trade Openness Indices and Growth Rates (1956-1999)Series and Intercept TimeTrend Intercept Slope Spike R-Bar DW- F-Procedure (a) (b) Dummy Dt) Dummy SDt) Dummy SPDt) Squared Statistics StatisticsExport/GDPTS:OLS 1.420* 0.019* - - - 0.598 0.259 65.054 (1,42)GN(1) 1.044* 0.031' - - - 0.913 2.089 220.393(2,40)TS: D74.99 SD74-99 SPD74OLS 1.8* -0.024* -0.590 0.050* -0.086 0.832 0.548 54.328(4,39)GN(8,12) 1.905* -0.031* -0.562* 0.053* -0.269* 0.916 1.365 57.132(6,25)Import/GDPTS:OLS 1.792* 0.012* - - - 0.280 0.254 17.730(1,42)GN (1) 1.340* 0.027* - - - 0.842 1.869 112.710(2,40)TS: D74.99 SD74-99 SPD74OLS 2.311* -0.046* -0.821 0.068* -0.036 0.820 0.948 50.008(4,39)GN(1) 2.258* -0.041* -0.818* 0.065* -0.089 0.867 1.896 55.668(5,37)(Export+lmport)/GDPTS:OLS 2.318* 0.015* - - - 0.444 0.204 35.363(1,42)GN (1) 1.808* 0.031* - - - 0.906 1.814 202.603(2,40)TS: D7499 SD7499 SPDOLS 2.776* -0.036* -0.7189 0.S060 -o0.0j 0.858 0.687 66.144(4,39)GN(1) 2.677* -0.028+ -0.664+ 0.054* -0.122 0.921 1.965 98.317(5,37)GDPgrowth ateTS:OLS 2.095 0.126+ - - 0.104 2.001 6.017(1,42)GN (3,4) 2.212* 0.122* - - - 0.216 1.938 4.573(3,36)TS: D7499 SD74.9 SPDOLS 2.202 0.157 0.640 -0.04T -13.394* 0.247 2.067 4.517(4,39)GN(3,4,6,8,9,10) 2.479 0.153 -0.504 -0.011 -15.385* 0.543 2.513 4.925(10,23)PercapitaGDPgrowth ateTS:OLS -0.266 0.133* - - - 0.124 1.997 7.087(1,42)GN (3,4) -0.215 0.130* - - - 0.230 1.915 4.876(3,36)TS: D74.QQ D74.99 SPD74OLS 0.017 0.148 -0.103 -0.04 -12.833* 0.265 2.058 4.878(4,39)GN 3,4,6,8,9,10) 0.153 0.157 -1.041 0.006 -14.930* 0.577 2.523 5.497(10,23)DS: D74.99 SPD74OLS 0.077 - 0.555 - 13.081+ 0.068 2.754 2.558(2,41)GN(1,2,3,4) 0.205 - 0.143 - -5.893+ 0.379 2.252 4.974(6,33)Notes:(1) The fittedequation orthree"TradeOpenness" ndicesforTS model:LogY(t)= a+b.t+u(t)The fittedequation orthree "TradeOpenness" ndicesforTS model ncorporatingtructural hift:LogY(t)=a+b.t+P.LogY(t-1)+ c.Dt+d.(SDt)+e.SPDt u(t),where Dt=0 fort < &= T (timebreak)and Dt=1 for t >TBaccordinglySDt=0 & , andSPDt=1 fort =(TB+1)&0 otherwise.(2) The fittedequationsfor"GDP rowthrate" re same as "TradeOpenness" ndices,excepting that the series is not takeninlogarithmicorm.(3) The fittedequation or"PerCapitaGDPGrowthRate" eries is same as "GDPGrowthRate" eries inrespectof TS model, moreover aking ntoconsideration he non-stationarityf the series after ncorporatingtructuralhift ollowing quationof DS model is fitted:d Y(t)=a + c.Dt+e.SPD,+du(t),where 'd' ndicates irstdifference,D =0 fort < or= TB timebreak)andDt=1 for t >TBandSPDt=1 fort =(TB+1)&0 otherwise.(4) GN(Gauss-Newton terativemethod)correspondingigures nthe parenthesesrepresents hestatisticallyignificantags takenforcalculation.(5) F-statistics orresponding igures nthe parenthesesrepresent hedegrees offreedom.(6) Thesymbols*and+ denotes the significanceat 1 percent and5 percent levels respectively.

