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 Order N um ber 8917234

O utw ard-lookin g versus inw ard-looking in d u strialization

strategies: T he effect on G N P grow th in develop in g countries
over tim e

Hatcher, Thomas Michael, Ph.D.

Fordham University, 1989

Copyright © 1989 by H atcher, Thom as Michael. A ll rights reserved.

UMI
300 N. Zeeb Rd.
Ann Arbor, MI 48106
 OUTWARD-LOOKING VERSUS INWARD-LOOKING
INDUSTRIALIZATION STRATEGIES:
THE EFFECT ON GNP GROWTH IN
DEVELOPING COUNTRIES OVER TIME

BY

Thomas M.Hatcher
B.A., Iona College, June 1981
M.A., Fordham University, May 1984

DISSERTATION
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN THE DEPARTMENT
OF ECONOMICS AT FORDHAM UNIVERSITY

NEW YORK
1989
To My Parents
 11
TABLE of CONTENTS

Preface Page iii - v

Chapter One : Introduction Page 1 - 4

Chapter Two : Literature Review Page 5 - 7 3

2.1 O v e rv ie w.............................. Page 5 - 7

2.2 Inward-Looking Development.......... Page 7 - 1 2
2.3 Outward-Looking Development......... Page 12 - 35
2.4 Savings, Investment and
Technology Transfer................. Page 35 - 46
2.5 Exports and Economic G r ow th Page 47 - 67
2.6 Extensions Of This P r oj e ct Page 67 - 73

Chapter Three : The Model, Data,and Estimation

Techniques Page 74 - 83

3.1 The M o d e l Page 74 - 79

3.2 Data Utili ze d Page 79 - 80
3.3 Estimation Techniques Page 80 - 83

Chapter Four : Empirical Results Page 84 - 127

4.1 O v e rv ie w Page 84 - 90
4.2 Evaluation of Vari a bl es Page 90 - 122
4.3 Evaluation of Model's Performance..Page 122 -127

Chapter Five : Summary and Conclusions with

Policy Implications Page 128 - 133

5.1 Summary & Conclusions............... Page 128 - 132

5.3 Policy Implications................. Page 132 - 133

Bibliography................................... Page 134 - 145

A pp en di ce s......................................Page 146 - 153

Abstract

Vita
 Ill

PREFACE

There has been a renewed interest in the field of

development economics over the past decade. Many questions

have been raised regarding the industrialization strategies

adopted by developing countries in the 1960s and early

1970s and in their ability to foster continued economic

growth.

Following a period of extensive theoretical

advancement, it was the opinion of many economists that

inward-looking industrialization strategies held the most

promise of growth and progress for developing nations. As a

result, inward-looking or import-substitution policies were

adopted by many developing countries. Many of these

countries have continued along their inward-looking paths to

the present while others have changed over to a pro trade,

or outward-looking strategy.

By the end of the 1960s there arose a variety of

questions and problems associated with inward-looking

strategies. Administration of the multitudes of

regulations, misallocation of resources, disincentives,

inefficiencies and corruption all posed real threats to

the success of this industrialization strategy. However,

 iv

inward-looking strategies continued to be followed by many

of the worlds developing countries.

Several countries successfully changed their

industrialization strategy from an inward-looking to an

outward-looking orientation. These nations experienced

higher growth rates than those remaining relatively closed

or inward-oriented. Despite the oil shocks of the 1970s,

the downward trend in the growth rates of international

trade and growing protectionist sentiments, outward-oriented

nations continued to grow at a rate unmatched by inward-

oriented economies {Balassa 1985) .

Although there are many problems associated with the

ability to change a nation's market orientation, it has been

accomplished by several countries which have continued to

demonstrate qualities superior to their inward-looking

counterparts despite the downward trend in world trade and

adverse economic conditions. The focus of the following

study is restricted to the evaluation of the relationship

between industrialization policy orientation and economic

growth.

The first chapter serves as an introduction that

provides one with an overview of the scope of this

research project. In chapter two, a review of the relevant

literature is presented and evaluated in order to determine

the currently accepted attitudes and theories concerning

the relationship between trade / industrialization policy

and the factors responsible for growth in developing

countries. Chapter three describes the model and data used

in this study as well as the estimation techniques utilized.

The empirical results obtained are presented and analyzed in

chapter four. The summary and conclusions with policy

implications are contained in the fifth and final chapter.

