ARE EXPORTS CAUSING GROWTH? EVIDENCE ON INTERNATIONAL TRADE EXPANSION IN CUBA,

Transcription

1 ARE EXPORTS CAUSING GROWTH? EVIDENCE ON INTERNATIONAL TRADE EXPANSION IN CUBA, Guadalupe Fugarolas Álvarez-Ude GAME-IDEGA. Universiy of Saniago de Composela and Caixa Galicia (Spain) Isis Mañalich Gálvez Researcher of Naional Insiue for Economic Research (Cuba) David Maesanz Gómez Applied Economics Deparmen, Universiy of Oviedo (Spain) Absrac: Economic developmen in Cuban economy in he las 50 years has been involved in he so called socialis revoluion ime. In he exernal secor, he COMECON arrangemens have deermined is inernaional specializaion rade paern and balance of paymens posiion unil When he Berlin Wall fell down, Cuban economy collapsed showing he malfuncions of he previous exernal regulaed period. In his paper, we analyzed he role of expors as an engine of economic growh in Cuba considering essenial evens in is commercial policy-making in he long period from 1960 o Our resuls show ha he expor led growh (ELG) hypohesis is no an appealing phenomenon. Causaliy proofs on he basis of error correcion and augmened level VAR modellings show he imperious necesssiy o impor for he Cuban developmen. The inclusion of impors no only evidences he weakness in he feedback and inerrelaion beween economic growh and expors bu also heir expansion has been precisely causing growh in mos of he considered periods. Keywords: Cuba, Expor-led Growh, commercial agreemens effecs, coinegraion, causaliy, error correcion and augmened VAR modelling. JEL Classificaion: C32, C52, F43 Corresponding auhor. D. Maesanz, Avda. Criso s/n 33006, Oviedo, Spain, Phone: , fax: , address: maesanzdavid@uniovi.es

2 I. Inroducion. Though since he nineieh cenury connecions beween openness and growh have been an issue of ineres, i is in he las hiry years when his radiional economic area of analysis has produced a grea amoun of works and a srong aenion from he developmen inernaional insiuions. This reappearance coincides, on one hand, o he long ime rapid growh achieved by he Asian newly indusrialized counries (NICs) which have implemened since he sevenies a (successful) ouward oriened developmen sraegy; on he oher hand, he Lain American impor subsiuion developmen sraegy showed by he same ime boh heir limis and heir economic malfuncion, especially when hey are compared wih economic growh dynamic of Asian counries. Empirically, he causal relaionship beween expors and economic growh has been a primary opic of research in he openness growh issue and, ill now, is an ongoing debae in he economic developmen lieraure. Expors have been considered he main channel hrough which openness increases he economic growh performance. The main quesion in he expor-growh issue is wheher causaliy goes from expors o economic growh, labelled Expor-led Growh (ELG) hypohesis or, conrary, causaliy flows from economic growh o expors, namely Growh-led Expors (GLE) hypohesis. The esablishmen of he direcion of his causal relaionship has imporan implicaions for economic policy sraegies. If causaliy flows from expors o growh hen he implemenaion of expor promoion policies is a proper sraegy for a counry o grow. Bu if causaliy goes on he reverse direcion hen a cerain degree of developmen may be a prerequisie for a counry o increase is expors and, herefore, previous inernal

3 economic growh policies are necessary o expand expors. A bi-direcional causaliy would imply ha boh sraegies are necessary as long as one reinforcing he oher one. More recenly, and complemening he connecion beween he exernal secor and growh, he role of capial flows, especially Foreign Direc Invesmen, has been also considered. Among he se of developing counries, he Cuban economy is an appealing example due o special rade agreemens periods in heir unique economic growh and developmen pah and poliical and social sysems. In he exernal secor, he period running from 1960 o 1991 was overbear by he inegraion of Cuba in he Council of Economic Muual Assisance (COMECON), formed by socialis counries. This period implied for Cuba he definiion of all he relevan aspecs of he exernal secor: is inernaional commercial parners, he prices of expors and impors and wha is even more imporan, he paern of goods o be expored and impored The COMECON implied special financial faciliies for rade flows and commercial preferences for he Cuban economy and moved away from he counry exernal capial flows. In his long period, he exernal secor was in fac no open and impor and expor flows were no price marke direced. Afer he rupure of he socialis block in 1989, Cuban oupu and expors suffered an inense crisis and begun a period of srucural reforms searching for macroeconomic sabiliy and a new inernaional paern ino he world economy. This new guide of inernaional inegraion has been based more inensely in he services, mainly associaed o ourism expors, raher han in deep changes in he goods rade flows. Hence, he main objecive of his paper is o examine he evidence of he openness growh connecion on he Cuban economy in very differen periods of heir

4 economic inernaional rade recen hisory and including for he firs ime he services ogeher wih goods, because of he grea imporance of ourism since he beginning of he nineies as we have already poined ou. Our major concern is o presen a sequenial causaliy analysis ha in higher dimensional sysems akes ino accoun he indirec effec of erms of rade and impors of goods and services. This aricle conribues o he economic developmen of Cuban economy in he following ways. Firsly, i ess he ELG hypohesis for Cuban economy hrough he applicaion of recen advances in ime series echniques including in he analysis he expors of services, basically ourism, in he ELG hypohesis which has no been analysed in previous works. Secondly, we seek o examine indirec effecs on he ELG phenomenon hrough he inclusion of impors and erms of rade in he analysis. Thirdly, i provides new insighs on he effecs of he COMECON period in he causal relaionship beween expors and oupu in he recen economic hisory of Cuba and, herefore, o show fuure guidelines for exernal economic sraegies relaed o developmen performance. In his sequenial sudy, our saring poin is o es for causaliy in a bivariae framework linking oupu and expors of goods and services on he basis of a vecor error correcion model (VECM). Then, we move o mulivariae sysems by considering he informaion provided by he erms of rade and, laer on, by he impors of goods and services; in boh higher-dimensional analysis Granger causaliy is implemened by means of he modified-wald es (MWALD) for augmened level VAR model wih inegraed and coinegraed processes inroduced by Toda and Yamamoo (1995) and Dolado and Lukepohl (1996) (TYDL henceforh). We should remark ha in order o es for hose indirec effecs on he ELG hypohesis, he inclusion of impors of goods and services, is also aking ino accoun