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Figure3: India's Real GDP GrowthRate, 1956-19992015

cc 10

l0X ?

1956 1961 1966 1971 1976 1981 1986 1991 1996 1999Years

Figure5: India's Per Capita Real GDP GrowthRate, 1956-199915

The real al o

o -5

,-10

1956 1961 1966 1971 1976 1981 1986 1991 1996 1999YearsDS model exhibits a very high rateof stochastic trend-growth upto 1972,thereafter deceleration.However,Korea's mport hareinGDPdemonstratesa deterministic growth upto 1972 and decele-ration nthelaterperiod,overall there s absence of trend Table3).

IIIGrowth f Indianand KoreanEconomyThe real growth rates fluctuated over the concerned period ofthepresentstudyin India(Figures 3 and5) and n Korea(Figures 4and6). To test the trend- stationaritywith and without structuralbreak, ADF tests and Perron tests are applied as in Section II.This procedure discloses the presence of a deterministic trendin the series of India's real GDP growth rate and per capita realGDP growth rate (Table 1). Fitting a TS model to these series,it is observed that India's real GDP growth rate and per capitareal GDP growth rate showed some tendency to rise over timeamidst much fluctuation. But if structural shift is taken care of,no growthof these series can be found; only a significant spikedummy is present in 1973 (Table 2).6 In the context of Korea,the two series on growth rates are stationary with and withoutthestructural reakof 1969 (determinedbythepre-testingnotion).Consequently, the TS model over the whole periodof study 1956-2001 indicates no trend in these series. But furtherstudy revealsthat, till the end of 1960s or the beginning of 1970s the rates

Figure 4: Korea's Real GDP Growth Rate, 1956-20012520

- /\\\/V

~. . . I..-10---- ----------------------------................................, .0.

-5

1956 1961 1966 1971 1976 1981 1986 1991 1996 2001Years

Figure 6: Korea's Per Capita Real GDP Growth Rate, 1956-200120

5,

rn~Years

IV.(-5

GR = a+b.t+ ,13.TO u (t) ...(1)

ofrowhereR = annual percentage rate of growth of real GDPxpound

real GDP per capita, TO = Index of tradeopenness: X/Y, MN,(X+M)/Y, t = time variable, u = errorterm, and a, b and are

thelation betweenradeO penness ndGrowthThe simple procedure of tudying thempact of tradepennessonrowth based on time seriesata is to fit a linear regressionwith time trends:GR = a+b.t + 3.TO + u (t) ...(1)where GR = annual percentage rateof growth of realGDP orreal GDP perapita, TO =ndexf tradepenness: X/Y,eY,

(X+M)/Y, t =time variable, u = errorerm,and a, b andc arethe parametersto be estimated The explicit introduction of thetrend variable inhe regression has theeffect ofetrendinggrowth rate.The validity of such a procedure is now questioned afterdecades of development of "unit root" econometrics andcointegration study [see Sarkar 1994 for a simple exposition].According to this new breedof time series analysis one can carryon with the standard practice only if the trend variables aredeterministic and not stochastic. Now-a-days to examine therelationship between two first-difference stationary series onehas to carry on usual unit root tests, which often suffer firomavery importantproblem of power, specially undersmall samples.

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There appears the uncertainty relating to the true degree ofintegration of the series.Recently, Pesaran and Shin (1999) developed a techniqueto test for the existence of a long run relationship betweentwo variables irrespective of whether they are stationary ordifference stationary. Their technique avoids the problemsof uncertainty posed by the lack of power of unit root tests

and the difficulties of simple co-integration analysis where re-gression involving time series makes sense if each of them isindividually non-stationaryand if and only if these variables are"co-integrated".The ARDL-based estimators of long run coef-ficients are also super-consistent, andvalid inferences on the longrun parameterscan be made using standardnormal asymptotictheory.Table 3: Analysis of Trends of Korea's Trade Openness Indices and Growth Rates (1956-2001)

