Globalization and Export Concentration
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1 Globalization and Export Concentration Chowdhury Nawsheen Farooqui* Guillen (2001) influentially defined globalization as "a process leading to greater interdependence and mutual awareness (reflexivity) among economic, political and social units in the world. Current era of globalization allows free flow or movements of factors of productions. Such free flow of ideas information has immensely influenced trade among nations, creating shifty of preference. Existing literature says about both positive and negative consequences on trade due to globalization. Ricardian Theory of comparative advantage directed the nations for specialization. Theoretically Ricardian theory of comparative advantage would like to predict globalization to crate export concentration following specialization. Globalization covers a wide range of issues, economic, political, cultural, etc. Globalization does not only mean opening of trade opportunities only in terms of goods and services but it also refers to transfer or free flow of capital, labor and so on. Bangladesh being a developing country still has restrictions on the free flow of capital, movement of labor and so on. Bangladesh has not yet enrolled in the super highway of globalization and yet we can expect some sort of impact of globalization on export scenario in the context of Riacrdian specialization theory. In this proposed paper I looked whether more globalization of Bangladesh leads to more export concentration or not. Running regression using HHI index and globalization index, saw positive relationship between the two, in support of Ricardian theory. Field of Research: Globalization and export concentration. *Senior Lecturer, Department of Economics, North South University chowdhury.farooqi@northsouth.edu
2 Introduction Bangladesh being a developing country and is a small open economy in international trade. Early 1980s the major export concentration was jute and jute products, which was overshadowed by the RMG sector in the end of 1990s. Bangladesh experienced vertical diversification of its exports (from primary to manufactures). By 2000, it became a unique LDC exporting predominantly manufactures (over 90%).The exports are largely dominated by readymade garments, whose share was 81.2 percent in FY2014. Around 96 percent of all exported goods are manufactured commodities. Bangladesh's export basket is heavily concentrated on one product that is the readymade garments and others include: jute goods, home textile, footwear and frozen shrimps and fish. In Bangladesh export commodities mainly leather products, synthetic fabrics, some agricultural products and thus we are more inclined to labor intensive technology. In this paper I examined whether the concentration of few products are due to the impact of globalization or not. There is limited body of literature or research activities on the globalization impact on export concentration at least pertaining to Bangladesh. This paper will add to the existing literature and add to the policy guide in the future. This paper looks into the export concentration indicators such as Herfindal-Hirschman concentration index. The KOF index for measuring the globalization will be used. The KOF Index of Globalization was introduced in 2002 (Dreher, published in 2006) and is updated and described in detail in Dreher, Gaston and Martens (2008). The overall index covers the economic, social and political dimensions of globalization. KOF index of globalization is comprehensive in nature. This simple minded study tries to identify the relationship between globalization and export concentration. Using data of and econometric methods it is further scrutinized.
3 The paper is structured as follows. After introductory remarks there is discussion on relevant literature. Then methodology and data is presented which is followed by econometric results and related discussion. Concluding remarks will be presented in the last section. Literature Review Globalization is about bridging the gap between nations, connecting different regions of the world, from the cultural to the criminal, the financial to the environmental and so on. In the earlier history Ricardian theory highlighted the benefits the nation gained from specialization of products and thus exporting the commodities after specialization. Existing literature shows that due to globalization and nations being more open to trade do have export concentration on products they export. Ricardo (1817) referred to the framework of two countries and two commodities when studying the notions of comparative advantage and efficient specialization in production. The investigation of the general case of many countries and many commodities which was not analyzed by Ricardo was initiated by Graham (1948) by the use of some numerical examples. McKenzie (1954) also showed a way of systematically exploring the general case by drawing on activity analysis. Jones (1961) used this approach and developed necessary and sufficient conditions for efficient multilateral specialization. Some earlier findings talks about other factors leading to export concentration.studies by Simon Kuznets (1964) and A. 0. Hirschman (1945) suggest that country size and commodity export concentration are inversely related. Michael Michaely [1958] found that it is the level of development rather than country size that exerts a significant influence on the degree of export concentration. Some findings relate to export concentration having impact on GDP per capita growth. Lederman and Maloney (2003) find a negative relationship between export concentration and GDP per capita growth in a cross-section and panel data regression. Similarly, De Ferranti et al. (2002) estimate that 1 percent increase in export concentration is associated with a 0.5 per cent decline in GDP per capita growth. Hamid (2010) investigates the magnitude of geographic as well as commodity concentration for Malaysia from 1970 to 2003 and how the pattern of trade and instability has changed over time. The results indicate that the commodity concentration appears as a significant variable in explaining the export earnings instability.
