Cultural Globalization and Economic Growth

17 Cultural Globalization and Economic Growth Nuno Carlos Leão 1 This article investigates the relationship between cultural globalization and economic growth for the Portuguese experience for the period 1995-2011. In this research we apply a static and dynamic panel data. The inial GDP per capa is negatively correlated wh economic growth. This result is according to theoretical and empirical studies. This paper shows that international trade and cultural globalization promote the economic growth. As we expected the inflation has a negative impact on economic growth. Keywords: Portugal, Panel data, Convergence and Economic growth. JEL Classifications: C23, F21, O4 Introduction Over the last few years much has been wrten about globalization. Indeed, the social sciences have several ways to evaluate this phenomenon. In general, globalization is often analyzed in terms of costs versus benefs. There are several authors who argue that globalization promotes economic growth (Celik and Basdas,2010; Dreher, 2006; Leão 2012b). We find in the lerature authors who 1 Nuno Carlos Leão Polytechnic Instute of Santarém,and CEFAGE, Evora Universy ; E-mail:nunocarlosleao@gmail.com

18 argue that globalization promotes inequaly between countries (Heshmati and Lee, 2010, Goldberg and Pavcnik, 2007). This paper examines the relationship between cultural globalization and the economic growth using a panel data for the period 1995-2008 between Portugal and the European Union countries (EU-27). The openness trade, foreign direct investment and globalization must be explained in the context of endogenous models of economic growth. In fact the assumptions of monopolistic competion introduced new explanatory variables to the study of economic growth (see Grossman and Helpman, 1991, Rebelo, 1991, and Romer 1986). This study is organized as follows: section 2 presents the lerature review; section 3 explains the methodology and economic model; section 4 shows the empirical results and the final section provides conclusions. Lerature Review In this section we present a survey of the theoretical models of economic growth and their relationship wh globalization. The lerature (Dreher, 2006; Leão 2012b) shows that globalization promotes the economic growth. Some authors as in Beer and Boswell (2001), Dollar (1992) used openness trade and foreign direct to measures globalization. According to growth endogenous models these proxies are explanatory variables of economic growth. Beer and Boswell (2001) and Mah (2002), Goldberg and Pavcnik, (2007) consider that globalization are posively correlated wh inequaly. Dreher (2006), Leão (2012b), and Celik and Basdas (2010) consider that there is a correlation between globalization and economic growth. Dreher (2006) demonstrates that there are arguments to consider a causal direction whin globalization and economic growth, i.e these proxies reinforce between them. The globalization more suable indicators have been proposed by Kearney (2003) and the KOF index (Dreher 2006). The index of globalization (KOF) proposed by Dreher,

19 (2006) represents three dimension of globalization: economic, social and polical (see Dreher, 2006; Dreher and Gaston, 2008). In this research we used only the cultural globalization. This index is interpreted as the domination of American products (Dreher, 2006). The data on cultural proximy are the number of McDonald's restaurants. There is some robust evidence that international trade is posively correlated wh economic growth (Grossman and Helpman 1991, Rebelo 1991, Frankel and Romer 1996). However some authors as in Lai et al. (2006), and Onaran and Stockhammer (2008) found a negative association between openness trade and growth. According to the lerature the foreign direct investment is posively wh the economic growth. Kai and Hamori, (2009); Damijan and Rojec, (2007), Campos and Kinosha, (2002), Badinger and Tondl, (2002), Mileva, (2008) and Onaran, (2007) defend this idea. However, De Mello, (1999) and Ayanwale, (2007) defend a negative impact of FDI on growth. Leão (2012a) finds a posive correlation between globalization and foreign direct investment. The author examines the link between foreign direct investment and globalization for OECD countries for the period 1990 to 2008. Leão (2012a) applies a panel data (fixed eefects and GMM system estimator). The results show that market size, openness trade and globalization have a posive impact on FDI. The empirical studies (Padovano and Galli, 2002, Koch et al., 2005, Lee and Gordon, 2005) demonstrate that a higher taxes system cause a decrease on economic growth. On the other hand fiscal policy can be understood as an indicator control or adjusted to the government spending and the inflation. Econometric Model The dependent variable is the real GDP per capal of Portugal for the period 1995 and 2011. The data are taken from World Bank. The