5 capial accumulaion, as long as capial goods have been basically impored in he Cuban economy as we are explaining below. In his sense, we use a demand approach of he economic growh dynamic bu considering also he mos imporan variable in he supply approaches of economic growh The res of he paper is organized as follows. Secion 2 provides a survey of he lieraure on he expor-led-growh hesis. In he hird secion daa and a descripive analysis is presened. Secion 4 conains he economeric mehodology and he models will be sysemaically inroduced and discussed while Secion 5 ses our empirical resuls for Cuba. The paper closes wih a brief discussion of he resuls. II. Expor-Led Growh. A brief survey on he lieraure. From a heoreical poin of view and wih regard o expors as a generaor of economic growh several approaches can be disinguished (see, Krugman, 1987; McCombie and Thirlwall, 1994; Giles and Williams, 2000, for a survey). Firs, he rae of growh of expors, as a deerminan of aggregae demand, affecs direcly o oupu growh; an increase in foreign demand can produce a rise in oupu due o greaer employmen, income an invesmen in he exporable secor. Of course, his direc connexion is relaed o he foreign rade muliplier exposed by Hicks (1950). Second, he increase of expors can indirecly raise oupu growh based on he assumpion of increasing reurns o scale and spill-over effecs from expors o oher secors of he economy. These exernaliies can produce a more efficien resource allocaion, moving resources from relaively inefficien non-radable secors o he higher producive expor secor.

6 Besides, expors secors can promoe he diffusion of improved echniques, exploiaion of economies of scale, learning by doing gains, greaer capaciy uilizaion and improved echnological and managemen abiliies due o more compeiive markes faced by expor secors. New growh and inernaional rade heories emphasised hese indirec channels of benefis of a dynamic expor secor o economic growh (for example Arrow, 1962; Lucas, 1988; Helpman and Krugman, 1985; Grossman and Helpman, 1991). Third, growh requires impors of capial and inermediae goods ha allows a faser capial formaion and, herefore, increasing raes of growh, and if expors do no rise as fas as impor requiremens, growh could be consrained by he balance of paymens (as suggesed, for insance, by Lamfalussy, 1963; Mckinnon, 1964 and Thirlwall, 1979). Forh, he smaller is he domesic marke, he greaer is he imporance of he exernal demand o achieve economies of scale and o obain capial and inermediae goods as was suggesed by Adam Smih more han wo cenuries ago. Though all hese reasons suppor ouward-oriened policies o achieve higher raes of growh, here are heoreical criics o he ELG hypohesis. For insance, he radiional impor subsiuion sraegies implemened by Lain American and oher counries o foser domesic firms and secors because of he hypohesis of deerioraion of erms of rade exposed by Prebisch (1950, 1959) and Singer (1950). Grossman and Helpman (1991) showed ha proecion of key secors in economies wih comparaive disadvanage may lead o higher economic growh. Technological approaches of inernaional rade, based on absolue advanage (Smih, 1776), suppor his possibiliy of negaive effecs of openness in growh depending on he absolue advanage of radable secors (see, for insance, Dosi and Soee, 1998 and Krugman, 1996). There is also suppor for GLE hypohesis based on he assumpion ha economic growh leads o

7 enhancemen of abiliies o produce, o use and develop new echnologies, and so on, ha increase produciviy creaing ha comparaive advanage necessary o expor (Krugman, 1984). Finally, he role of impors as an engine for long-run economic and expor expansion have been emphasized ino he endogenous growh models (Coe and Helpman, 1995). Impors serve as a channel o ge foreign R&D knowledge and more advance capial and inermediae goods suggesing Impor-led Growh (ILG) alernaive causaliy relaionship (Awokuse, 2007). Since rade heories does no provide a definiive answer on he causaliy beween expors and growh, he debae has generaed a vas amoun of empirical work, especially applied o less developed counries. Resuls from hese sudies are, a bes, mixed and conradicory (Ahmad and Kwan, 1991 and Bahmani Oskooee e al., 2005). The majoriy of empirical sudies can be separaed in hree groups (see Giles and Williams, 2000; Begum and Shamsuddin, 1998; Bahmani Oskooee e al., 2005 for more exensive reviews on he empirical lieraure). The firs group includes sudies based on cross-secional daa using correlaion coefficiens or ordinary leas squares (OLS) regressions beween expors and oupu. A huge number of counries and ime periods can be found bu in general hose resuls end o suppor a posiive associaion beween expors and oupu (for example, Kravis, 1970; Balassa, 1978 and Feder, 1982). A second group includes works using sandard ime series regression echniques such as ordinary leas squares (for example, Ram, 1985 and Foser, 2006). However, hese wo firs groups hough hey are analyzing possible relaionships do no analyse he direcion of causal influence from expors o growh or vice versa. Finally, he hird group includes all hose more recen sudies ha have used new ime series mehods o esablish inegraing properies of expors and oupu in order o analyze causaliy on he

8 basis of eiher he coinegraing properies of heir long-run relaionship hrough he inroducion of coinegraion and error correcion modelling by Engle and Granger (1987) or augmened VAR levels and acyclic graphs. These sudies include crosscounry and single counry analysis of he ELG hypohesis and, independenly, resuls are mixed (Islam, 1998; Bahmani Oskooee and Alse, 1993; Van den Berg and Schmid, 1994; Richards, 2001, Balaguer and Canavella-Jordá, 2004; Awokuse, 2005a, 2005b, Bahmani Oskooee e al., 2005 and Siliversovs and Herzer, 2006). In general, cross-counry analysis have suppored associaions beween expors and oupu bu ime series daa sudies have failed o provide srong evidence in favour of eiher ELG or GLE hypohesis. We noe ha cross secional daa sudies show wo essenial problems: he firs one is he imporan limiaion of correlaion analysis because expors are buil ino oupu and spurious resuls can be achieve because of he bias in favour of correlaion (Sheehey, 1990). Trying o avoid his bias of correlaion beween expors and growh a new lieraure has emerged including addiional variables and, hen, moving o a mulivariae correlaion and causaliy (for insance, Sheehey, 1992; Tang, 2006; Kónya, 2006 and Awokuse, 2007). In hese papers, indirec effecs have been aking ino accoun by including capial, produciviy, foreing oupu, raios of commodiy or rading paern desinaion concenraion, governmen budge defici or an economic openess variable. The second problem is ha his kind of sudies assumes common and idenical economic srucure and levels of developmen o all he counries considered. More recen sudies are considering he connecion beween capial flows and growh because of he suppose posiive effecs of openness on growh involves much more han jus rade. Those empirical conribuions are generally addressing ha FDI is

