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Do Trade Restrictions or Openness Affect Economic Growth Differently in the Presence of Export Credits?

Farrokh Kahnamoui*

Department of Economics, Western Washington University, Bellingham, WA, USA.

*Corresponding Author:
Farrokh Kahnamoui
Department of Economics
Western Washington University
Bellingham, WA, USA
E-mail: [email protected]

Accepted date: December 15, 2012; Published date: January 11, 2012

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Abstract

This paper looks at the impact of trade barriers and trade openness on economic growth in the presence
of export credits. A panel data analysis of 90 non-Organisation for Economic Co-operation and Development
(OECD) countries, which are recipients of export credit is conducted and the impact of trade restrictions and
trade openness on economic growth over three decades is investigated. The results show no evidence of any
change in the impact of trade restriction on economic growth but a positive and significant impact of trade
openness on economic growth in the presence of export credits.
 

Keywords

Export credits; trade; economic growth.

Introduction

In this paper, I intend to investigate if trade barriers or trade openness have different impacts on economic growth in the presence of export credits. Export credits are government financial support, direct financing, guarantees, insurance or interest rate support provided to foreign buyers to assist in the financing of the purchase of goods from national exporters. The main purpose of export credits, therefore, is to promote exports of the home country by providing financial guarantees against payment defaults of foreign importers (For more on this, see Demirguc-Kunt and Erzan [1]). Using export credits has three important advantages. First, they promote the trade with almost 8% of global trade covered by such credits, they outweigh the amount of development aid, traditional private investment and other cash flows from developed to developing countries [2]. Many studies have shown the positive impact of export credits on the volume of trade. For example, Egger and Url [3] showed a robust and sizable long-term effect of export credits issued by the Organisation for Economic Co-operation and Development (OECD) countries on the volume of their exports. In a theoretical and empirical study, Rienstra-Munnicha and Turvey [4] showed a positive relationship between export credits granted by USA, Canada and Australia and the volume of exports. Chen [5] and Kohlscheen and O’Connell [6] also found a positive relationship between export credits and the volume of export. Figure 1 shows a high correlation (0.97) between global export credits1 and world trade over the period 1975–2005. Second, there are no trade liberalization requirements attached to the granting of export credits. In other words, the country to which an exporter exports the goods is not required to lower its trade barriers or make any other changes in them. This fact is especially relevant to our discussion as we are interested in finding out whether access to export credits causes unchanging import restrictions to have a different effect on economic growth. Third, most export credits are given by developed countries to developing countries so that the latter can import from the former. If trade with developed countries helps economic growth in developing countries and export credits increase the trade between the two, then export credits can affect growth in developing as well as developed countries.

This paper will consider whether trade restrictions or trade openness affect growth differently in the developing countries that receive export credits. For example, countries receiving export credits could have more potential to trade and so any restrictive effect from tariffs could be more potent. On the other hand, if tariffs do not lower the growth when export credits are large, then perhaps countries could use tariffs as a source of government revenue without facing more severe negative effects on growth. These findings could hold important policy implications. If a developing country wishes to maintain or increase its economic growth via trade with a developed one and at the same time needs to raise revenue by imposing trade duties, it can do so without sacrificing one for the other.

I have selected non-OECD countries2 in addition to Mexico and Turkey because their average Gross Domestic Product (GDP) per capita for most of the period under study is lower than those of several countries in the sample. Major oil-producing countries and former or present socialist countries are excluded. Oil-producing countries are excluded because they generate most of their GDP from natural resources rather than value added (see Mankiw et al. [7] and Barro [8]). Socialist or formerly socialist countries are excluded because a great majority of them did not have a free market economy for about two-thirds of the period under study in this paper. In this paper, the impact of trade restriction and openness on economic growth in the presence of export credits is reported.

On export credits

There are two categories of countries that are eligible to receive “export credits” (For more details, see Arrangement on Officially Supported Export Credits, The OECD [9] Category I are those countries whose per capita Gross National Income (GNI) has been for at least two consecutive years above the World Bank graduation threshold (i.e. per capita GNI more than $5685 for 2004 and more than $6055 for 2005). Category II countries are all the others. Category I countries have a repayment period of 5 years and category II countries have a repayment period of 10 years. There is also a country risk factor based on political, legislative or any other conditions that will render repayment of funds borrowed under export credit difficult or impossible. There are 0–7 categories of countries in an ascending order of risk. The riskier is a country the higher will be the minimum premium rate, which is the rate charged to borrowers.