Series and Intercept TimeTrend Intercept Slope Spike R-Bar DW- F-Procedure (a) (b) Dummy Dr) Dummy SDt) Dummy SPDt) Squared Statistics StatisticsExport/GDPTS:OLS 1.415* 0.062' - - - 0.722 0.091 117.641(1,44)GN(1) 3.391* 0.008 - - - 0.978 1.904 992.064(2,42)TS: D74-01 SD74.01 SPD74OLS 0.322* 0.165* 2.869* -0.156* -0.063 0.971 0.680 384.012(4,41)GN(1,2,5,9) 0.433* 0.157* 2.850* 0.151* -0.115 0.953 2.127 92.893(8,28)DS: D74.01 SPD74OLS 0.171* - -0.154* - -0.078 0.230 1.828 7.739(2,43)GN(9,10) 0.161* - -0.150* - -0.002 0.272 1.920 4.266(4,31)Import/GDPTS:OLS 2.712* 0.023* - - 0.639 0.199 80.635(1,44)GN(1,2,5) 3.720' -0.001 - - - 0.909 1.818 100.606(4,36)TS: D74.oI SD74.o1 SPD74OLS 2.305* 0.060* 1.194* -0.059* 0.146 0.905 0.734 107.670(4,41)GN(1,8) 2.242* 0.066* 1.280* -0.067* 0.089 0.898 2.005 55.160(6,31)(Export+lmport)/GDPTS:OLS 2.957* 0.037* - - 0.729 0.120 121.838(1,44)GN(1,9,12) 3.932* 0.009 - - - 0.864 1.985 53.475(4,29)TS: D74.01 SPD74OLS 2.396* 0.087* 1.646* -0.082* 0.053 0.955 0.718 241.367(4,41)GN(1,8) 2.319* 0.096* 1.705* -0.091* 0.029 0.946 2.023 110.039(6,31)GDPgrowth ateTS:OLS 7.771* -0.009 - - - -0.022 1.616 0.027 (1,44)

GN(11) 10.944* -0.108+ - - 0.260 1.951 6.968 (2,32)TSi D70o.01 SD70.01 SPD70OLS -0.354 1.001* 12.385* -1.144* 2.629 0.221 2.237 4.185(4,41)GN 1,3,4,7,10,11) -3.197 1.352* 12.882* -1.418* 5.766+ 0.421 1.782 3.474(10,24)TS: D74-01 SD74.01 SPD74OLS 1.421 0.704* 9.222+ -0.810* -0.536 0.182 2.143 3.502(4,41)GN(11) 9.016 0.046 2.905 -0.182 -1.643 0.191 1.962 2.610(5,29)PercapitaGDPgrowth ateTS:OLS 4.568* 0.049 - - - -0.004 1.611 0.833 (1,44)GN(11) 7.803* -0.050 - - - 0.161 1.897 4.264(2,32)TS: D70.01 SD70.01 SPD70OLS -3.267 1.001* 12.613* -1.101* 2.215 0.224 2.207 4.257~4,41)GN 1,3,4,7,10,11) -7.038+ 1.456* 13.983* -1.477* 4.801 0.343 1.714 2.771(10,24)TS: D74.01 SD74.01 SPD74OLS -1.756 0.750* 9.842+ -0.815* -0.583 0.196 2.133 3.740(4,41)GN(11) 4.145 0.226 5.128 -0.319 1.418 0.091 1.911 1.678(5,29)

Notes:(1) Thefittedequationof TS modelandDS (incorporatingtructuralhift)modelforforfirst"TradeOpenness Index"Export/GDP):LogY(t)=a+b.t+u(t).dLogY(t)=a + c.Dt+e.SPDt+du(t),where'd' ndicates irstdifference,Dt=0 for t < &= TB time break)and Dt=1 for t >TBandSPDt=1 fort =(TB+1)&0 otherwise.Thefitted quation orremainingwo"TradeOpenness" ndices s same inrespectTSmodel, moreoveraking ntoconsiderationhestationarityof theseries after ncorporatingtructural hift ollowingTS model s fitted:LogY(t)=a+b.t+P.LogY(t-1)+ c.Dt+d.(SDt)+e.SPDt u(t),where Dt=0 fort < &= TB(timebreak)and Dt=1 fort >TB accordinglySDt=0 & , andSPDt=1 for t =(TB+1) &0 otherwise.(2) Thefitted quation or"GDP rowth ate" nd "PerCapitaGDPGrowthRate" eries aresame as last two "TradeOpenness" ndices,excepting hattheseries are not taken inlogarithmicorrm.(3) GN(Gauss-Newton terativemethod)correspondingigures n the parenthesesrepresents he statistically ignificant ags takenforcalculation.(4) F-statistics orrespondingigures n the parenthesesrepresent hedegrees offreedom.(5) Thesymbols*and+ denotes the significanceat 1percent and5 percent levels respectively.