9 appering o cause beneficial effecs for domesic invesmen, echnology ransference and spillover effecs on domesic labour and capial produciviy. Meanwhile porfolio capial inflows and banking and commercial loans have no shown imporan impacs on economic growh (see Cuadros e. al (2004) and Goldin and Reiner (2005), for a survey). As far as we know, here is no conribuion including he case of Cuba in a cross counry sudy dealing wih he ELG hypohesis and, in a single counry scenario, here are only wo papers ying up expors and oupu: while Mendoza and Robers (2000) use a leas square mehodology o es a balance of paymens consrained model, Creibeiro and Triana (2005) analyses impor and expors elasiciies by using differen echniques which include coinegraion and error correcion modelling. These wo conribuions suppor a posiive associaion beween expors of goods and oupu bu neiher services are included nor causaliy is examined. III. Daa and descripive analysis The daabase consiss of annual ime series covering he period from Oficina Nacional de Esadísica (ONE), Comié Esaal de Esadísicas (CEE), Insiuo Nacional de Invesigaciones Económicas (INIE) and Miniserio de Economía y Planificación. The variables considered in our modelling are real gross domesic produc (GDP), expors of goods and services (X), impors of goods and services (M) and he erms of rade (TOT) which are defined by he raio price index (1997=100) of impors and price index of expors. All he variables are expressed in logarihmic erms. As long

10 as he beginning of he sevenies and he nineies seer wo exogenous cu-off poins in he Cuban policy-making, hree differen sub-periods , and are also examined from now on. Figure 1 depics he evoluion of real GDP, impors and expors in Cuba during (able 1 shows heir corresponding average annual raes of growh for he whole and seleced periods). All variables followed upwards rends, bu wih differen rhyhm. The long erm slope of GDP severely dropped afer he collapse of communism sysem in Eas Europe in 1989 (real GDP dropped 35% beween 1990 and 1993); in fac, i is in 2005 when he Cuban economy rerieved real GDP levels of 1989, implying fifeen years of sagnaion in his period. During he economy rae of growh was relaively high based on he COMECON arrangemens which specified expors and impors goods, volumes and prices. Afer Berlin Wall fallen, Cuban economy eners in a sage of secor, insiuional and openness reforms rying o face up he negaive effecs of sovie collapse; agrarian reform o increase oupu, ourism openness o foreign invesmen, bioechnology secor recommendaions and expors financial suppor were policies implemened o improve economic performance in his difficul period (González, 1993). Since 1994, he economy recovered a posiive pah no only in is economic growh and bu also in is expor and impor performance, bu absolue levels in 2004 do no reach 1989 levels. We noe ha expors have shown a more volaile pah wih a long period of rapid growh in , an inense dropped in he rae of growh from 1990 o 1995 and a quie fas recover of he slope of growh afer was he golden period of Cuban expors and impors: he annual rae of growh was of around 16% and 15%, respecively and economic growh reached almos 7% annual rae of growh. In his

11 period, Cuban economy was inegraed in he COMECON wih preferenial prices for Cuban mos imporan expored producs, especial access o sovie markes and oher faciliies such as impor credis and ohers. From 1960 unil 1989 more han around 80% of expors were sugar, nickel, fish producs, cirus fruis and obacco and COMECON counries received almos hree quarers of he global Cuban expors. Laer on, afer he disinegraion in 1991 of socialis area and Sovie Union and subsequenly he end of he COMECON commercial agreemens, Cuban expors had o be diversify in erms of expors producs and commercial parners: medicamens and ourism were he principal expors hereafer and Canada and Lain America he regions of desinaion. Table 1. Cuba: GDP, expors and impors ( and seleced periods) Period gdp (1) x (1) m (1) o (1) , Noes: (1) Denoes average annual raes of growh of real GDP, expors and impors, respecively. Source: Own calculaions based on daa from CEE and ONE

12 Also impors followed a rapid rae of growh during he COMECON period, a collapse in he firs years of he nineies and a slow recuperaion afer During he COMECON period jus abou he 90% of impors were composed by capial and inermediae goods: one hird of hem capial goods were necessary for indusrializaion process of he Cuban economy and perol was he mos imporan inermediae goods for producion arriving from he Sovie block. Afer 1989, impors paern was diversified in erms of producs. Capial goods and fuel impors were subsanially reduced due o he economic crises and consumpion impors were elevaed in order o complee he basic food baske of Cuban populaion, aaining more han 20% of impors during hese years. On he oher hand, radiional Eas commercial parners began o be subsiued for Lain America, Asian and European counries. Finally, erms of rade have shown a slighly improvemen during COMECON period, coinciding wih hose faser periods of expors and impors expansion 1. Hereafer, he collapse of he Sovie Union implied a coninuous deerioraion of erms of rade moving away from adminiser prices of he previous rules and adjusing Cuban exernal secor prices o more realisic inernaional marke condiions. We noe ha he Cuban economy have shown some special feaures on heir openness growh nexus in he long period of ime we are analyzing in his paper. Firsly, Cuban inernaional rade paern of specializaion is perfecly defined by expors ha are, basically, primary goods and recenly ourism and impors are represening he capial and echnological goods in he economy of he Isle. Secondly, no imporan flows of FDI have arrived o he Cuban economy in he COMECON period and afer ha, hese flows have been mainly relaed o ourism services. For i, our economeric modellings have esed he ELG hypohesis hrough a direc bivariae analysis and hen

