Trade and Human Development in OIC Countries: A Panel Data Analysis

Transcription

1 Islamic Economic Sudies Vol. 21, No. 2, November, 2013 (55-70) DOI No / Trade and Human Developmen in OIC Counries: A Panel Daa Analysis ZARINAH HAMID RUZITA MOHD AMIN Absrac This sudy examines he relaionship beween rade and he OIC counries social developmens as measured by he Human Developmen Index (HDI) using he generalized mehod of momens (GMM) procedure in a panel daa disribued lag model for he years 1980 o 2005, wih a five-year incremens as well as annual daa from 2000 o I addresses wo quesions: (i) wheher rade has a posiive relaionship wih human developmen as refleced by longeviy, educaional aainmen and income in he HDI measuremen, and (ii) wheher rade sill has a posiive relaionship wih human developmen, when he income componen of he HDI is excluded. Comparisons are made across OIC counries based on hree World Bank Classificaions by Income, namely, high income, middle income and low income counries. Trade is found o have a significan posiive relaionship wih HDI for all income caegories, bu insignifican relaionship wih nonincome HDI. The finding indicaes ha rade is associaed wih human developmen only hrough income channels, and i is no associaed wih oher componens, such as longeviy, lieracy level and educaional aainmen. More of appropriae and effecive public policies need o be formulaed and implemened so as o achieve he desired oucomes of mulidimensional human developmen in he rue sense of he word. Keywords: Trade, Human Developmen Index, OIC Counries, Generalized Mehod of Momen JEL Classificaions: O190, J310, C

2 56 Islamic Economic Sudies Vol. 21, No.2 1. Inroducion The increasingly globalized world has made counries engagemen wih inernaional markes no jus unavoidable bu also beneficial since rade can faciliae, promoe and susain he developmen process. For individual naions, rade is seen as a prerequisie for susained growh. This is currenly he dominan view an inheren exension of he argumens on he classic heoreical exposiion of he gains from rade. The Unied Naions Developmen Program (UNDP) in is Asia Pacific Human Developmen Repor 2006 presened a concepual framework ha relaes rade o human developmen. The framework says ha rade has been known o have he abiliy o change he srucure of he economy as well as he rae of growh. This, in urn, has implicaions for employmen of facors of producion, paricularly boh labor and capial. Trade has been said o reward skilled labor more highly han unskilled labor and can lead o he adopion of capial-inensive echnologies ha may deepen inequaliy. However, such a problem can be prevened hrough public policies ha can be used o ensure ha rade benefis human developmen. There is also a feedback loop from human developmen o rade, which operaes direcly or is mediaed hrough he domesic policy framework. Feedback effecs work hrough higher income, higher echnical compeence and skills or hrough he power of advocacy on policymakers. Finally, human developmen can also have a direc influence upon he srucure of he economy, he rae of growh and rade iself (UNDP, 2006). The links beween rade and human developmen can be summarized in Figure 1. There are hree basic building blocks in he diagram: rade, human developmen and he links beween he wo. The hypohesized chain is: rade growh human developmen rade. There is hus a wo-way causaion: from rade o human developmen and back o rade. Even hough radiional rade models have shown ha rade liberalizaion and expansion will generae high income and economic growh (López, 2005), is ranslaion ino corresponding improvemens in human developmen is no auomaic. I depends on how and he exen o which he paern and characer of economic growh affec specific dimensions of human developmen. Trade should no be an end in iself. Raher, i should realize a broad range of human

3 Zarinah & Ruzia: Trade and Human Developmen in OIC Counries 57 developmen objecives, and especially o help alleviae povery and reduce human deprivaion in he poores and Leas Developed Counries (LDCs) (UNDP, 2006). 1 Figure 1 Trade and Human Developmen A Schemaic View Source: Figure 1.1 of UNDP (2006), p. 16. Trade and privae invesmen are needed o provide new engines of growh and dynamism for mos developing counries. Wih more rade and invesmen, he counries will be able o achieve faser growh, reduce povery, creae more jobs, and improve he knowledge, skills, and produciviy of heir workforce. While mos developing counries have managed o achieve improvemens in rade and privae 1 In order o ranslae rade liberalizaion ino improvemens in human developmen, various insiuional facors mus be in place such as poliical sabiliy, poliical will and an esablished regulaory framework.