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The ARDL approach to co-integration is done between theseries on either GDP growth rate or per capita GDP growth rateand one of the trade openness indices at a time in case of bothIndia and Korea.Accordingly, thefollowing equation(2) is fitted:4(L) GR = ot + alt + 3(L)TO + u(t) ...(2)P qwhere O(L) = 1 - X j . and P(L) = j L J.j =l1 j =oIncase of non-significant timetrend,theequationis reestimatedexcluding the trend term. Evidently the estimates of long runcoefficients of TO reveals no direct relationship. If there is anyrelationship, that is negative! (Tables 4 and 5).

VConclusionThe question addressed in this paperwas about the effect tradeliberalisation might have on a country's growth rate. In the firststage of trend analysis application of the tests of stationarity

Table 4: Impact of Trade Openness on Growth Rates in IndianEconomy (1956-1999)

Series andLag Intercept TimeTrend LongRun ARDLOrderSelection (ao) (a,) Coefficient LagOrderCriterion TradeOpennessIndices(P)

Impact n GDPgrowth ateExport/GDPSBC 1.624' 0.338* -0.830* (4,0)AIC -1.782+ 0.178* 0.407 (12,12)R-BarSquared -1.632+ 0.174* 0.391 (11,12)Import/GDPSBC 1.455 0.335+ -0.578 (0,1)AIC 0.194 0.271* -0.275 (10,9)R-BarSquared 0.194 0.271* -0.275 (10,9)-(Export+import)/GDPSBC 1.717+ 0.377* -0.447* (4,1)AIC -1.027 0.221* 0.049 (10,9)R-BarSquared -1.162 0.203* 0.094 (8,9)Impact n per capitaGDPgrowth ateExport/GDPSBC -0.899 0.336* -0.776* (4,0)AIC -4.371* 0.176* 0.471 (12,12)R-BarSquared -4.229 0.169* 0.468 (11,12)Import/GDPSBC -1.197 0.337+ -0.529 (0,1)AlI -3.055* 0.307* -0.271 (12,11)R-BarSquared -2.666* 0.256* -0.144 (10,9)(Export+import)/GDPSBC -1.502 0.340+ -0.250 (0,1)AIC -3.818* 0.208* 0.114 (10,9)R-BarSquared -3.952* 0.188* 0.163 (8,9)Notes:(1) Theequationitted orestimatingmpactof"TradeOpenness" TO)on"GrowthRates"(GR)usingARDL pproach ocointegration:?(L)GR= o0+aclt+3(L)TO+u(t)..........(a)P qwhere 0(L) = 1 - Z j L and 3(L) j Lij=1 j=0

(2) Thelagorderof the ARDLmodel s selected byusingtheSchwarzInformationriteria,Akaike Information riteria,R- BarSquaredCriteria.(3) Thesymbols* and + denotes significanceatthe 1 percent and5 percent levels respectively.

(Augmented Dicky-Fuller tests and Perron tests), however,exhibit that all the series have deterministic trend except the"export share" of Korea. The trend analysis reveals thatinitially tradeopenness in India declines and grows after 1972.In Korea trade opens at a high rate up to 1972 and deceleratesafterwards.In the face of it, growth rates in India's GDP and per capitaGDPshow risingtrendspossibly due to thepresenceof significantspike. They actually remainstagnant.On the otherhand,theratesof growth of GDP and per capita GDP swell in Korea at a rapidrate up to the end of 1960 and falls subsequently. With furtheradvancement of the ARDL approachto co-integration, ourstudyfinds no evidence of favourable impact of trade liberalisationon realgrowthratesof India and Korea.Contrary otheexperienceof pro-IMFor World Bankcircles, we get an unfavourable mpact;Table 5: Impact of Trade Openness on Growth Rates in KoreanEconomy (1956-2001)Series and Lag Intercept TimeTrend LongRun ARDLOrderSelection (ao) (al) Coefficient LagOrderCriterion TradeOpennessIndices