13 we considered he indirec effecs by considering in mulivariae srucures he erms of rade and impors, as long as hey are he mos imporan indirec links in he openness growh connecion, represening he principal via of accumulaion of capial for Cuba. Figure 1. Cuba : real GDP (lef scale), expors and impors of goods and services (righ scale). Source: CEE and ONE Ln GDP Ln X Ln M As Figure 1 is suggesing here exiss a closer associaion among expors, impors and oupu showing upward rends in he same periods and an eviden and deep break in heir long run expansion in he end of he eighies. Our ask needs o economerically validae such connexion and wha is mos imporan in our work o es for causal influence among rade and economic growh. In looking for he ELG or GLE hypohesis, we invesigae he possibiliy of Granger causaliy beween he expor expansion and economic growh pace by means of a sequenial procedure. Though he

14 classical bivariae srucure linking expors and income is analyzed by considering heir long-run associaion and herefore an error correcion model, our sudy is exended o higher dimensional sysems. In so doing, we are concerned wih he Granger casual inference biases ha can emerge when coinegraion mus be pre-esed so looking for a genuine and complee model and on he basis of he advanages of he TYDL procedure, he effec of erms of rade and impors are inroduced and esed in he causal relaionship. IV. Model specificaion. Causaliy and Mehodology. Granger (1969) inroduced a popular causaliy concep which has been used in he conex of raional expecaions, definiion of super exogeneiy and economeric modelling sraegy. He defines a variable x o be casual for a ime series variable y if including he former variable in he informaion se helps o improve he forecass of he laer. More precisely, le Ω sand for he se of all he relevan informaion in he universe and y for he opimal h-sep forecas of + h Ω y a origin based on Ω. We may define x o be Granger-non causal of y if and only if y = + h Ω + h Ω { x s }, h = 1,2, K (1) y s Where he symbol A B denoes he se of all elemens of a se A no conained in he se B and h is a posiive ineger ha can be infinie. Hence, x is said o be no causal

15 for y if removing he pas of x from he informaion se does no change he likelihood o help predic y a any forecas horizon. In urn, x is Granger-causal for y if (1) does no hold for a leas one h, and hus a beer forecas of y is obained for some period ahead by including he pas of x in he informaion se. The simples and mos common framework assumes ha values of x and ph-order VAR process given by { } ' y, ha is, Ω = ( y, x ) s and ( x ) ' s s s, s Ω only conains pas y is generaed by a bivariae y = x p 11, i 12, i i= 1 21, i 22, i y x 1 i + ε (2) and non-causaliy condiion (1) of x for variable do no ener in he firs equaion 2, ha is, y is equivalen o es if he lags of he firs H o : 12, i K, = 0, i = 1,2, p (3) Granger causaliy is dealing wih precedence and, precisely, he procedure defined by (3) which ess he significance of he coefficien of he lagged independen variable is commonly used in pracice hough many oher esing procedures have been proposed in he relaed lieraure In his paper we consider wo popular approaches o Granger causaliy: (i) he bivariane and simples case is invesigaed in he framework of he vecor error

16 correcion model (VECM); and (ii) he Wald es on augmened levels VAR procedure is used in he higher dimensional sysems. In his scenario, our sudy seeks o examine he possibiliy of a causal relaionship beween Cuba s exernal posiion and is growh pah. Having analyzed he saionary properies of he involved ime series daa in order o avoid he error of spurious resuls, our saring poin, herefore, is he following bivariae model error correcion model linking GDP and expors long-run informaion wih a shor-run adjusmen mechanism M N 1 + i ln GDP i + β i i= 1 i= 1 ln GDP = a + λ eˆ ln X + U (4) i K L ln = b + eˆ 1 + γ i ln X j + θ i ln i= 1 i= 1 X ψ GDP + V (5) i Where indicaes he firs difference operaor and U and V are whie noise and uncorrelaed processes. The erm e ˆ 1 = lngdp 1 bo b1 ln X 1 represens he residuals obained from he coinegraing vecor which are conaining he long-run informaion and λ and ψ represen he speed of adjusmen afer he GDP (expors) deviaes from he long-run equilibrium in period 1. As i has been poined ou, we should remark ha hough our ineres is cenred on causal relaionship beween expors expansion an economic growh, he conclusions obained from he usual bivariae modelling can be biased. Invesigaing he inerrelaionships in greaer deail usually requires aking ino accoun he possible

17 indirec effec of oher relevan variables in he economic sysem. Therefore, indirec causal links mus be analyzed in higher dimensional dynamic srucures. On one hand, and as we have already poined ou, hree sub-periods are discerned in he whole analyzed sample in keeping wih Cuba s commercial policy-making; in so doing, o go ino he real effecs of he counry s rade decisions, he classical formulaion defined by (4)-(5) is firsly exended o a rivariae srucure by inroducing he erms of rade variable. On he oher hand, following Riezman e al (1996) and he very recen empirical conribuions of Tang (2006) and Awokuse (2007) he validiy of any Expor- Led Growh or a Growh-Driven Expor phenomenon should ake ino accoun he key role of impors no only as inermediae inpus in expors bu also for is influence in recovering global and sable posiions from possible exernal disequilibria. Hence, he informaion se is once again exended by adding he impors of goods and services. In addiion, i is worh menioning an essenial issue regarding he Granger Causaliy approach iself. Following common pracice, in he bivariae model he sequenial esing procedure based on likelihood raios ess o a dynamic VAR srucure inroduced by Johansen (1991) and Johansen and Juselius (1990) is implemened. Once he exisence of long-run relaionships is acceped, heir direcion is checked on he basis of an error correcion represenaion by means of a join significance es of he coefficiens. We noe ha hough coinegraion refers o equilibrium in he long-run and causaliy o shor-run precedence boh noions are in fac linked: as long as an equilibrium relaionship exiss in he long-run beween a pair of series, here mus be some Granger causaion in a leas one direcion beween hem o provide necessary dynamics. Neverheless, i urns ou ha weakness is characerizing his wo-sep causaliy approach. As Giles and Mirza (1999) brough o mind, his mehodology is