4 58 Islamic Economic Sudies Vol. 21, No.2 invesmens in he 1990s, he Middle Eas and Norh Africa (MENA) 2 was he only region in he world o experience a reversal (World Bank, 2003). Povery did no improve in he las decade, bu human developmen indicaors for he region are repored o have improved remendously, a a rae ha surpassed even ha of lower middle income counries (Iqbal, 2006). The experience of he MENA counries as saed above, he majoriy of which are OIC counries, presens a paradox o he earlier argumen ha rade has a posiive impac on human developmen. Hence, i is a cause for furher analysis. The UNDP model is adoped in his sudy since i is, by far, he mos comprehensive model ha provides he disinc link beween rade and human developmen. Since he objecive of his sudy is no o examine he direcions of causaliy, i will focus only on he firs relaionship, i.e., from rade o human developmen hrough higher growh raes. Thus, he quesion addressed by his sudy is: does rade have a posiive relaionship wih human developmen (as a measure of social developmen)? Since human developmen is commonly measured by he Human Developmen Index (HDI) which consiss of hree componens, namely, longeviy, educaional aainmen and income, anoher quesion addressed in his sudy is: does he posiive relaionship beween rade and social developmen sill hold if he income componen of he HDI is excluded? The analysis in his sudy involves making comparisons of he resuls across hree caegories of OIC counries according o he World Bank Classificaions by Income, namely: (i) High income counries (Bahrain, Brune Kuwai, Qaar, Saudi Arabia and Unied Arab Emiraes); (ii) Middle income (boh upper and lower middle income) counries (Albania, Algeria, Gabon, Iran, Kazakhsan, Malaysia, Turkey, Cameroon, Coe d Ivoire, Egyp, Guyana, Indonesia, Jordan, Maldives, Morocco, Pakisan, Senegal, Sudan, Tunisia and Yemen); and (iii) Low income counries (Bangladesh, Chad, Gambia, Kyrgyzsan, Mal Mauriania, Mozambique, Niger, Sierra Leone, Tajikisan, Togo and Uganda). Such a comparison is necessary o examine wheher here is a posiive relaionship beween rade and HDI across he hree classificaions of OIC counries. 2 Based on he World bank classificaion, he Middle Eas and Norh Africa (MENA) region is comprised of weny-one counries or erriories, namely, namely he Gulf Cooperaion Council (GCC) members (Bahrain, Kuwai, Oman, Qaar, Saudi Arabia, and Unied Arab Emiraes), and fifeen oher counries or erriories, i.e., Algeria, Djibou he Arab Republic of Egyp, Iraq, he Islamic Republic of Iran, Israel, Jordan, Lebanon, Libya, Mala, Morocco, he Republic of Yemen, he Syrian Arab Republic, Tunisia, and he Wes Bank and Gaza (World Bank, 2003).

5 Zarinah & Ruzia: Trade and Human Developmen in OIC Counries 59 This paper is srucured as follows. The nex secion provides a brief survey of he lieraure on rade and human developmen boh a he iner-counry as well as inra-counry analyses. Secion 3 describes he daa and mehodology used in his sudy. Secion 4 presens he analysis and discussion of he findings while he las secion concludes. 2. Lieraure Review There is an exensive lieraure on he impac of rade on social well-being (wih economic growh explicily included in some sudies), boh a he cross-counry as well as wihin-counry analyses. Various aspecs of social well-being have been examined and he mos imporan ones include income inequaliy, povery, and human developmen as a composie index. A review of he vas lieraure using cross-counry comparisons for he impac of rade openness on povery wihin counries can be found in Ravallion (2006). He highlighs a number of sudies ha have combined survey-based measures of income inequaliy a counry level wih daa on rade and oher conrol variables o assess he disribuional impacs of rade openness; he laer is ypically measured by rade volume, defined by expors plus impors as a share of GDP (examples include Bourguignon and Morisson (1990), Edwards (1997), L Squire, and Zou (1998), Barro (2000), Dollar and Kraay (2002, 2004), Lundberg and Squire (2003), and Milanovic (2005)). The resuls are mixed which implies ambiguous implicaions of rade on inequaliy. In an influenial sudy by Dollar and Kraay (2002, 2004), hey find lile or no effec of rade volume on inequaliy, conrary o he findings of oher sudies which repored adverse effecs on inequaliy. Lundberg and Squire (2003), for insance, find evidence ha higher rade volume ends o increase inequaliy. Some sudies also repor similar findings in he case of poor counries bu he reverse holds a higher mean income (Milanovic, 2005; Ravallion, 2001). The implicaions for povery also depend on he growh impacs. Dollar (1992), Sachs and Warner (1995), Harrison (1996), and Edwards (1998), among ohers, provide empirical suppor for he view ha rade expansion promoes economic growh. In a mea-sudy of all he cross-counry growh regressions wih an average of seven regressors (chosen from 67 candidaes drawn from he lieraure on crosscounry growh regressions), Sala-I-Marin, Doppelhofer, and Miller (2004) repor ha rade volume is significan in wo-hirds of he regressions, hough i is no among heir subse of 18 robus predicors of economic growh. Wheher he