(O)Impact n GDPgrowth ateExport/GDPSBC (b) 16.892* - -0.273* (0,1)AIC a) 12.487* -0.120+ -0.012 (11,6)R-BarSquared (a) 12.487* -0.120+ -0.012 (11,6)Import/GDPSBC(a) 24.340* -0.143+ -0.365+ (0,0)AIC b) 12.127* - -0.129R-BarSquared(b) 15.405* - -0.232+ (12,9)(Export+import)/GDPSBC(b) 21.535* - -0.211* (0,0)AIC b) 19.851* - -0.188* (10,5)R-BarSquared(a) 13.704* -0.097* -0.039 (11,0)Impact n per capitaGDPgrowth ateExport/GDPSBC (b) 13.871* - -0.220* (0,1)AIC b) 13.871* - -0.220* (0,1)R-BarSquared(b) 9.217* - -0.081 (11,6)Import/GDPSBC (b) 20.917* - -0.434* (0,0)AIC b) 7.198* - -0.019 (11,12)R-BarSquared (b) 10.989* - -0.138 (12,9)(Export+import)/GDPSBC (b) 18.115* - -0.179* (0,0)AIC b) 17.565* - -0.166* (0,1)R-BarSquared (b) 13.410* - -0.106* (7,5)Notes: (1) Theequationitted orestimatingmpact f "TradeOpenness"TO)on "Growth Rates" GR)using ARDL pproach o cointegration:

?(L)GR= a0+a1t+1(L)TO+u(t)..........(a)p qwhere ?(L) = 1 - ? j LJand ,3(L) ? ij Lij=1 j=0o?(L)GR= a0o+1(L)TO+u(t)..........(b)

p qwhere 4)(L)= 1 - ? j L and 3(L)= ? ,j Lij=1 j=0(2) Thelagorderofthe ARDLmodel s selectedbyusingtheSchwarzInformationriteria,AkaikeInformation riteria,R-BarSquaredCriteria.(3) Thesymbols* and + denotes significanceat the 1 per cent and5 percent levels respectively.

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this calls for a further investigation to explain such an un-propitious conclusion. [iS1Email: [email protected]

[email protected]

I To test trend-stationarity,he AugmentedDicky-Fullar(DF) procedureis to fit the following regression:Log Y (t) = a+b.t+ADF.Log Y(t-I)+x Ti AY(t-i)+u(t)1=1where k is the order of the ADF model to be determinedthroughanappropriate riterion.The ADF t-ratios reportedare t-statistics of the estimate of testing'ADF=1'. Theappropriatemodel for ADF test,i e, inclusionof intercept(a)and imetrend t)isconsideredon the basisoft-statisticscorrespondingto 'a' and 't'.2 This criterion s advantageouso "information"riteria,because the lattertendto select very parsimoniousmodelsleadingto testswithsome timesserious size distortions and/orpower losses [Ng and Perron1995].3 The fittedequationfor three"TradeOpenness"indices for Perron eststatistics: kLog Y(t)=a+b.t+P.LogY (t-l) + c.D+d.(SD,)+e.SPD,+ET DY(t-i)+u(t),i=1where interceptdummy D = 0 for t < or = T (time break)and D =1for t > TB, accordinglyslope dummySD = 0 andt, and spike dummySPD =1 fort= (TB+1)and 0 otherwise.The Perron est statisticsreportedaret-statistics f testing he estimateof 'P=1' forthelagkchosenthroughthe appropriate riterion.4 The following equationis fitted for estimatingTS model:Log Y (t) = a + b.t + u (t)whereY (t)= series,t= time,a= intercept,b= slope,u(t) is the error erm.5 In the case a log-linear trendequation,the difference stationary DS)model incorporating tructural hift is,dLog Y(t)= a + c.D +e.SPD +du(t),where 'd' indicates firstdifference,D = 0 for t < or = T. (time break)andDt=1 for t > TBandSPD, =1 for t = (T +1) and 0 otherwise. Theerror erm,du(t) is a white noise error erm; t has a constantmeanandvariance.If the estimate of 'a' from the DS equationis found to bestatistically significant, the corresponding series is said to have a"stochastic" rend.6 In case of India'sper capita GDP growthrate,as a structuralbreak isabsent, results of the Perron test and consequent DS model are notreported, tationarity f this series is reported onsideringthe ADF test.7 The resultsrelating o Korea'srealGDP growthrate andpercapitareal