20 partners selected are European countries (EU-27). This section presents the methodological approach model and model specification using panel data. In static panel data (OLS, fixed effects, and random effects estimators) are used in this type of study. The Random effects were excluded because our sample is not random. The Hausman test rejects the null hypothesis RE versus FE. We also introduced Prob model to evaluate the expected signs. Wh dynamic panel data we used GMM-system estimator. This estimator perms the researchers to solve the problems of serial correlation and endogeney. These econometric problems were resolved by Arellano and Bond (1991), Arellano and Bover (1995) and Blundell and Bond (1998) who developed the first differenced GMM (GMM-DIF) estimator and the GMM system (GMM-SYS) estimator. We introduced the crerion of Windmeijer (2005). The paper uses the following explanatory variables in logs: - GDP: It is the inial level of GDP per capa. Barro (1991), and Dreher (2006) considered a negative correlation between economic growth and the intial level of GDP per capa, i.e there is a economic convergence. The income measure selected in this research is the Gross Domestic Product per capa, expressed in constant 2000 US$ and was collected from World Bank. - KOFCULT: This is cultural globalization proposed by Dreher (2006), and Dreher and Gaston (2008). The data on cultural proximy are the number of McDonad s restaurants per capa. The expected effect on growth is posive. Dreher (2006), and Leão (2012b) found a posive correlation between globalization and economic growth. - TRADE: This is international trade (exports plus imports between Portugal and trade partner). The data for trade were collected fom National Instute of Statistics. According to previous studies (Grossman and Helpman, 1991, and Rebelo, 1991), a posive sign

21 is expected for our model. - FDI: It is the net inflows of investment. The data are collected from World Bank. The studies of Kai and Hamori (2009), Badinger and Tondl (2002), and Onaran, (2007) find a posive sign. However De Mello, (1999) and Ayanwale, (2007) defend a negative impact of FDI on growth. - INF (Inflation): this is measured by the consumer price index and reflects the annual percentage change in the cost to the average of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. According to Gillman and Kejak (2005), and Fountas et al. (2006) a negative sign should be expected. The econometric model on growth takes the following representation: LogGrowth = β GDP) KOFCULT) TRADE) + β Log( FDI) 4 0 INF) 5 1 2 + t + η + ε i Where Growth is the real GDP per capa; X is a set of explanatory η variables. All variables are in the logarhm form; i is the unobserved time- invariant specific effects; δtcaptures a common deterministic ε trend; is a random disturbance assumed to be normal, and ε identically distributed (IID) wh E ( ) =0 ; Var( ε )=σ2 >0. The model can be rewrten in the following dynamic representation: LogGrowth ρloggrowth GDP) KOFCULT) + β Log( TRADE) 3 = 1 FDI) 4 1 INF) 5 3 + δt + η + ε Empirical Results Table 1 presents the estimates of fixed effects model. The general performance of the model is satisfactory. According to the results, the variables have the expected signs and level of significance. The variable of inial of GDP per capa (LogGDP) is statistically significant at 1% level, indicating that there is an economic convergence (Barro, 1991; Dreher,2006). We expected that cultural 2 i

22 globalization (LogKOFCULT) has a posive sign on the economic growth. The result is according to Dreher (2006), and Leão (2012b). The coefficient of foreign direct investment (LogFDI) presents a posive correlation. This result is according to previous studies (Kai and Hamori 2009; Badinger and Tondl 2002, and Onaran, 2007) According to empirical lerature (Grossman and Helpman, 1991; Rebelo, 1991, and Leão 2012b) the coefficent of international trade would have a posive impact on the growth. Our result indicates that international trade promotes the economic growth. The variable inflation (LogINF) finds a negative sing, as we expected and corresponds to the empirical works as in Gillman and Kejak (2005), and Fountas et al. (2006). Table 1 Fixed Effets: Dependent Variable LogGrowth Independent Variables Coefficient Expted Signs LogGDP -0.66(-11.58)*** (-) LogKOFCULT 0.09 (5.90)*** (+) LogTRADE 0.17 (16.65)*** (+) LogFDI 0.02 (4.50)*** (+) LogINF -0.01(-1.87)* (-) C 0.98 (9.90)*** Observations 220 Ad. R-squared 0.81 T-Statistics (heteroskedasticy corrected) are in brackets. ***/* statistically significant, respectively at the 1%, 10% levels. In table 2 we can observe the relationship between cultural globalization and economic growth using a Prob model. The variables are significant at 1% (LogGDP, LogKOFCULT,