Appendices listing supplemental statistics can be found

after the bibliography.

 1

CHAPTER ONE

INTRODUCTION

The role of international trade has long been the focus

of both industrialized and developing countries. Despite the

pronounced and accepted advantages which international trade

has to offer, especially to developing countries, many

nations have chosen to close their doors on international

markets. Although it is virtually impossible to withdraw

completely from world markets, many developing nations have

selected industrialization strategies which severely

restrict their involvement in international trade. Other

developing countries have taken the opposite approach and

have opted to open their economies to world markets, some to

a greater degree than o t h er s .

The scope of this dissertation is to examine a large

group of developing countries, both lesser-developed and

newly-industrialized, and to compare the growth rates of GNP

(or GDP} to the degree of openness of the economies over an

extended period of time. The theoretical hypothesis

purported is that a nation's "openness" determines it's rate

of growth: the more open the nation, the faster will be it's

rate of economic growth. The more outward-oriented a

nation's industrialization strategy, the faster will be it's

 2

rate of growth of GNP (or GDP).In addition, as countries

switch from inward-looking (closed) to outward-looking

(open) policies, they will experience higher rates of

growth.

In addition to providing evidence supporting the

superiority of outward-looking over inward-looking

development strategies, the links between trade /

industrialization strategies and macroeconomic performance

will be presented and evaluated. Does improved economic

performance enable nations to adopt outward-looking

strategies or does outward-orientation result in better

economic performance? Despite the growing evidence

supporting the superiority of outward-orientation, the links

between trade / industrialization strategies and economic

performance are not altogether clear. This dissertation

will evaluate the most important factors suggested by some

economists that might be responsible for the link between

outward-orientation (trade policy) and economic growth. It

will then go beyond the current body of literature by

exploring several key factors purportedly responsible for

this link and by developing an empirical model which will

enable us to better understand the nature and operations of

this link. Consequently, it will be shown how and why

outward-looking industrialization strategies result in

superior economic growth and performance.

 3

The nations included in this study are grouped into

four categories: strongly outward, moderately outward,

moderately inward, and strongly inward-oriented. The

analysis will compare the combined growth rates of the

countries within each of the four categories for two

different time periods, 1963-1973 to 1973-1985. In addition,

three countries that changed their orientation from inward

to outward-looking over the two sample periods will be

studied in order to evaluate the differences in the growth

rates for each nation. It will be shown that these countries

grew faster during the second period while exercising

outward-oriented policies than they did while under an

inward-oriented regime in the first period. The changes in

the rates of growth, as well as the average rates of growth,

for the various groups of nations between the two periods

will also be evaluated.

Higher rates of growth should be achieved during each

time period the more outward-looking the nation or group of

nations are. The changes in the rates of growth over each

and between the two sample periods will be evaluated in an

attempt to explain and measure the relative contribution of

the various factors affecting the rates of growth of

developing countries. It is also within the scope of this

paper to illustrate and measure the relationship between

exports (and the rate of growth of exports) and GNP (or

G D P ) . It is commonly known and accepted that a strong

correlation exists between export growth and GNP (or GDP)

growth. This study will attempt to explain and illustrate a

causal relationship between these two variables.

Moreover, it will be through the identification and

evaluation of the links between trade strategy and

macroeconomic performance that this study will improve upon

the existing body of knowledge pertaining to the beneficial

aspects of export-promotion and outward-looking development

strategies on economic development and performance.

 5

CHAPTER TWO

LITERATURE REVIEW

SECTION 2.1 OVERVIEW

Over the past twenty-five years, there has been a

considerable amount of research aimed at the determination

of an optimal strategy for industrial development. Although

the determinants of a country's rate of economic growth are

numerous, there exists two basic strategies for economic

development: inward-looking and outward-looking. The phrase

"inward-looking" is chosen to represent an economy that is

relatively closed and thus relies on the import-substitution

strategy of industrial development. The term "outward-

looking" is selected to signify a constant and persistent

attention to industrial and trade occurrances outside the

country. Such a policy stance inherently prohibits a

prolonged reliance on import biased or import-substitution

strategies and necessitates the adoption of open market or

export-oriented policies.