The fact that export credits affect a country’s access to world trade and are a time-varying variable allows one to see to what extent the effects of trade restrictions or openness on economic growth vary by a country’s potential for trade.

Methods

The model:

GDPPCGRit = β1log(IGDPPC)I,t + β2SCHit + β3log(TELit) + β4TRit + β5log(EXCPCit) + β6TRit × log(EXCPCit) + αt + ηi + εit

GDPPCGRit is the per capita GDP growth rate averaged over each sub-period (1970–1979, 1980–1989 and 1990–1999). IGDPPC is the initial GDP per capita in the first year of each sub-period (1970, 1980 and 1990). SCH is a measure of human capital averaged over each sub-period proxied by the percentage of population with a secondary school education. TEL is a measure of initial physical capital in the first year3 of each sub-period proxied by the number of telephone main lines per 1000 people. Telephone mainlines are indicators of communication infrastructure in an economy. See, for example, Rogers [10]. Communication infrastructure is not only vital for economic growth but it has been shown to play a more important role than variations in tariffs in the propensity of a country to trade François and Manchin [11]. Telephone mainlines are a key development indicator according to the World Bank Atlas [12]. Furthermore, they have been used as proxies for physical capital in other studies. See, for example, Yanikkaya [13] and Butkiewicz and Yanikkaya [14]. TR is the trade restriction averaged over each sub-period. For trade restriction, I used the ratio of import duties over imports and the Sachs–Warner (SW) index of openness. The SW trade liberalization index updated by Wacziarg and Welch [15] is based on five criteria of trade restriction: (1) non-tariff barriers covering 40% or more of trade; (2) average tariff rates of 40% or more; (3) a black market exchange rate that is depreciated by 20% or more relative to the official exchange rate; 4) a socialist economic system; (5) a state monopoly on major exports. A country is considered “open” if it meets none of the five criteria in which case it receives a value of 1. A country is considered “closed” if it meets any one criterion in which case it receives a value of 0. EXCPC is export credit per capita averaged in the same way. Export credits enter the model both individually and interactively with trade restrictions. They enter the model individually to capture the direct effect of export credits on growth. Export credits enter the model interactively with trade restrictions to capture the impact of the latter on growth in the presence of export credits. Investigation of this impact is, of course, the main focus of this paper, at and hi are fixed effects and eit is the disturbance term.

Results and Discussion

Using ordinary least squares (OLS), I obtained estimates with and without the inclusion of period fixed effects (but always included cross-section fixed effects). The results using both cross-section and period fixed effects are reported in Table 1. In Equation (1), trade restriction is significant at 10% and has a positive coefficient. This result is not necessarily surprising. There are a number of studies that have found similar positive relationship. For example, Yanikkaya [13] finds a positive relationship between tariffs and economic growth. Nunn and Trefler [16] conclude that tariff protection in skilled industries can have a beneficial effect on economic growth. In a theoretical model, Shun-Fa [17] shows that higher import tariffs can boost economic growth under certain conditions. Export credit per capita has an insignificant coefficient. Although export credit seems to affect trade as evidenced by studies cited above as well as Figure 1 but its direct impact on economic growth is less clear. Export credit and economic growth have a very weak positive correlation at only 0.023. The correlation between the two is also shown in Figure 2.

Equation (1) Equation (2)
C 53.88 (0.00) 53.63 (0.00)
Log(IGDPPC) -7.31 (0.00) -7.31 (0.00)
Log(SCH) -0.48 (0.55) -0.47 (0.56)
Log(TEL) 1.54 (0.12) 1.54 (0.13)
TR 0.09 (0.08) 0.11 (0.77)
Log(EXCPC) 0.07 (0.94) 0.09 (0.93)
TR 3 Log(EXCPC) - -0.00 (0.97)
R2 0.79 0.79
Number of countries 68 68
Number of observations 145 145

Table 1: Interactive effects of import tariffs and export credits on per capita GDP growth; panel data (1970–1999).

In Equation (2), where trade restriction and export credit are interacted, the coefficients for trade restriction, export credit per capita and the interactive term between the two are all insignificant. It should be noted that the R2 for both Equations (1) and (2) is 0.79 which, given the fact that the model contains cross-sectional data, is a fairly strong number, pointing to the absence of model misspecification. Table 2 shows the results of the estimation where only cross-sections fixed effect has been used. Once again, the coefficients of interest are not significant and R2 at 0.75 is now lower than in Table 1, indicating that the model where both cross-section and period fixed effects have been used has somewhat of a stronger explanatory power.