23 LogTRADE, and LogINF), wh exception the coefficient foreign direct investment (LogFDI), and inflation (LogINF). Table 2 Prob Model: Dependent Variable LogGrowth Independent Variables Coefficient Expted Signs LogGDP - 21.47 (-18.25)*** (-) LogKOFCULT 13.94 (14.05)*** (+) LogTRADE 8.99 (29.91)*** (+) LogFDI 0.02 (0.19) (+) LogINF -0.14(-0.36) (-) Log likelihood -376.15*** Pseudo R2 0.37 Observations 220 T-Statistics (heteroskedasticy corrected) are in brackets. ***/ statistically significant, respectively at the 1%, level. The inial GDP per capa (LogGDP) presents a negative sign. This result is according to the hypothesis formulate. A posive effect of cultural globalization (KOFCULT) on economic growth was expected and the results confirm this. The variable of bilateral trade (LogTRADE) has also the expected sign. The coefficient of inflation (LogINF) is negative wh significance. Table 3 shows the results using a GMM-System estimator wh orthogonal transformation data. The equation presents consistent estimates, wh no serial correlation for the GMM-System estimator (AR2). The specification Sargan test shows that there are no problems wh the validy of the instrument used.

24 Table 3 GMM-System: Dependent Variable LogGrowth Independent Variables Coefficient Expted Signs LogGrowth t-1 0.98 (23.21)*** (+) LogGDP -0.03(-3.37)*** (-) LogKOFCULT 0.02 (5.68)*** (+) LogTRADE 0.03 (2.51)** (+) LogFDI 0.04 (4.15)*** (+) LogINF -0.05(-3.46)*** (-) C 0.05(0.99) Observations 179 Arellano-Bond test for AR(2) 0.60 Sargan Test 1.00 The null hypothesis that each coefficient is equal to zero is tested using one-step robust standard error. T-statistics (heteroskedasticy corrected) are in round brackets. P-values are in square brackets; ***/** - statistically significant at the 1 and 5 per cent level. Ar(2) is tests for second order serial correlation in the first-differenced residuals, asymptotically distributed as N(0,1) under the null hypothesis of no serial correlation (based on the efficient two-step GMM estimator). The Sargan test addresses the over-identifying restrictions, asymptotically distributed X 2 under the null of the instruments validy (wh the two-step estimator). We used the crerion of Windmeijer (2005) to small correction. As shows in table 3, all explanatory variables are statistically significant (LogGrowth t-1 at 1%, LogGDP at 1%, LogKOFCULT at 1%, LogTRADE at 5%, LogFDI at 1%, and LogINF at 1% level significant). As expected the lagged dependent variable (LogGrowth t-1 ) has a significant and posive effect. So the past changes in economic growth values have a significant impact on the current variation in the same index. The coefficient of inial GDP per capa (LogGDP) presents a negative sign. The variable cultural globalization (LogKOFCULT)

25 presents a posive sign, which confirms that globalization enhances economic growth. For the proxy LogTRADE the expected sign is posive and this is confirmed by the estimator. Inflation has a negative coefficient and is statically significant. This negative coefficient is prediced by previous studies (Gillman and Kejak, 2005; and Fountas et al., 2006). Thus, we can conclude that inflation discourages economic growth. Conclusions This paper investigates the relationship between cultural globalization and economic growth for the period 1990-2011 between Portugal and European Countries. There appears to be a posive and statistically significant impact of cultural globalization on economic growth. The general performances of the models are satisfactory. The estimates are strongly statistically significant. This study tests the impact of cultural globalization in Portugal. The bilateral trade expresses the openness trade. Our findings suggest that international trade promotes economic growth. This result is according to Grossman and Helpman (1991), Rebelo (1991), and Leão (2012b). In relationships the foreign direct investment wh GMM-system estimator this variable presents a posive impact on economic growth. The studies of Kai and Hamori (2009), Badinger and Tondl (2002), and Onaran, (2007) find a posive effect. However, De Mello, (1999) and Ayanwale, (2007) consider a negative impact of FDI on growth. The coefficient inflation reveals a negative association wh economic growth. The empirical studies of Gillman and Kejak (2005), and Fountas et al. (2006) also found a negative effect on growth. We can infer that inflation discourage the growth. This study contributes in several ways. Firstly, the paper examines the impact of cultural globalization and economic growth. Secondly, the results allow us to view cultural globalization as a vehicle that promotes to increase of economic growth.

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