First, a brief review of the practices and results of

inward-looking development strategies will be presented and

evaluated. It will be shown that industrialization

strategies relying exclusively on the home market are

inefficient, sub-optimal and counter-productive. Secondly,

in contrast to the inward-looking strategy of import-

substitution, a comprehensive analysis of the experiences of

nations employing an outward-looking industrialization

strategy will be presented. Although the terms "export-led

growth" (or "export-promotion") and "outward-looking" are

not synonymous, it will be made quite clear that the

promotion of exports and the policies associated with

export-promotion are an integral part of an outward-looking

strategy. Thirdly, a review of the literature examining the

relationship between trade policy and savings, investment

and technology transfer will be presented and evaluated.

Finally, the role of exports and the relationship between

export growth and economic growth will be examined in

exhaustive detail.

It is important for the reader to understand that all

research to date indicates an important relationship between

development strategies and rates of growth. There is no

universally accepted method of measuring the effect of any

one factor on the rate of economic growth, mainly because

trade strategy is only one of many influences on the

effectiveness with which the factors of production are

employed. In addition, a nation at one point in time may

exhibit a mixture of export-promotion and import-

substitution policies. However, it will be shown that a

number of factors tend to reinforce initial biases in trade

regimes (Krueger 1983). Whether a nation is classified as

outward or inward-oriented is determined by the overall

incentive structure for exports and imports in the economy.

SECTION 2.2 INWARD-LOOKING DEVELOPMENT

An inward-looking development strategy relies on

domestic demand as its primary source of growth and

industrial development. This type of strategy does not look

toward world markets and in fact isolates the nation to a

great extent from world trade and the advantages offered

therein. This is accomplished through the use of trade

restrictions and incentives offered to domestic producers.

Under an inward-oriented regime, effective subsidies and

incentives favor domestic sales over foreign sales. In

addition, the country relies primarily on quantitative

measures as a means of regulating it's trade and payments.

In effect, the incentive structure implies that the

effective exchange rate for exports is less than the

effective exchange rate for imports (EERx < E E R m ) . This

constitutes a "bias against exports": it creates a net

incentive to import-substitute relative to what

international prices dictate (Bhagwati 1988). Such a policy

fosters the substitution of domestic production for imports

and discourages exports i.e., import-substitution.

The import-substitution approach can be divided into

two distinct stages. The underlying concept of import-

substitution is quite simple, and many outward-looking

 8

nations began the road to development utilizing an import-

substitution strategy. Most nations, however, changed their

market orientation to outward-looking soon after the first

stage of import-substitution was reached. It is not until a

country enters the second stage of import-substitution that

serious difficulties are encountered.

The first "easy" stage of import-substitution involves

the replacement of the importation of consumer nondurables,

and their inputs, with domestic production. This does not

usually result in substantial costs due to a number of

factors. First, the industries involved employ mostly

unskilled and semiskilled labor, both of which are abundant

in most developing nations. Also, most consumer nondurables

are manufactured with relatively standardized technologies

that are easily accessible to producers in developing

countries. These products also require few inputs from

ancillary industries. Another important aspect is that

producers are not severely handicapped by their limited

domestic market because the efficient scale of operations is

relatively low and the resulting costs are not substantially

higher in small plants (Balassa 1980). Lastly, protective

barriers are established in order to protect the investment

in and production of the targeted industries.

The second stage of import-substitution is referred to

as the "difficult” stage because it causes the nation to

incur significant costs and to sometimes face insurmountable

 9

p r o b l e m s .In the second stage, domestic production replaces

the importation of intermediate goods, as well as producer

and consumer durable goods. The problem encountered here is

that such goods are relatively capital intensive, require

many inputs from other industries, and have higher levels of

technological and skill requirements than consumer

nondurables. Also, economies of scale are extremely

important and unit costs are much higher at lower levels of

output (Balassa 1980) .

The principal policy instruments of import-substitution

are import tariffs, import quotas, and overvalued exchange

rates. The simplest way to replace imports with domestic

production in a market economy is to impose restrictions on

imports. In addition, overvalued exchange rates, production

subsidies and the resultant import bias (anti-export bias)

further reinforce the goals of an import-substitution

strategy of economic development. However, these policies

and factors that ensure the success of the first stage of

import-substitution are directly responsible for the failure

of the second stage's ability to bring about further growth

and d ev el o pm en t.