4 . Globalization reflects a state of affairs in which countries become more interconnected with the rest of the world ( Levitt, 1983; Bordo, 2002). The drivers of globalization include elimination of trade barriers and free flow of products and services across countries (e.g., Levitt, 1983; Yip, 1989; Hill, 1997). Johansson and Nilsson (2007) explore for Swedish export flows during the years Globalization, in their study, has been referred to as increases in country diversity, extended transport radii, less effect of distance on trade flows, and the ratio of exports to the importing countries incomes. The results from the empirical analysis do not support the hypotheses of increasing trade globalization and it is rather the case that export flows are becoming more internationally regionalized. Bangladesh has some natural inclination or concentration on the production of certain commodities mainly leather products, synthetic fabrics, some agricultural products and we are more inclined to labor intensive technology. This paper examine whether the concentration of few products are due to the impact of globalization or not. There is limited body of literature or research activities on the globalization impact on export concentration at least pertaining to Bangladesh. This paper will add to the existing literature and add to the policy guide in the future. Methodology : We used a linear regression model, where the HHI is the dependent variable (export concentration index measured by Herfrindal -hirschman index) and the globalization index - the globalization index that covers the economic, social and political dimensions of globalization, is the independent variable. The KOF Index of Globalization was introduced in 2002 (Dreher, published in 2006) and is updated and described in detail in Dreher, Gaston and Martens (2008). The overall index covers the economic, social and political dimensions of globalization.
5 According to Low et al. (1998), the Herfindahl Hirschman index is a flow-weighted concentration index which implies that it can be decomposed according to the shares of total flows of each group. Thus, the weight given to each group depends on the trade share of each group. The formula is as follows: HHI K ( Xik /Xi) 2 HHI is Herfindahl Hirschman Index of country i. Xik is the export value of commodity k or export destination k for exporter i. Xi is the total export value of all commodities or export destinations for exporter i. Then, it is converted into export concentration index Looked at the data between the periods 1985 to The final regression equation looks like (here the symbols have their usual meanings): HHI ( Globalizationindex ) 1 t At first, unit root tests are carried out to find out if data series are stationary or not. Nonstationary data can give rise to spurious regression results. To make thing informationally inclusive, ran a group unit root test. Cointegration means that a linear combination of different order 1-integrated variables I(1) can produce stationary results (I(0)), and it implies the existence of an empirical long-run relationship between those variables. Thus here Johansen's cointegration test was performed to find out existence of any possible relationship between variables. Once the cointegration is established, the next step was to see the direction of causality existing between the variables. However cointegration test does not give the direction of relationship among variables so took help of cointegrating regressions namely, Fully Modified Ordinary Least Square (FMOLS), Canonical Cointegration Regression (CCR), and Dynamic Ordinary Least Squares (DOLS). These are single equation regression based methods and are variations of OLS method to avoid some problems in error term that may arise in absence of full-fledged model. Fully modified ordinary least squares The FM-OLS regression is designed to provide efficient estimates of
6 cointegrating regressions. The method modifies least squares to account for serial correlation effects and for the endogeneity in the regressor that results from the existence of a cointegrating relationship. In the same vein, CCR and DOLS estimators deal with the problem of second-order asymptotic bias arising from serial correlation and endogeneity. Data Source The variable used for export concentration indicators such as Herfindal Hirschman concentration index is used. Before calculating the HHI, had to gather the data of the values of commodities exported from Bangladesh by HS section, from the statistical yearbooks of Bangladesh. The Globalization index which measures the overall globalization covering the economic, social and political dimensions, the data has been taken from the global economy. Com. Results obtained and discussion We start by taking the group unit root test; results of group unit root test are given in table 1. Data sets are thus stationary. Table 1: Group unit root test Group unit root test: Summary Series: GLOB, HHI Sample: Cross- Method Statistic Prob.** sections Obs Null: Unit root (assumes common unit root process) Levin, Lin & Chu t* Breitung t-stat Null: Unit root (assumes individual unit root process) Im, Pesaran and Shin W-stat ADF - Fisher Chi-square PP - Fisher Chi-square