6 60 Islamic Economic Sudies Vol. 21, No.2 growh effecs are srong enough such ha povery falls wih rade openness remains unclear. The findings of Dollar and Kraay (2004) and ohers ha rade does no affec inequaliy bu fosers growh make i very likely ha i lowers absolue povery (meaning ha he povery line is fixed in real erms). In a sudy on China, Ravallion (2006) ess he claim ha he counry s greaer rade openness has been an imporan facor in reducing povery. Aggregae ime series daa spanning he period and hree povery measures were used, namely, he headcoun index, he povery gap index, and he squared povery gap index. For all 3 povery measures, no significan effec is found of curren or lagged rade volume on povery in China, a finding which is significanly differen from earlier sudies. Very few works have aemped o look a he relaionship beween rade and human developmen as a whole. Arimah (2002) relaes iner-counry variaions in he level of human developmen o iner-counry differences in he macroeconomic environmen, invesmen in human capabiliies, good governance, commimen o he objecives of human developmen, and naural resource endowmen. The sudy finds ha he macroeconomic environmen is he key deerminan of iner-counry differences in human developmen. Specifically, economic growh has a posiive impac on human developmen. In anoher sudy, Davies and Quinlivan, (2006) examines he impac of rade on counries social developmens as measured by he Human Developmen Index (HDI). The generalized mehod of momens (GMM) procedure in a panel daa disribued lag model is used and he change in he HDI index is modeled as a funcion of per-capia rade. Using panel daa on 154 counries for he period , he sudy finds ha increases in rade are posiively associaed wih fuure increases in social welfare. Gunduz, Hisarciklilar and Kaya (2009) find similar resuls in erms of he posiive relaionship beween rade and social developmen for he differen classificaions of 106 counries from The sudy also reveals ha his posiive link is valid only for high and upper middle income counries, bu diminishes wih lower income when he income componen of he HDI is excluded. The survey of lieraure above has shown ha very few sudies have looked ino he relaionship beween rade and human developmen, paricularly wheher here are cross-counry variaions in he differen caegories of income levels of OIC counries. Hence, his sudy is an aemp o fill his gap.

7 Zarinah & Ruzia: Trade and Human Developmen in OIC Counries Mehodology and Daa Descripion This sudy uilizes panel daa esimaion echnique following Gunduz, Hisarciklilar and Kaya (2009) and Davies and Quinlivan (2006) wih he model: HDI 1HDI 1 2Trade i (1) where HDI i, Human Developmen Index for counry i period expors imporsi, exporsi, 1 imporsi, 1 Trade ln ln populaioni, populaioni, 1 is hefixedor randomeffec whi ch measures hespecificcharaceri sicsof counry i i disurbances The Generalized Mehod of Momens (GMM) echnique is applied on his model since i is a very general saisical mehod of formulaing models and obaining esimaes of parameers wihou making srong assumpions on heir disribuions. The idea of he GMM is o use momen condiions ha can be found from he problem wih lile effor. I is a mehod of esimaing he populaion parameers such as mean, variance, and median, by equaing sample momens wih unobservable populaion momens and hen solving hose equaions for he quaniies o be esimaed. According o Greene (2003), he GMM esimaors are assumed o converge and mee he condiions of law of large numbers, hey fulfill he idenificaion condiions and hey are asympoically disribued. Irwin and Tervio (2002) and Noguer and Siscar (2005) used he Ordinary Leas Square (OLS) mehod o deermine if rade raises income. However, he GMM mehod is preferred o he OLS mehod because he former is applicable when esimaing an unknown probabiliy disribuion whereas he laer always assumed ha he error erm is normally disribued. Furhermore, he OLS esimaion is very sensiive o ouliers and wih he exisence of ouliers in he daa i will lead o biased and inefficien esimaes. In oher words, he OLS mehod is nooriously non-robus o ouliers. Since we anicipae ha our sudy will conain such caegory of daase and he appropriae probabiliy disribuions may no be known, hence he momen-based esimaes are preferred o OLS esimaes.

