Trade Liberalization, Human Capital and Economic Growth: Empirical Evidence From Selected Asian Countries

Author:ATIF KHAN JADOON, HAFIZ ABDUR RASHID and AAMIR AZEEM
 
FREE EXCERPT

Abstract

Countries around the globe are liberalizing their trade policies for the maximum gains due to comparative advantage. Trade is considered as one of the primary tools to increase the economic growth. There are four main channels in literature through which trade liberalization affects economic growth: capital accumulation, equality of factor prices among countries, knowledge transfers and technology transfers. Last two channels are related to the human capital of the country. The more open economy will have larger benefits from trade openness, if country has absorbing capacity of new technology. The present study has been designed to see the impact of trade liberalization on the human capital and economic growth by using panel data analysis.

Selected Asian countries (India, Indonesia, Japan, Malaysia, Pakistan, Singapore, South Korea and Sri Lanka) have been grouped as lower income countries (India, Indonesia, Pakistan and Sri Lanka) and higher income countries (Japan, Malaysia, Singapore and South Korea) for comparative analysis. The results show that both developed and developing countries enjoy the trade led growth for the selected period. The impact of trade openness on human capital has been found positive for both groups but found significant only for the developed countries due to well-trained human capital. The fruits of trade openness in form of increased productivity of human capital have not been achieved in developing countries due to their less trained and less skilled workers. The investment in human capital is the dire need of the time for the developing countries to enjoy more beneficial effects of trade openness.

Keywords: Trade liberalization, Human capital, Economic growth, Asian countries, Capital formation

  1. INTRODUCTION

    The world has become global village and the present era of nations' history is the era of globalization. No country in this age can survive without foreign trade. Countries are liberalizing their trade policies to achieve maximum gains from the opportunities of comparative advantage. Trade openness or liberalization is now considered as one of the primary tools to increase the economic growth. Rich literature is available on the relationship between trade liberalization and economic growth but it has remained contentious among the policy makers due to the empirical results obtained from various studies. The gain from trade liberalization has not been achieved by the developing countries due to protectionist trade policies of the developed nations (Spanu, 2003).

    But a significant amount of empirical literature has shown the trade led growth for a single developing country analysis, such as analysis of Chaudhry et al. (2010) for Pakistan and Utkulu and ozdemir (2004) for Turkey. Easterly and Levine (2001) studied the growth process of sixty four countries and concluded that trade policies regarding openness had affected economic growth positively in these countries.

    The empirical literature available on the hypothesis that trade openness affects economic growth positively advocates four main channels; capital accumulation, equality of factor prices among countries, knowledge transfers and technology transfers. Last two channels are related to the human capital of the countries. The countries having better quality and quantity of human capital can enjoy more fruits from trade openness. The more open economy will have larger benefits from trade openness, if country has absorbing capacity of new technology. The impact of trade openness will be limited, if the human capital of the country is not groomed enough to handle new technology due to trade openness. The transmission of knowledge and innovative ideas due to openness of trade increase the quality of human capital. Trade restriction on other hand, hinders transmission process and have negative effect on the human capital.

    "Trade liberalization between developed and less developed countries may inhibit learning by doing and therefore the growth of general knowledge in developing countries. Trade liberalization can encourage specialization in product lines, which has not had very much learning by doing in developing countries" (Young, 1991). According to Young (1991), the human capital needs to be efficient enough to use the knowledge and technology coming from other countries. The impact of human capital on growth is well defined and researched and there exists consensus among researchers that human capital of any country contributes positively towards economic growth. Human capital refers to the skills and abilities of country's human resources which expand through education, trainings and experiences.

    The human capital formation refers to the process of increased education, skills and experiences of the human resources which play a significant role for higher economic growth. The investment in human resources of a country can be defined as human capital formation. It is generally accepted phenomenon that for the sustainable growth a country needs productive resources, technology innovations and handling of new technology. The main resources of country include labour which can be increased with the higher population growth rate; physical capital accumulation which can be increased with higher investment rates and human capital which can be enhanced by investment in human capital. The human capital has to do with both the quantity and quality of the labour force. The countries using human capital effectively are enjoying higher growth rates.

    Since, human capital is one of channels of economic growth so the impact of trade liberalization on human capital will be empirically tested in the present study. There is hardly any study according to our knowledge conducted on panel data to check the relationship between trade openness, human capital and economic growth. By using panel data, the present study will take care of the issue that whether trade openness helps countries of Asian region or not. In the present study, we have taken eight countries and have made two groups, i.e. high-income countries and low-income countries (according to per capita incomes). The high-income countries include Japan, Singapore, South Korea and Malaysia. The low-income countries include Indonesia, India, Pakistan and Sri Lanka.

    The reason for choosing these countries is availability of data and reason for making two groups is to draw inferences about the effects of trade openness on economic growth and human capital in developed and developing countries simultaneously.

    OBJECTIVES OF THE STUDY

    The objectives of the present study are as follows:

    1. To check the impact of trade liberalization on the growth and human capital of the lower and high-income Asian economies.

    2. To check whether trade openness has indirect link with economic growth due to its impact on human capital in these countries.

  2. OVERVIEW OF THE ECONOMIES

    DEVELOPED COUNTRIES OVERVIEW Japan

    The economy of Japan is recognized as the second largest among the developed economies, standing next to United States. Japan stood as the fourth largest economy in the world in 2011 based on Purchasing Power Parity. The growth rate of Japan was negative in the year 2008, 2009 and 2011 but in 2012, growth rate of the economy was 4.1% with per capita GDP $ 37,870. The largest share is from services sector in the GDP which was 74.6% in 2012 with industry share of 24% and agriculture 1.4%. The population of Japan has been growing at an average of 0.0154 since 2005 to 2012.

    Japan is the largest investor in international markets. The outward FDI flows from Japan were $ 114 billion in 2011. Trade was one of the features by which Japan was known in international community, but in 1980's the investment increased so many fold that it had given Japan a new world prominence. In 2010 Japan was the world's fourth exporter of goods and the world's sixth provider of commercial services. The major exports of Japan include motor vehicles, non-electric machinery, consumer electronics and semiconductors, chemical, iron and steel equipment and scientific and optical equipment. The total volume of exports of Japan was $ 788 billion in 2011. The major imports of Japan include fuel, machinery, food, manufactured goods, chemicals, raw materials and clothing. The total import volume of Japan was $ 808.4 billion in year 2011 and total trade deficit was standing at $ 20.4 billion in the same year.

    Malaysia

    The Malaysian Economy is a fast growing, relatively open and state-oriented economy. The Malaysian economy was ranked 3rd largest economy among the South East Asian countries in 2007. Today Malaysia is one of the world's top countries for offshore manufacturing and service-based operations, therefore, more than 40 countries have invested in over 5,000 Malaysian companies.

    Malaysia has had incredible growth in past three decades and achieved 14 continuous years of trade surplus. Free trade zones and technology parks have also been built for the faster growth of business and research. The major exports of Malaysia include electronic equipment, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, textile and chemicals. The total export volume of Malaysia during the year 2011 was $ 212.7 billion. The major imports of Malaysia included electronics, machinery, petroleum products, plastics, vehicles, iron and steel products and chemicals with total import volume of $ 168 billion in the year 2011.

    Singapore

    Singapore is one of the most stable economies in macroeconomic terms with no foreign debt, high government revenue and a positive budget surplus. The features like worldwide financial services,...

To continue reading

REQUEST YOUR TRIAL