OPENNESS, GROWTH AND INVESTMENT : INVESTIGATING THE LINKS IN THE EAST ASIAN REGION

Abstract

Endogenous growth models propagate that trade affects growth directly through Total Factor Productivity. The theory has found support from the vast cross-sectional empirical literature available. However, recent empirical studies have also found an indirect link between trade openness and growth through capital accumulation. Since the current theoretical models fail to resolve this issue, whether openness generates growth through the TFP channel or through capital accumulation, the debate becomes an empirical one. Furthermore, empirical studies can explore and identify other factors that are imperative to the trade-growth link. Current empirical investigations on trade and growth that adopt a single-equation methodology on cross-sectional data encounter several limitations and econometric problems. This study attempts to remedy these thorny issues by adopting a simultaneous equation approach on time series data. The system comprises the growth and investment equations and is estimated for each of the countries individually. In addition, the focus of this investigation is on East Asia as the region has the longest history of trade openness. Therefore, the present study can provide new insights into the mechanics of trade-growth linkages. The thesis found strong evidence for the direct trade-growth link and only weak evidence for the indirect trade-growth link. The estimation results also suggest that the indirect trade-growth link is important only for countries that are still undergoing industrial development or heavily reliant on capital formation for growth. The economic structure of the country concerned may also be a determinant. These results appear to suggest that both trade-growth linkages are valid but their relative importance is dependent on the characteristics of an economy.