8 62 Islamic Economic Sudies Vol. 21, No.2 Using he sandard procedure in GMM esimaion by aking he firs difference of he variables in a disribued-lag model, equaion (1) becomes: HDI 1 HDI 1 2 Trade (2) where HDI HDI i HDI 1 Trade Trade Trade The nex sage is o deermine he appropriae lag lengh by using he Arellano- Bond esimaor and hen used he lagged values of he dependen variable ( HDIi, 2 j, j 0,1...) as an insrumen for he HDIi while deriving he momen condiions (Gunduz, Hisarciklilar and Kaya, 2009). I is assumed ha he disurbances are homoscedasic wihin counries and over ime, (possibly) heeroscedasic across counries and oherwise well behaved,i.e., 2 i i j, v cov(, j, v) 0 oherwise In order o examine he impac of rade on social developmen (i.e., HDI excluding he income componen), anoher model is also esimaed uilizing HDI defined as non-income HDI: HDI 1 HDI 1 2 Trade (3) where min 1 log( y) log( y ) HDI, HDI, y = Gross naional income per i max min 3 log( y ) log( y ) min max capia, y = PPP US$100, y = PPP US$40,000 3 HDI Trade HDI HDI 1 Trade Trade The definiion is based on he official formula a hp:// hdr.undp.org/en/saisics/daa/calculaor/. The HDI is compued as a simple average of he hree componens of life expecancy, educaion and sandard of living, where HDI = 1/3(life expecancy index)+1/3(educaion index)+1/3(gdp index). Hence, subracing he hird componen, i.e., he income componen from he HDI, resuls in he nonincome HDI, namely HDI.

9 Zarinah & Ruzia: Trade and Human Developmen in OIC Counries 63 This sudy uses secondary daa from several sources namely he World Bank, he Unied Naions Developmen Programme (UNDP) Publicaions, Inernaional Financial Saisics CD-ROM, Direcion of Trade Saisics (various years) and IMF World Economic Oulook Daabase. The HDI daa are rerieved from he UNDP publicaions as a measure of social developmen while he oher daa sources supply he informaion o compue he counry s per-capia rade. Daa for HDI are repored in 5-year incremens beginning 1975 unil However, he year 1975 is excluded since he HDI daa are no repored for Bahrain and Jordan while he year 2010 is excluded because four counries, namely Oman, Lebanon, Iraq and Somalia are ye o furnish heir Human Developmen Index o he UNDP. In addiion, several OIC counries in he high, middle and low income caegories are excluded from he sudy due o daa consrain. Table 1 summarizes he number of counries included in he sudy by income classificaions conaining HDI daa of 5-year incremens and yearly incremens. Table 1 Number of Counries by Income Classificaions 5-year incremens ( ) Number of counries % of sample Yearly ( ) High income counries Middle income (boh upper and lower income) Low income counries Toal % of sample Based on availabiliy of HDI daa for he five-year incremens, his sudy makes a comparison of he resuls across he following caegories of 24 OIC counries as in World Bank (2007), namely: (i) High income counries (Bahrain, Saudi Arabia and Unied Arab Emiraes); (ii) Upper middle and lower middle income counries (Algeria, Gabon, Malaysia, Turkey, Cameroon, Coe d Ivoire, Egyp, Guyana, Indonesia, Jordan, Morocco, Pakisan, Senegal, Sudan and Tunisia); and (iii) Low income counries (Bangladesh, Mal Mozambique, Niger, Sierra Leone and Togo). As shown in Table 1, HDI daa for a oal of 24 counries are available a five-year incremens. Saring from he year 2000, HDI was repored on annual basis and