GDPgrowthratecorrespondingo structuralhift in 1973 are mentionedin Table 3 as this structural hift is consideredfor otherseries, andnotexplained in the text as the pre-testingnotion does not supportthisstructural hift for the concerned series.References

Banerjee,A,JDolado,J WGalbraith nd D FHendry 1992): Co-integration,Error-Correction nd theEconometricAnalysis of Non-StationaryData,OxfordUniversityPress, Oxford.Christiano,LawrenceJ (1992): 'Searchingfor a Break in GNP', Journalof Business and EconomicStatistics, Vol 10, No 3, pp 237-50.Maddala,G S, In-Moo Kim(1997):UnitRootsCo-integration nd StructuralChange, CambridgeUniversityPress, Cambridge.Myrdal,G (1956): An InternationalEconomy:Problems and Prospects,Harper,New York.Ng, Serena, PierrePerron 1995): 'Unit Root Tests in ARMA Models withData-DependentMethods for the Selection of the TruncationLag',Journal of the American Statistical Association. Vol 90, No 429,pp 268-81.Perron,Pierre(1989): 'The GreatCrash,the Oil PriceShock, andthe UnitRoot Hypothesis', Econometrica,Vol 57, No 6, pp 1361-1401.- (1997): 'FurtherEvidenceonBreakingTrendFunctions nMacroeconomicVariables',Journal of Econometrics,Vol 80, No 2, pp 355-85.Pesaran, M H and Y Shin (1999): 'An AutoregressiveDistributedLagModelling Approach to Co-integration Analysis' in S Strom (ed),Econometricsand EconomicTheoryin the 20th Century.The RagnarFrischCentennialSymposium,CambridgeUniversityPress,Cambridge.Prebisch,Raul (1950): The Economic Developmentof LatinAmerica andIts Principal Problems, United Nations, New York.- (1959): 'CommercialPolicy in theUnderdevelopedCountries',AmericanEconomic Review,Vol 49, pp 251-73. ;- (1964): Towards a New TradePolicy for Development,United Nationsfor UNCTAD, New York.Sarkar,Prabirjit 1994): 'India's Balance of Paymentand ExchangeRateBehaviour since 1971: A New Approach', Economic and PoliticalWeekly,January1-8.- (2001): 'The North-SouthTerms of Trade Debate: A Re-examination',Progress in DevelopmentStudies, Vol 1, No 4, pp 309-27.Singer, H W (1950): 'The Distribution of Gains between Investing andBorrowing Countries', American Economic Review, Vol 40, No 2,pp473-95.- (1987):'TheWorldDevelopmentReport1987 on theBlessingsof 'OutwardOrientation':A NecessaryCorrection',Journalof DevelopmentStudies,Vol 24, No 2, pp 232-36.Singer,H W and P Gray(1988): 'TradePolicy and Growth of DevelopingCountries: Some New Data', WorldDevelopment, Vol 16, No 3, pp395-403.WorldBank (1987, 1991, 1999, 2000): WorldDevelopment Report 1987,1991, 1999, 2000. Oxford University Press, Oxford.

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Development Effectiveness through Gender Mainstreaming:Gender Equalityand Poverty Reduction in South Asia - Govind KelkarWomen's Rights to Land and Assets: Experience of MainstreamingGender in Development Projects - Nitya RaoIs Microfinancea 'Magic Bullet' for Women's Empowerment?:Analysis of Findings from South Asia - Naila KabeerGender Indicators of Equality,Inclusion and Poverty Reduction:Measuring Programme/ProjectEffectiveness - Meena Acharya, Puspa GhimireHumanSecurity and Gender Violence - Radhika CoomaraswamyWomen's Agency in Peace Building:Gender Relations in Post-ConflictReconstruction - Rita ManchandaWomen in Governance in South Asia - Gail OmvedtFor copies write toCirculationManagerEconomic and Political WeeklyHitkariHouse, 284, Shahid Bhagatsingh Road, Mumbai400 001email: [email protected]

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Trade Liberalisation and Growth Case Studies of India and Korea

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