Equation (1) Equation (2)
C 45.33 (0.00) 41.14 (0.00)
Log(IGDPPC) -6.22 (0.00) -6.27 (0.00)
Log(SCH) 0.20 (0.81) 0.25 (0.77)
Log(TEL) 3.23 (0.00) 3.24 (0.00)
TR 0.09 (0.14) 0.44 (0.26)
Log(EXCPC) -0.09 (0.88) 0.36 (0.65)
TR 3 Log(EXCPC) - -0.04 (0.35)
R2 0.75 0.75
Number of countries 68 68
Number of observations 145 145

Table 2: Interactive effects of import tariffs and export credits on per capita GDP growth; panel data (1970–1999).

Next I replaced the import tariffs with the SW openness index4. Table 3 shows the results where both cross-section and period fixed effects have been used and Table 4 shows the result where only cross-section fixed effect has been used. In Equation (1), in both tables, SW has a positive coefficient and is significant (at 10% in Table 3 and at 5% in Table 4). This result is in line with many other studies, finding the positive impact of the SW index on economic growth. See, for example, Sachs and Warner [18], Wacziarg and Welch [19] and Clemens and Williamson [20, 21] among others. In Equation (2), in both tables, the interactive term between SW and log of export credit is positive and significant at 5%. This is an important result showing that export credit will have a positive impact on economic growth if the economy is open to trade. It is plausible to assume that the positive impact of export credit on the recipient country’s economy, as shown in Tables 3 and 4, is via increased import. To test this assumption, I first regressed the log of import per capita on log of export credit per capita, keeping the same control variables. The results, shown in Table 5, indicate a significant (at 5%) and positive coefficient for the log of export credit per capita with a very strong R2 of 0.96. The correlation between the two is a strong 0.73 (see also Figure 3 below). Next, I regressed the growth rate of GDP per capita on log of import per capita, again keeping the same control variables. Results are shown in Table 6. As can be seen the coefficient for the log of import per capita is positive and significant at 10%. Based on these results, it would be reasonable to conclude that the positive impact of the interaction between trade openness, as measured by SW index, and export credit on economic growth is due to increased import.

Equation (1) Equation (2)
C 26.31 (0.02) 35.67 (0.00)
Log(IGDPPC) -4.40 (0.00) -4.86 (0.00)
Log(SCH) 0.16 (0.84) 0.81 (0.35)
Log(TEL) 0.46 (0.65) 0.18 (0.86)
SW 1.23 (0.07) -9.90 (0.71)
Log(EXCPC) 0.60 (0.54) -0.24 (0.83)
SW 3 Log(EXCPC) - 1.81 (0.04)
R2 0.71 0.72
Number of countries 58 58
Number of observations 141 141

Table 3: Interactive effects of SW and export credits on per capita GDP growth; panel data (1970–1999).

Equation (1) Equation (2)
C 24.6 (0.00) 28.97 (0.00)
Log(IGDPPC) -3.54 (0.01) -3.85 (0.00)
Log(SCH) 0.32 (0.69) 1.12 (0.19)
Log(TEL) 1.16 (0.24) 0.79 (0.42)
SW 1.79 (0.00) -9.70 (0.70)
Log(EXCPC) -0.19 (0.77) -0.62 (0.36)
SW 3 Log(EXCPC) - 1.22 (0.03)
R2 0.69 0.70
Number of countries 58 58
Number of observations 141 141

Table 4: Interactive effects of SW and export credits on per capita GDP growth; panel data (1970–2009).

C 26.14 (0.00)
Log(IGDPPC) 0.97 (0.00)
Log(SCH) 20.32 (0.09)
Log(TEL) 20.07 (0.72)
Log(EXCPC) 0.64 (0.00)
R2 0.96
Number of countries 48
Number of observations 116

Table 5: Regression of log of import per capita on log of export per  capita.

C 34.91 (0.00)
Log(IGDPPC) 25.60 (0.00)
Log(SCH) 0.28 (0.77)
Log(TEL) 0.49 (0.65)
Log(IMPC) 1.14 (0.07)
R2 0.72
Number of countries 49
Number of observations 119

Table 6: Regression growth rate of GDP per capita on log of import per capita.