10 64 Islamic Economic Sudies Vol. 21, No.2 wih he availabiliy of his annual daa he number of counries in each classificaion increases o six for High income counries (Bahrain, Brune Kuwai, Qaar, Saudi Arabia and Unied Arab Emiraes); 20 for Upper middle and lower middle income counries (Albania, Algeria, Gabon, Iran, Kazakhsan, Malaysia, Turkey, Cameroon, Coe d Ivoire, Egyp, Guyana, Indonesia, Jordan, Maldives, Morocco, Pakisan, Senegal, Sudan, Tunisia and Yemen); and 12 for Low income counries (Bangladesh, Chad, Gambia, Kyrgyzsan, Mal Mauriania, Mozambique, Niger, Sierra Leone, Tajikisan, Togo and Uganda). Therefore, for HDI daa series produced annually from 2000 o 2009, a oal of 38 are uilized in his sudy (see Table 1). 4. Analysis and Discussion The rends in HDI and oal rade over he period of analysis by income classificaions are provided in Figures 2 and 3. The average HDI and he average oal rade are highes for high income counries, followed by middle and low income counries. The average HDI shows an increasing rend over he years for all counries. The average oal rade of high income counries increased rapidly beginning 2002, peaked in 2008 and declined in However, he average oal rade of middle and low income counries remained almos he same hroughou he period of analysis. Figure 2 Average HDI for OIC Counries Based on Income Classificaions

11 Zarinah & Ruzia: Trade and Human Developmen in OIC Counries 65 Figure 3 Average Toal Trade for OIC Counries Based on Income Classificaions Two ses of esimaions are performed separaely for each of he hree income classificaions of OIC counries, 4 choosing he dependen variables as HDI i, o examine he impac of rade on human developmen as a whole, and on HDI o invesigae furher he impac of rade on acual social developmen, when income is excluded from HDI. The esimaions uilizing five-year incremens of HDI generally yields insignifican resuls for all variables across all income classificaions. This may be due o he relaively small number of observaions obained for each income classificaions due o daa consrains. Hence, he resuls are no repored. 5 The firs esimaion on yearly daa from 2000 o 2009, however, yields more ineresing resuls. Trade per capia ( Trade i ) is posiively correlaed wih he variaion of he HDI and found o be significan (see Table 2). A similar resul is found in Davies and Quinlivan (2006) where rade and social welfare is significan and posiively relaed. However, only for he low income counries, increases in HDI levels observed over he pas wo years ( HDI -1 ) have a posiive relaionship wih he changes in oal human developmen over he pas period. 4 The esimaion using he 5-year incremens is also performed in addiion o using yearly daa in order o capure he experience of he counries in he years prior o 2000, of which daa on HDI is repored only on a 5-year inervals. 5 The esimaion resuls are available upon reques.

12 66 Islamic Economic Sudies Vol. 21, No.2 Table 2 Esimaion Resuls for Model 1 (HDI) High Income OIC Middle Income OIC Low Income OIC Trade i ( ) ( ) ( ) HDI ( ) ( ) ( ) Consan (0.2713) ( ) ( ) J-saisic 3.25E E E-27 Noes:,, denoe significance a he 10%, 5%, and 1% level, respecively. Figures in parenheses are -saisics. Table 3 Esimaion Resuls for Model 2 (HDI) High Income OIC Middle Income OIC Low Income OIC Trade i ( ) ( ) ( ) HDI ( ) ( ) ( ) Consan ( ) ( ) -2.31E-05 ( ) J-saisic 4.21E E E-27 Noes:,, denoe significance a he 10%, 5%, and 1% level, respecively. Figures in parenheses are -saisics. The second esimaion on HDI ha excludes he income componen of HDI shows non-significance of he rade variable for all income classificaions (see Table 3). This indicaes ha rade relaes posiively only wih he income componen of human developmen, bu no wih he oher componens, such as longeviy, lieracy level and educaional aainmen as capured by HDI. Thus, consisen wih Gunduz, Hisarciklilar and Kaya (2009), rade is found o be linked o human developmen only hrough income channels. As before, only for he low income counries, increases in HDI levels observed over he pas wo years ( HDI ) have a posiive relaionship wih he changes in oal human 1 developmen over he pas period. This suggess ha for he middle and high income OIC counries, he level of developmen has reached a level where he