18 calling for pre-esing uni roos and coinegraion before causaliy esing and he resuls may suffer from size disorions and inference biases leading o an over rejecion of he non-causal null hypohesis. Hence, in hose more suiable mulivariae frameworks, our poin is o carry ou Granger Causaliy es avoiding he coinegraion examinaion hough he order of inegraion and lag srucure is sill required. For i, we employ he augmened level VAR echnique wih inegraed and coinegraed process. The TYDL procedure consiss on over-fi a levels VAR specificaion wih a oal of p=(k+dmax) lags being k he laglengh chosen by using some informaion crieria and dmax he maximal order of inegraion for he ime series daa involved in he sysem. The asympoic chi-squared disribued MWald es proposed is applied o he firs k VAR coefficien marix while he coefficien marices of he las dmax lagged vecors in he model are ignored. More precisely, he underling inuiion of his approach o Granger Causaliy is ha whenever he elemens in a leas one of he coefficien marices A i are no resriced a all under he null hypohesis (for insance, he non causaliy resricion (3) which involves in a VAR modelling elemens from all A i, i = 1K,, k ) i is enough o add exra and redundan lags in esimaing he parameers of he srucure o ensure he sandard asympoic properies of he Wald saisic which mainains is usual limiing 2 χ disribuion. Therefore, he TYDL enables he proposed MWALD saisic o es linear or nonlinear resricions on hese k coefficien marices using he sandard asympoic heory. To sum up, he conclusive specificaion esed is defined by he following four variable (k+dmax) order VAR srucural modelling linking expors, economic growh, erms of rade and impors 3

19 ln X 10 lngdp = 20 + lntot 30 ln M 40 k i= 1 11, i 21, i 31, i 41, i 12, i 22, i 32, i 42, i 13, i 23, i 33, i 43, i 14, i 24, i 34, i 44, i ln X i lngdp lntot ln M i i i + (6) + k + 1+ d max j= k , j 21, j 31, j 41, j 12, j 22, j 32, j 42, j 13, j 23, j 33, j 43, j 14, j 24, j 34, j 44, j ln X j lngdp lntot ln M j j j ε X ε GDP + ε TOT ε M V. Economeric analysis and resuls This secion presens he corresponding empirical resuls for Cuba s expors-growh connecion. Prior o run he described Granger Causaliy ess mehodologies for he bivariae and wo mulivariae dimensional versions, we sar by invesigaing he uni roos in order o examine he saionary and univariae ime series properies of each of he ime series daa involved in modelling. V.1.Inegraion properies of he daa series In erms of a disribuion momens, a ime series generaed by a saionary sochasic process mus flucuae around a consan mean, is variance is ime-invarian and does no show any rend. However, mos of he economic ime series are nonsaionary and

20 is use can falsely imply he exisence of a meaningful economic relaionship. Hence deermining wheher a variable follows a rend saionary or a difference-saionary process, and herefore wheher o derend or o diferenciae i in order o resul in a saionary series, is of grea imporance for any analysis. Table 2. Augmened Dickey-Fuller es (ADF). Cuba H 0 : δ = 0 H : δ 0 (i) y (ii) y (iii) y 1 < m 1 + β 2 + δy 1 + ( i y i ) i= 1 = β + ε m 1 + δy 1 + ( i y i ) i= 1 = β + ε m 1 + ( i y i ) i= 1 = δ y + ε variable k Model (i) Model (ii) Model (iii) Φ 3 τ βδ c Φ 1 τ µ c nc ln GDP lngdp X ln X TOT lntot M ln M 1 n.a. n.a n.a n.a. n.a n.a * ln n.a. n.a. n.a. n.a. n.a. n.a * ** ln n.a. n.a. n.a. n.a. n.a. n.a * ** ln n.a. n.a n.a n.a. n.a n.a * ** Noes: k is he lag srucure order chosen o guaranee whie noise residuals and is he firs differenced lag operaor; subscrips c, c and nc indicae if rend and inercep. inercep or none is included in es equaion (iii), (ii) and (i). Φ 3, τ βδ, Φ 1, τ µ denoe saisics for individual or join significance of rend and inercep assuming uni roo. * and ** show 5% and 1% significance level in accordance o MacKinnon (1996) criical values; n.a is non available. Resuls implemened using Eviews 4.1. In his paper he daa univariae characerisics are examined using he Dickey- Fuller (DF) and he Augmened Dickey Fuller (ADF) uni roo approaches. On he basis of independenly no serial correlaed and idenical disribued errors, his parameric

21 procedure is assuming a sochasic par modelled by an auoregressive represenaion esing he null hypohesis of a uni roo agains he alernaive of saionary. Lag-lengh is seleced o ensure non-auocorrelaed error erms and he decision ree proposed by Charemza and Deadman (1992) is implemened o check he significance of ime rend and drif erms ogeher wih non-saionary. Table 2 summarizes he ADF es over he period Based on he resuls neiher a rend nor a drif can be acceped; in addiion, he null hypohesis of non saionary of he variables canno be rejeced. Hence, a 5% or even 1% levels of significance, all four variables are inegraed of order one, I(1), so hey are nosaionary in levels bu saionary afer differencing. V.2. Expors and GDP. A bivariae analysis Following common pracice, our saring specificaion is a bivariae srucure. In his scenario we assume ha he error correcion sysem defined by (4) and (5) is defining he nexus beween expors expansion and income growh dynamics. Before analyzing he direcion of causaliy, he firs sep o esimae he shor-run dynamic modelling is o es in each of he considered periods if expors of goods and services and GDP pahs are, in heir levels form, driven by a common sochasic rend. In checking he coinegraion rank of he Cuban expors-gdp sysem, we make use of he procedure developed by Johansen (1991) and Johansen and Juselius (1991) based on maximum likelihood echniques o a VAR model assuming he Gaussian srucure of he residuals.