Conclusion

The results obtained above provide no evidence that export credits cause tariffs to affect economic growth differently in developing countries. However, when it comes to trade openness, the picture changes. Export credits do have a positive and significant impact on economic growth when they are interacted with the SW index. As was discussed above, this positive impact is most likely due to the positive impact of increased import by the recipient countries on their economic growth. This has important policy implications both for the recipients of export credits as well as those countries that grant them. Both trading partners will benefit from extension of these credits. Recipient countries benefit through the positive impact of increased import on their economic growth and the granting countries benefit as more exports increase their total real GDP.

Competing Interests

None declared.

Acknowledgement

I would like convey my special thanks to Dr. Kevin Sylwetsr for his helpful comments and insights. My thanks also goes to Dr. Richard Grabowski, Dr. Subhash Sharma and Dr. Scott Gilbert. Any and all errors in this paper are mine only.

1For a list of recipient countries, see Appendix A.

2For a list of these countries, see Appendix B.

3Due to data limitation and for the 1970–1979 sub-period, the year 1975 was taken as the first year for this variable.

4Due to data availability for SW index, the countries for which this index was used are different from the ones for which import tariffs were used. For a list of these countries, see Appendix C.

References

  1. Demirguc-Kunt A, Erzan R, 1991. The role of officially supported export credits in “African external finance in 1990s”. In: Husain I, Underwood J (Eds.). The World Bank, Policy Research Working Paper Series: 603.
  2. Orellana M, 2003. Export credit agencies and the World Trade Organization. The Center for International Environmental Law. [Draft issue brief], http://www.ciel.org/Publications/pubtae.html
  3. Egger P, Url T, 2006. Public export credit guarantees and foreign trade structure: evidence from Austria. World Economy, 29(4): 399–418.
  4. Rienstra-Munnicha P, Turvey C, 2002. The relationship between exports, credit risks and credit guarantees. Canadian Journal of Agricultural Economics, 50: 281–296.
  5. Chen JH, 1998. The effects of international competition of fiscal incentives on foreign direct investment. Economia Internazionale, 51(4): 497–516.
  6. Kohlscheen E, O’Connell S, 2006. A sovereign debt model with trade credit and reserves. University of Warwick, Department of Economics, The Warwick Economic Research Paper Series (TWERPS): 58.
  7. Mankiw NG, Romer D, Weil DN, 1992. A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107(2): 407–437.
  8. Barro RJ, 1997. Determinants of economic growth: a cross-country empirical study. Lionel Robbins Lectures. Cambridge and London: MIT Press, xii, 145.
  9. The OECD arrangement on officially supported export credits, 2004. 12. webdomino1.oecd.org/olis/2004doc.nsf/Linkto/td-pg
  10. Rogers K, 2003. Knowledge, technological catch-up and economic growth. Cheltenham, UK and Northampton Mass.: Elgar, x, 172.
  11. François J, Manchin M, 2007. Institutions, infrastructure, and trade. The World Bank, Policy Research Working Paper Series: 4152.
  12. World Bank Atlas, 2002. Washington, DC. p. 52. http://www.scribd.com/doc/16060157/World-Bank-Atlas-2002-
  13. Yanikkaya H, 2003. Trade openness and economic growth: a cross-country empirical investigation. Journal of Development Economics, 72: 57–89.
  14. Butkiewicz J, Yanikkaya H, 2005. The effects of IMF and World Bank lending on long-run economic growth: an empirical analysis. World Development, 33(3): 371–391.
  15. Wacziarg R, Welch KH, 2003. Trade liberalization and growth: new evidence. National Bureau of Economic Research, Inc., NBER Working Paper Series: 10152.
  16. Nunn N, Trefler D, 2010. The structure of tariffs and long-term growth. American Economic Journal, 2(4): 158–194.
  17. Shun-Fa L, 2011. Tariff, growth and welfare. Review of International Economics, 19(2): 260–276.
  18. Sachs JD, Warner A, 1995. Economic reform and the process of global integration. Brookings Papers on Economic Activity, 1, 1–118.
  19. Wacziarg R, Welch KH, 2008. Trade liberalization and growth: new evidence. World Bank Economic Review, 22(2): 187–231.
  20. Clemens MA, Williamson JG, 2001. A tariff-growth paradox? protection’s impact the world around. National Bureau of Economic Research Working Paper Series: 8549.
  21. Clemens MA, Williamson JG, 2002. Why did the tariff-growth correlation reverse after 1950? National Bureau of Economic Research Working Papers Series: 9181.