7 Table 2 :Cointegration Rank Test between HHI and Globalization (Glob) Sample (adjusted): Hypoth esized Trace 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None At most Trace test indicates no cointegration at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Results indicate that the variables are not cointegrated. Associated Granger causality test results are given in the following table. Table 3: Results of Granger Causality test between HHI and Globalization (Glob) Sample: Lags: 1 Null Hypothesis: Obs F-Statistic Prob. GLOB does not Granger Cause HHI HHI does not Granger Cause GLOB Results show that we fail to reject that Glob granger causes export concentration. Table 4: Results showing the FMOLS between HHI and Globalization (Glob) Dependent Variable: HHI Method: Fully Modified Least Squares (FMOLS) Included observations: 27 after adjustments Variable Coefficient Std. Error t-statistic Prob. GLOB C R-squared Durbin-Watson stat Adjusted R-squared Sum squared resid S.E. of regression
8 FMOLS results show that there is a positive relationship between Glob and HHI. These results qualitatively confirm CCR and DOLS. Together with causality results we can say that as the globalization increases export concentration increases. Table 5: Results of the CCR Regression Dependent Variable: HHI Method: Canonical Cointegrating Regression (CCR) Included observations: 27 after adjustments Variable Coefficient Std. Error t-statistic Prob. GLOB C R-squared Durbin-Watson stat Adjusted R-squared Sum squared resid S.E. of regression Table 6: Results of the DOLS Regression Dependent Variable: HHI Method: Dynamic Least Squares (DOLS) Included observations: 22 after adjustments Variable Coefficient Std. Error t-statistic Prob. GLOB C R-squared Durbin-Watson stat Adjusted R-squared Sum squared resid S.E. of regression The fully modified least square, the canonical cointegrating regression and Dynamic least square all shows that globalization has positive impact on export concentration. From the 1985 onwards there has been huge demand of our textiles, thus the export of textiles till today comprised of higher percentage on the total export value of all the commodities. Some vegetables, raw hides and skins leather fur skins, saddlery and harness, handbags, live animal and animal products, products also share a good percentage on the total value of exports. However the textiles and live
9 animal and animal products share the largest percentage on the total value of goods being exported. Conclusion In this simple study found out that globalization has positive association with increased export concentration.thus consistent with Ricardian theory of specialization. As the nation opens to each other for trade the nations will produce and trade that commodity in which it has higher comparative advantage and can gain higher export earnings. Concentration is, after all, a relative matter. Countries too heavily dependent on certain products has also proven to be risky. To diversify ex- ports, or to reduce their concentration, is worth- while only insofar as it is possible to do so without impinging upon other policy objectives that may be regarded as more important. Export concentration would thus be lessened appreciably, but in any case without adverse repercussions in other sectors of the Bangladesh economy.
10 Reference : De Ferranti, D, Perry, G, D. Lederman & Maloney, W, 2002, From Natural Resources to the Knowledge Economy, World Bank. Graham, FD., 1948, The theory of international values, Princeton University Press. Jones, R.W., 1961, Comparative advantage and the theory of tariffs: A multi-country, multicommodity model, Review of Economic Studies 28, Guillen, Mauro F. (2001). 'Is Globalization Civilizing,Destructive or Feeble? A Critique of Five Key Debates in the Social Science Literature." Annual Review of Sociology27: Hamid, Zarinah,2010, Concentration of exports and patterns of Trade: A time series evidence of Malaysia, The journal of developing areas, Vol 43 no.2 pp Hill, C.W.L.: 1997, International Business: Competing in the Global Marketplace (Irwin, Chicago, IL). Hirschman, Albert O. (1945). National Power and the Structure of Foreign Trade. Berkeley: University of California Press. Kuznets, Simon "Quantitative Aspects of the Economic Growth of Nations: Level and Structure of Foreign Trade: Comparisons for Recent Years." Economic Development and Cultural Change, vol.13, pp Johansson, B & Nilsson, D, 2007, Gloabalization and distribution of exports Cesis electronic working paper series paper no 93. Lederman, D, & Maloney, W, 2003, Trade Structure and Growth, Policy Research Working Paper, No. 3025, World Bank. Levitt, T, 1983, The globalization of markets, Harvard Business Review, May-June, pp Low, Patrick, Marcelo Olarreaga, and Javier Suarez, 1998, Does Globalization cause a Higher Concentration of International Trade and Investment Flows?. McKenzie, L, 1954, Specialization and efficiency in world production, Review of Economic Studies, vol.21, pp Michaely, Michael "Concentration of Exports and Imports:An Inter-national Comparison." Economic Journal, vol.68, pp Yip, GS, 1989, 'Global strategy - In a world of nations?, Sloan Management Review, fall, pp
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