13 Zarinah & Ruzia: Trade and Human Developmen in OIC Counries 67 growh in human developmen over he period has become small, rendering i insignifican. Examining he validiy of boh models, he J-saisic null hypohesis saes ha a model is valid while he alernaive hypohesis indicaes ha a model is invalid and he daa do no come close o meeing he resricions. The resuls in Table 2 indicae ha he null hypohesis canno be rejeced a he 99% confidence level (or a he 1% significance level), hus boh he models are, overall, valid. 5. Conclusion and Policy Recommendaion Trade has been known o have he abiliy o change he srucure of he economy as well as he rae of growh. I is a means o realize a broad range of human developmen objecives, such as o help alleviae povery and reduce human deprivaion. This sudy examines he relaionship beween rade and he OIC counries social developmens as measured by he HDI using he GMM procedure in a panel daa disribued lag model for he years 1980 o 2005, wih a five-year incremens as well as annual daa from 2000 o I addresses wo quesions: (i) does rade have a posiive relaionship wih human developmen as refleced by longeviy, educaional aainmen and income in he HDI measuremen? (ii) If he posiive relaionship beween rade and human developmen exiss, does i sill hold if he income componen of he HDI is excluded? Comparisons are made across OIC counries based on hree World Bank Classificaions by Income, namely, high income, middle income and low income counries. The sudy finds ha rade is posiively linked o HDI for all income caegories, bu he link is insignifican on non-income HDI. The finding indicaes ha rade relaes o human developmen only hrough income channels, and i does no relae o oher componens, such as longeviy, lieracy level and educaional aainmen. The sudy also found ha increases in HDI levels observed over he pas wo years have a posiive relaionship wih he changes in oal human developmen over he pas period only for he low income counries. This suggess ha for he middle and high income OIC counries, he level of developmen has reached a level where he growh in human developmen over he period has become less gradual, rendering i insignifican. As menioned in he beginning of his paper, even hough rade liberalizaion and expansion can generae high income and economic growh, is ranslaion ino

14 68 Islamic Economic Sudies Vol. 21, No.2 corresponding improvemens in human developmen is no auomaic. I depends on how and he exen o which he paern and characer of economic growh affec specific dimensions of human developmen, and his can be grealy influenced by appropriae public policies ha can be used o ensure ha rade benefis human developmen. The finding ha rade no longer has a posiive relaionship wih human developmen when he income componen is excluded may imply ha public policies in hese counries have been unable o channel he benefis from rade ino more meaningful dimensions of human developmen. Hence, more of appropriae and effecive public policies need o be formulaed and implemened so as o achieve he desired oucomes of muli-dimensional human developmen in he rue sense of he word. References Arimah, B. C. (2002), Naure, deerminans and prospecs for susainable human developmen in he Arab region, in Arab Developmen Challenges of he New Millennium, edied by Belkacem Laabas, Hampshire, England: Ashgae Publishing Limied. Barro, R. (2000), Inequaliy and growh in a panel of counries. Journal of Economic Growh 5: Bourguignon, F., and Morisson, C. (1990), Income disribuion, developmen and foreign rade. European Economic Review 34: Davies, A., & Quinlivan, G. (2006), A panel daa analysis of he impac of rade on human developmen. The Journal of Socio-Economics 35: Dollar, D. (1992), Ouward-oriened developing economies really do grow more rapidly: Evidence from 95 LDCs, Economic Developmen and Culural Change 40(3): Dollar, D. and Kraay, A. (2002), Growh is good for he poor. Journal of Economic Growh 7(3): Dollar, D. and Kraay, A. (2004), Trade, growh and povery. Economic Journal 114(493): F22 F49. Edwards, S. (1997), Trade policy, growh and income disribuion. American Economic Review 87(2): Edwards, S. (1998), Openness, produciviy and growh: Wha do we really know? Economic Journal 108:

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16 70 Islamic Economic Sudies Vol. 21, No.2 World Bank. (2003), Trade, Invesmen, and Developmen in he Middle Eas and Norh Africa: Engaging wih he World. Washingon, D.C.: The Inernaional Bank for Reconsrucion and Developmen/The World Bank.