22 A his poin, an essenial choice ha has o be made is he number of lagged differences o be included in he models on which he coinegraion rank ess are based. Table A1 in he appendix summarizes he level vecor auorregresive sysem esimaions. Opimal lag orders are deermined in accordance wih he informaion crieria of Schwarz (BIC) and Hannah-Quinn (HQ) which indicae one lagged year for all he periods excep for he shor-span beginning in he early nineies where a lag lengh of wo guaranees beer Gaussian properies of he errors. Assuming his lag srucure a range of diagnosic ools are applied: ess for residual auocorrelaion (Pormaneau (Q) and Breusch-Godfrey Lagrange muliplier (LM) proofs), Whie condiional heerocedasiciy and Jarque-Bera non normaliy via Cholesky facorizaion show well-behaved Gaussian errors for each of he inroduced specificaions. The long-run relaionship beween expors and GDP is hen analyzed. The resuls for he sequenial coinegraion rank procedure are repored in Table A2 in he appendix. Le r sand for he number of coinegraion vecors running from 0 o h-1 being h=2 he number of endogenous variables included in he modelling. Two likelihood raios he race, λ race, and he maximal-eigenvalue saisic, λ max, - are used o es ha here are a mos r coinegraing vecors and ha here are r coinegraing vecors agains he alernaive ha r + 1 exiss, respecively. In our analysis, he resuls of he λ race and λ max saisics are compued assuming ha all rends are sochasic; using he 5% and 10% criical values from Oserwald- Lenum(1992) we found ha eiher in or he null hypohesis of non coinegraion ( r = 0 ) can be rejeced. Therefore, boh saisics confirm he exisence of a mos one coinegraing equilibrium relaionship among he logarihms of GDP and expors a he 95% confidence level. On he conrary, evidence of negaively

23 coinegraion in he long-run is found for he sample periods, and Finally, in hose periods running from he early sixies o he las eighies and 2004 where GDP and expors of goods and services move ogeher in he long-run, Granger causaliy es is carry ou on he basis of he esimaion of he error correcion modellings. In so doing, causaliy deals wih he Wald es aking ino accoun he firs differences of boh variables ( ln GDP and ln X ) and he one period lagged residuals ( e ˆ 1 ) obained from he esimaed coinegraion rank. For i, he F-saisic ess of join significance of he coefficiens involved in equaions (4) and (5) in each sample. Table 3 below presens he resuls of he Granger causaliy proof. A he 5 percen significance level, in he whole period i is rejeced he null hypohesis ha expors of goods and services does no Granger-cause GDP and no vice versa. However, he ELG hypohesis ha can be addressed for urns ino reverse causaliy from GDP growh o he expors growh during he samples 5. Table 3. Granger causaliy Tes. VECM Period Null Hypohesis F-saisic Number observaions ln ln lngdp nc ln X nc X GDP 6.052* ln ln lngdp nc ln X nc X GDP * 29 Noes: nc denoes no Granger-cause; * indicaes significance a he 5% level. Resuls carried ou on Eviews 4.1.

24 V.3 Terms of rade and impors of goods and services. The mulivariae analysis As we have already poined ou, hough our ineres focuses on causal linkages beween expor and income expansion for he Cuban economy, he informaion se mus be enlarged in order o ake ino accoun he effec of indirec causal links. Hence, urning o a mulivariae analysis he possibiliies of muliple channels of influence are inroduced in he relaion expors-oupu. In his secion we move o higher dimensional sysems by including wo more relevan economic variables in he expor-led-growh analysis: firs we inroduce he erms of rade and laer on he impors of goods and services. Le Model (i) and Model (ii) sand for he hree and four variable respecively. As i is well known, he muli-sep procedure esing causaliy condiional on he esimaion of a uni roo, a coinegraion rank and coinegraion vecors used in Secion 2 may suffer from severe pre-es biases. In his secion we keep away from looking for he exisence of long-run relaionships before checking causaliy. Once we move o hese more realisic mulivariae srucures he causal analysis for hese wo modellings is carried ou by means of he augmened VAR procedure proposed by Toda and Yamamoo (1995) and Dolado and Lukepohl (1996) which allows for causal inference (by esing general resricions on he parameer marices) on he basis of an augmened level VAR wih inegraed and coinegraed vecors. Before esing for causaliy an essenial issue is o specify he lag-lengh in each of he considered periods. The general approach is o fi VAR(m) models wih orders m = 0, K, j and o choose an esimaor of he order j ha minimizes he crierion. In max so doing, he disance beween he rue model and he Kullback-Leiber quaniy of

25 informaion conained in a proposed model is measured by he log-likelihood funcion wih h parameers given by TR T l = (1 + ln 2π ) ln de( Ωˆ ( m)) 2 2 Where de ( ) denoes he deerminan, R is he number of equaions and Ωˆ ( m) = T T 1 = 1 eˆ eˆ is he residual covariance marix esimaor for a VAR of order m. In measuring he goodness of fi and parsimonious of a model specificaion, he informaion crieria of Akaike (AIC), Schwarz (BIC) and Hannah-Quinn (HQ) are defined on he basis of -2 imes he average log-likehood funcion adjused by a penaly funcion. Table A3 in he appendix shows he opimal lag selecion in boh hree and four vecor auoregressive srucures esimaed by OLS over each of he considered periods. In his fashion we prefer lag srucures which are he more parsimonious bu sill long enough o whien he residuals. For he rivariae model, we can see ha AIC and SC choose a lag lengh of one for all he erms wih he excepion of wo years for he subperiod Once he impors variable is included, lag selecion is based on he AIC and HQ crieria which indicae wo lags for hose long periods saring in he sixies and one for he shorer ones and Given ha VAR(k) has been seleced for each hree and four variable auoregressive modelling in each of he considered periods, he las poin is o deermine he maximal order of inegraion ha migh occur in he process. As long as all he variables have been found o be a mos I(1), an exra lag may be added in each of he periods so dmax=1 in boh hree and four variable modelling.

