Unbalanced Economic Growth and Dynamic Trade Specialization

Unbalanced Economic Growth and Dynamic Trade Specialization Tri Widodo and Samsubar Saleh1 Abstract This paper examines the impact of unbalanced economic growth upon countries’ dynamic trade specialization. Firstly, we identify theoretically the impact. Secondly, we construct an econometric model to investigate the impact. We employ revealed symmetric comparative advantage (RSCA) index as an indicator of trade specialization and coefficient of variation (CV) of sectoral output growth as an indicator of unbalanced economic growth. Thirdly, we apply empirically the model in the cases of Korea, Singapore, Indonesia and Malaysia. We conclude that domestic unbalanced economic growth has a positive and statistically significant impact on dynamic trade specialization in the cases of Indonesia and Malaysia, but not in the cases of Korea and Singapore. However, the world unbalanced economic growth has a statistically insignificant impact on the all selected countries’ dynamic trade specialization. Keywords: Impact, unbalanced economic growth, RSCA. A. Introduction Theory of static comparative advantage postulates that countries will specialize in products with comparative advantage and import products with comparative disadvantage. Factor endowments affect countries’ capacity to produce goods and services as reflected by their production possibility frontiers (PPF). The effects of factor endowments on international trade therefore become a critical issue since they also determine countries’ comparative advantage. Countries with abundant factor endowments have more opportunities to attain economies of scale in the production of goods and services. Heckscher2 and Ohlin3 examine the effects of Lecturer of Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia 2 Hecksher, E.F., “The Effect of Foreign Trade on The Distribution of Income,” in Howard S. Ellis and Lloyd A. Metzler, (Eds.). Readings in the Theory of International Trade. American Economic Association. Philadelphia: Blakiston, 1919. 3 Ohlin, B. Interegional and International Trade. 1 Volume 1, Number 1, November 2010 factor endowments on international trade. The trade model of theirs is often referred to as the Heckscher-Ohlin (H-O) model. In fact, a country’s comparative advantage shifts dynamically due to the changes in supply and demand sides in both domestic and international markets. The supply side is related to PPF; meanwhile, the demand side is related to community preference (community indifference curve, CIC). On this matter, Echevarria4 notes two relevant findings. First, in the long run, comparative advantage is driven by total factor productivity (TFP) differential. This explains the fact that less developed countries are likely to export primary commodities even though they are not less capital-intensive. Second, non-homothetic preferences imply fewer countries export only or mostly primary commodities as Cambridge, MA: Harvard University Press, 1933. 4 Echevarria, C. “International Trade and The Sectoral Composition of Production,” Review of Economic Dynamics 11 (2008):192-206. 7 the global economy develops. Many other researchers also consider a country’s comparative advantage in dynamic sense rather than static one. So far, the dynamic theory of comparative advantage has put greater attention on changes of the supply (production) side. This is related to how specific determinants affect the output (economic) growth and, in turn, comparative advantage. Redding5 finds that comparative advantage is endogenously determined by the past technological changes and innovation. The dynamics of comparative advantage might be also caused by the role of input trade6, the friction in international trade and investment flows due to geography, institutions, transport, and information cost7, the transmission of knowledge across borders8, the technological differences across border9, and the monopolistic competition in differentiated products with increasing return to scale.10 This paper aims to examine the impact of unbalanced economic growth upon dynamic trade specialization. Korea, Singapore, Indonesia and Malaysia are chosen for the case studies. The rest of Redding, S. “Specialization Dynamics,” Journal of International Economics 58 (2002): 299-334. 6 Jones, R.W. Globalization and the Theory of Input Trade (Cambridge: MIT Press, 2000). 7 Venables, A.J. “Geography and International Inequalities: The Impact of New Technology,” (Paper Prepared for ABCDE, World Bank, Washington DC, 2001). 8 Grossman, G.M. and Helpman, E. Inovation and Growth in the Global Economy (Cambridge: The MIT Press, 1991). 9 Trefler, D. “The Case Missing Trade and Other Mysteries,” American Economic Review 85(5):102946, 1995. 10 Krugman, P.R. “Increasing Returns, Monopolistic Competition, and International Trade,” Journal of International Economics 9 (1979): 469–79. 5 8 this paper is organized as follows. Section II describes the theoretical framework. Section III shows the methodology. Sections IV represents results and analysis. Finally, several conclusions are presented in Section V. B. Theoretical Framework This section describes theoretically the relationship between economic growth and trade specialization. Suppose a small country (price taker in international market) uses its available inputs labor (L) and capital (K) to produce competing outputs X (labor-intensive good) and Y (capital-intensive good). Let us assume the country is relatively a labor-abundant country. In addition, the country has a production possibility frontier (PPF) and a community indifference curve (CIC), as depicted by PPF0 and CIC0 in Figure 1, respectively. The international term of trade is (PX/PY)Int. The initial equilibriums in both production and consumption are at points A and B, respectively. The volume of international trade is shown by the triangle ABC i.e. exports of X (quantity: CA) for the imports of Y (quantity: CB). With economic growth, the PPF shifts outward, allowing the country to choose different production combinations of X and Y. The various new possible equilibriums in production are located within the regions fixed by the mini-axes drawn through the original production equilibrium at point A. If the new equilibrium in production lies on the straight line 0P, the economic growth is product-neutral, since productions of the export good and the import competing good have increased in the same rate. If the new equilibrium lies in region I P, it is protrade-biased (reflecting the relatively greater availability of the export good); Journal of World Trade Studies in region IIp, it is ultra-protrade-biased; in region IIIP, it is antitrade-biased (reflecting the relatively greater availability of the import-competing good); and in the region IVP, it is ultra-antitrade-biased. Figure 1 about here. In addition, the economic growth will also affect the consumption equilibrium. The consumption effect of growth on trade can be isolated by t (...truncated)