Appendix A: Recipients of export credits.

Albania Gambia, The Panama
Algeria Georgia Papua New Guinea
Angola Ghana Paraguay
Argentina Grenada Peru
Armenia Guatemala Philippines
Azerbaijan Guinea Poland
Bangladesh Guinea-Bissau Romania
Barbados Guyana Russian Federation
Belarus Haiti Rwanda
Belize Honduras Samoa
Benin Hungary Sao Tome and Principe
Bhutan India Senegal
Bolivia Indonesia Serbia  and Montenegro
Bosnia and Herzegovina Iran, Islamic Republic Seychelles
Botswana Jamaica Sierra Leone
Brazil Jordan Slovak Republic
Bulgaria Kazakhstan Solomon Islands
Burkina Faso Kenya Somalia
Burundi Kyrgyz Republic South Africa
Cambodia Lao PDR Sri Lanka
Cameroon Latvia St. Kitts and Nevis
Cape Verde Lebanon St. Lucia
Central African Republic Lesotho St. Vincent and the Grenadines
Chad Liberia Sudan
Chile Lithuania Swaziland
China Macedonia, FYR Syrian Arab Republic
Colombia Madagascar Tajikistan
Comoros Malawi Tanzania
Congo, Democratic Republic Malaysia Thailand
Congo, Republic Maldives Togo
Costa Rica Mali Tonga
Cote d’Ivoire Mauritania Trinidad and Tobago
Croatia Mauritius Tunisia
Djibouti Mexico Turkey
Dominica Moldova Uganda
Dominican Republic Mongolia Ukraine
Ecuador Morocco Uruguay
Egypt, Arab Republic Mozambique Uzbekistan
El Salvador Myanmar Vanuatu
Equatorial Guinea Nepal Venezuela, RB
Eritrea Nicaragua Vietnam
Estonia Niger Yemen, Republic
Ethiopia Nigeria Zambia
Fiji Oman Zimbabwe
Gabon Pakistan

Appendix B: Non-OECD countries for which import tariffs were used.

Argentina Fiji Peru
Bangladesh Gabon Philippines
Barbados Gambia, The Rwanda
Belize Grenada Samoa
Benin Guatemala Sao Tome and Principe
Bhutan Guinea Senegal
Bolivia Guinea-Bissau Seychelles
Botswana Guyana Sierra Leone
Brazil Haiti Solomon Islands
Burkina Faso Honduras Somalia
Burundi India South Africa
Cameroon Indonesia Sri Lanka
Cape Verde Kenya St. Kitts and Nevis
Central African Republic Lebanon St. Lucia
Chad Lesotho St. Vincent and the Grenadines
Chile Liberia Sudan
Colombia Madagascar Swaziland
Comoros Malawi Syrian Arab Republic
Congo, Republic Malaysia Tanzania
Costa Rica Mauritania Thailand
Cote d’Ivoire Mauritius Togo
Djibouti Mexico Tonga
Dominica Morocco Trinidad and Tobago
Dominican Republic Mozambique Tunisia
Ecuador Nepal Turkey
Egypt, Arab Republic Niger Uganda
El Salvador Pakistan Uruguay
Equatorial Guinea Panama Vanuatu
Eritrea Papua New Guinea Zambia
Ethiopia Paraguay Zimbabwe

Appendix C: Non-OECD countries for which SW index was used.

Argentina Ethiopia Pakistan
Bangladesh Gambia, The Papua New Guinea
Barbados Guatemala Paraguay
Benin Guinea Peru
Bolivia Guinea-Bissau Philippines
Botswana Guyana Sierra Leone
Brazil Haiti South Africa
Burkina Faso Honduras Sri Lanka
Burundi India Syrian Arab Republic
Cameroon Indonesia Thailand
Central African Republic Kenya Togo
Chad Madagascar Trinidad and Tobago
Chile Malawi Tunisia
Colombia Malaysia Turkey
Congo, Republic Mauritania Uganda
Costa Rica Mauritius Uruguay
Dominican Republic Mexico Zambia
Ecuador Morocco Zimbabwe
Egypt, Arab Republic Nepal
El Salvador Niger

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