26 To conclude, and overfiing he rue VAR order, we esimae a levels VAR wih a oal of p=(k+dmax) lags. For he Granger-Causaliy ess, we apply sandard Wald es o he firs k VAR coefficien marix excluding he exra parameers in esing for Granger causaliy. Table 4 and Table 5 repor all he resuls of he MWALD es for he augmened VAR models (i) and (ii) respecively. Table 4. GDP. expors and TOT Granger causaliy Tes. Augmened VAR model Period MWALD-Saisics Dependen variables Source of causaion ln GDP ln X ln TOT ln GDP n.a (0.0267) (0.2078) ln X (0.0314) n.a (0.515) ln TOT (0.0745) (0.0000) n.a. ln GDP n.a (0.7377) (0.7699) ln X (0.4289) n.a (0.7699) ln TOT (0.1747) (0.0124) n.a ln GDP n.a (0.5450) (0.5483) ln X (0.9451) n.a (0.9020) ln TOT (0.0253) (0.01) n.a. ln GDP n.a (0.5593) (0.4279) ln X (0.6620) n.a (0.002) ln TOT (0.0528) ( ) n.a. Noes : The [ d(max) ] k + h order level VAR has been esimaed wih d (max) = 1 selecion follows Table 6 resuls Values in parenheses are p-values. Lag lengh From he applicaion of he TYDL mehodology in he hree-dimensional analysis (see Table 4), we noe ha in expors of goods and services Granger- cause

27 GDP a he 95% confidence level hen supporing he ELG hypohesis; for he same sample, he expor equaion resuls indicae ha he null hypohesis ha expors are no caused in he Granger sense by GDP can also no be rejeced a he 5% significance level, showing he exisence of he posiive influence of GDP on heir dynamic. Hence, we observe ha he causal link beween expors and economic growh in Cuba is bidirecional in he whole period However, no causal relaionship can be addressed in any of he analyzed sub-periods. As long as expor expansion and openness o foreign markes are considered as key deerminans of economic growh, our poin is o ake ino accoun he effec of impors. In he Cuban case, hough in he shor-run some mismaches can be observed, expors co-moved wih impors of goods and services in he long-erm. This join movemen is refleced by high correlaion coefficiens over 0.95 for all he periods expec for he period ha drops up o Turning o he four variable causaliy resuls (see Table5), we can conclude ha, a leas in he Granger sense, eiher he ELG hypohesis or he GLE phenomenon can be srongly rejeced a he 5% and even 10% significance level. Ineresingly, he GDP equaion resuls show a posiive casual relaionship going from impors of goods and services o he Cuban growh pah in all he periods bu This finding is implying ha impors are causing growh in Cuba suggesing Impor-led Growh (ILG) causaliy and so, impors are more imporan for Cuban economy o grow han expors. In , period we do no find a ILG causaliy paern bu a direc causaliy flowing from oupu o expors (GLE) and, ineresingly, causaliy from impors o expors.

28 Table 5. GDP. Expors, TOT, Impors. Granger causaliy Tes. Augmened VAR model Period MWALD-Saisics Dependen variables Source of causaion ln GDP ln X ln TOT ln M ln GDP n.a (0.5073) 0.093(0.793) (0.0421) ln X (0.7575) n.a (0.0319) (0.4393) ln TOT (0.0067) (0.0505) n.a (0.9719) ln M (0.9399) 1.491(0.2220) (0.8359) n.a. ln GDP n.a (0.8997) (0.770) (0.032) ln X (0.3515) n.a (0.0259) 1.971(0.1603) ln TOT (0.0151) 1.98(0.1593) n.a (0.097) ln M 0.051(0.813) (0,8166) 0.048(0.9442) n.a ln GDP n.a (0.3120) (0.4529) (0.748) ln X (0.0372) n.a (0.3220) (0.060) ln TOT (0.000) 20.56(0.0000) n.a. 3.70(0.0544) ln M (0.7760) (0.7492) (0.025) n.a. ln GDP n.a. 7.69e-05(0.9930) (0.380) 3,8444(0.0499) ln X (0.399) n.a (0.1013) 0,3125(0.5761) ln TOT (0.0038) (0.030) n.a. 6,2252(0,0126) ln M 0,387(0,5336) (0,5071) (0.8060) n.a. Noes : The [ d(max) ] k + h order level VAR has been esimaed wih d (max) = 1 selecion follows Table 6 resuls. Values in parenheses are p-values. Lag lengh VI. Conclusions. This paper, repors on new empirical developmens in inernaional rade lieraure and, more precisely, o he crucial role of a counry s exernal secor posiion on is growh performance and he so-called expor-led growh phenomenon. Despie he lack of

29 empirical works, few would disagree ha Cuba s inernaional rade resricions have been a cenral issue in is income pah. In addiion, hough i is well known ha services -especially ourism- are playing a key role in all aspecs of his economy, up unil oday, no single generally empirical analysis has demonsraed he role of inernaional rade of boh good and services as an engine of growh for Cuba. There are wo essenial conclusions ha crops up from his paper. Firs, our resuls clearly suppor he idea ha bivariae causaliy analysis in he relaionship beween expors and oupu is affeced by spurious correlaions because of he bias in favour of correlaion driving o misaken inerpreaions in he ELG or GLE hypohesis, as suggesed by Sheehey (1990). In his sense, for he Cuban economy eiher he exporled-growh (ELG) and he growh-led-expor (GLE) hypohesis is, a leas, weak. By adding new relevan variables o es for indirec effecs, we have obained ha he incorporaion of erms of rade no only preserves bu also reverses he casual relaionship flowing from expors o growh in he whole period. The second conclusion derives from he mulivariae causaliy when erms of rade and impors are included in he analysis. Once he model is exended concerning he significance of impors of goods and services, he causaliy link, a leas in Granger s sense, beween expor expansion and growh fades away. On he conrary, a sriking resul for Cuba is ha whenever expors and impors of goods and services show high correlaed movemens, economic growh in Cuba is responsive o impor expansion. So, impors seem o be more imporan for Cuban economic growh han expors suggesing an Impor led growh (ILG) hypohesis (Awokuse, 2007). When including differen periods we observe ha in he whole sample and in he COMECON analysed periods (ha is, , and ) ILG

30 causaliy is verified and only in he period, hough a long-run mach can sill be observed, correlaion disappears and impors appear o no Granger cause growh. Wha is suggesing ha? From our poin of view, ILG resuls sugges ha during socialis regulaion of inernaional rade period he Cuban economy was able o ge impors, principally of capial and inermediae goods and, in general, of more echnological advance inpus for Cuban producion, from he sovie block and hese were he base of he Cuban oupu expansion. A he same ime, primary expors o he sovie block financed Cuban impors a preferenial prices. A his poin, our resuls for Cuba end o suppor he hypohesis exposed by Krugman (1984) and, in general, for he echnological approaches of inernaional rade and developmen and endogenous models (Dosi and Soee, 1988 and Coe and Helpman, 1995). When he adminisered inernaional rade period ended for Cuban economy in 1990, ILG causaliy does no generae growh due o an inense dropped in he Cuban impors since 1990, especially capial and inermediae goods impors. However, we obain in his period ha growh causes expors and ha impors causes expors, reflecing again he imporance of impors in he economic growh pah in his case linked direcly o expors growh. So, a major conclusion is he imperious necessiy of imporing for Cuban economy o grow. 1 Following common pracice, erms of rade are consruced as he raio of impors prices o expors prices so, a negaive rae of growh implies an improvemen of erms of rade and, vice versa, a posiive rae of growh implies deerioraion. 2 In he same way, y does no Granger-causes x whenever 21, i = 0 for i = 1,2, K, p 3 Noe he rivariae specificaion is idenical o he (6) by omiing in he variable and esimaor marices he las row corresponding o he impors field. 4 No repored here bu available on reques, we noe ha all he variables are found o be inegraed of order one in each of he analyzed sub-periods. 5 No included here for breviy causaliy in he bivariae case is also analyzed by means of he augmened VAR level mehodology. The resuls are idenical from ha obained on he VECM.

31

32 VII. References. Ahmad, J. and Kwan, A. C. C. (1991) Causaliy beween expors and economic growh: Empirical evidence from Africa. Economics Leers, 37, pp Arrow, K. (1962) The economics implicaions of Learning by Doing. Review of Economic Sudies, 29, June, pp Awokuse, T.O. (2007) Causaliy beween expors, impors and economic growh. Evidence from ransiion economies. Economics Leers, 94, pp Awokuse, T.O. (2005a) Expor-led growh and he Japanese economy: evidence from VAR and direced acyclic graphs. Applied Economics Leers, 12, pp Awokuse, T.O. (2005b) Expor, economic growh and causaliy in Korea. Applied Economics Leers, 12, pp Bahmani Oskooee, M. and Alse, J. (1993) Expor growh and economic growh: an applicaion of coinegraion and error correcion modelling. Journal of Developing Areas, 27, pp Bahmani-Oskooee, M. Economidou, C. and Gobinda Goswami, G. (2005) Expor led growh revisied: A panel coinegraion approach. Scienific Journal of Adminisraive Developmen, 3, pp Balaguer J. and Canavella-Jordá, M. (2001): Examining he Expor-Leg Growh Hypohesis for Spain in he Las Cenury. Applied Economics Leers, 8, pp Balassa, B. (1978) Expors and economic growh: furher evidence. Journal of Developmen Economics, 5, pp Begum, S. and Shamsuddin, A. F. (1998) Expors and Economic Growh in Bangladesh. Journal of Developmen Sudies, 35 (1), pp Charemza W.W. and Deadman, F.D. (1992) New Direcions in Economeric Pracice Brookfiels VT_ Edward Elgar Coe, T. D. and Helpman, E. (1995) Inernaional R&D spillovers. European Economic Review, 39, pp Cribeiro Y. and Triana, L. (2005) Las Elasicidades en el Comercio Exerior Cubano: Dinámica de coro y Largo plazo. Degree disseraion. Universidad de la Habana. Saniago de Cuba. Cuadros, A., Ors, V. and Alguacil, M. (2004) Openness and Growh: Re-Examining Foreign Direc Invesmen, Trade and Oupu Linkages in Lain America. The Journal of Developmen Sudies, Vol. 40 (4), pp

33 Dolado. J.J. and Luekepohl. H. (1996) Making Wald es work for coinegraed VAR sysems. Economerics Reviews, 15, pp Dosi, G. and Soee, L. (1988) Technical change and inernaional rade, in: G. Dosi, e. al., (eds) Technical Change and he Economic Theory, (London: Piner Publishers), pp Feder, G. (1982) On expor and economic growh. Journal of Developmen Economics, 12, pp Foser, N. (2006) Expors, growh and hreshold effecs in Africa. Journal of Developmen Sudies, 42 (6), pp Granger, C. W. J. (1969) Invesigaing causal relaions by economeric models and cross-specral mehods. Economerica, 37, pp Giles J.A. and C.L. Mirza (1999) Some Preesing Issues on Tesing for Granger noncausaliy (Mimeo) Deparmen of Economics, Universiy of Vicoria, Economerics Working Papers Nº Giles, J.A. and C.L. Williams (2000) Expor-led Growh: a Survey of he Empirical Lieraure and some Non-Causaliy Resuls. Par 1, Journal of Inernaional Trade and Economic Developmen, 9, pp Goldin, I and Reiner, K. A. (2005) Global capial flows and developmen: A Survey. The Journal of Inernaional Trade & Economic Developmen, Vol 14 (4), pp González, A. (1993) Cuba: Escenarios del Modelo Económico en los Años Novena (La Habana: INIE). Grossman, G. M. and Helpman, E. (1991) Innovaion and Growh in he Global Economy (Cambridge: MIT Press). Helpman, E. and Krugman, P. R. (1985) Marke srucure and Foreign rade (Cambridge (Mass.): MIT Press). Hicks, J. (1950) The rade cycle (Oxford: Clarendon Press). Islam, M. N. (1998) Expor expansion and economic growh: esing for coinegraion and causali., Applied Economics, 30, pp Johansen, S. (1991) Esimaion and Hypohesis esing of Coinegraion Vecors in Gaussian Vecor Auorregresive Models. Economerica, 59,