According to H. J. Bruton (1970), there are five

categories of characteristics inherent in the import-

substitution approach which appear to be particularly

detrimental. The emergence of a structure of production in

which it is impossible to utilize all available capacity

 10

without large scale capital inflows; the resultant

development of specific shortages which serve to hinder the

rate of growth and development; distortions imposed on the

economy as a result of tariffs and indirect taxes; declining

rates of productivity growth and terms of trade; and

incompatible, inflexible policies that render adjustments to

changes in demand and technology extremely difficult and

costly.

All the above characteristics do not wholly apply to

each and every country. Nevertheless, the issues cited

accurately reveal the nature of the consequences of an

import-substitution development strategy. Bruton concludes

this thought by stating that it is quite evident how and why

these consequences can create a situation in which income

growth and productivity growth decline and continued

development becomes virtually impossible.

In a 1983 study, Anne Krueger cites a chain of events

which is commonplace among countries adopting import-

substitution policies. Decreased foreign exchange earnings

and increased growth in demand for imports of goods and

services were reflected in periodic balance of payments

crises. These crises were associated with extremely

restrictive import licensing intervals that generally

resulted in slower growth rates, and in some cases, a

reduction in output. Once the easy stage of import-

substitution came to an end, the incremental capital-output

 11

ratio increased rapidly and the growth rate declined for the

economy's leading growth sector. In addition, the complex

structure of policy instruments contributed to decreased

rates of growth (Krueger 1983A).

There has been a considerable amount of research aimed

at the estimation and determination of potential growth

rates under alternative trade strategies. One of the most

comprehensive studies was conducted by the National Bureau

of Economic Research in 1978. In Krueger's volume on Turkey,

the conclusion was that it's trade regime and the associated

import-substitution strategies imposed considerable costs in

terms of potential growth of output and income. Also, the

1987 World Development Report indicates that countries

changing their orientation from inward-looking to outward-

looking experienced higher rates of growth. Current research

pertaining to the relationship between the level of exports

(and the rate of growth of exports) and GNP (or GDP) will be

covered thoroughly in section 2.5 of this literature

review.

At this point it is sufficient to state that the

evidence appears indisputable: open market and export-

promotion industrialization strategies foster higher rates

of growth than import-substitution policies (Keesing 1967;

Balassa 1983A and 1988; Salvatore 1983, Krueger 1983B; M.

Singer 1984; Corbo, Krueger, Ossa 1985; Kavoussi 1985; Lai

and Rajapatirana 1987; WDR 1987; Ram 1987; Bhagwati 1988) .

In virtually all instances, the multitude of problems

associated with import-substitution strategies are both

inherent and unavoidable. Foreign exchange constraints and

market distortions foster inefficiencies and sub-optimal

rates of growth (the efficiency of savings and investment,

as well as technological diffusion, for both inward and

outward-oriented nations will be addressed in section 2.4).

In the extreme, inward-looking strategies are restrictive to

the point of being counter-productive. It is only after a

country changes orientation from inward- to outward-looking

that it can experience sustained growth and development.

SECTION 2.3 OUTWARD-LOOKING DEVELOPMENT

An outward-looking development strategy is one that

relies on both foreign and domestic demand as its source of

growth and industrial development. An outward-looking policy

stance looks toward world markets in order to reap the

benefits offered by world trade and international resource

flows. Rather than simply focusing on the domestic market,

outward-looking development seeks to export manufactured

goods at an early stage of the industrialization process.

It is important to understand that an outward-looking

development strategy does not prohibit the use of import-

substitution. In fact, the process of import-substitution

occurs in both inward and outward-oriented economies. The

"fundamental" orientation of a country's industrialization

 13

policies determines whether it is outward or inward-looking

(Keesing 1967). As discussed earlier, inward-oriented

countries rely almost exclusively on domestic demand and

thus deliberately encourage import-substitution. These

economies pursue import-substitution strategies throughout

their industrialization process, even after the easy stage

of import-substitution has been exhausted. Outward-oriented

economies may initially adopt import-substitution policies

but do so with the intention of merely building up their

country's industrial base at the earliest stage of the

development process. Exportation of goods are encouraged as

soon as domestic manufacturers are able to produce certain

standardized products in a relatively efficient manner.

Maybe the most important distinction here is that outward-

looking development strives to remain in touch, absord the

latest technology, catch up and become competitive with the

industrialized nations of the world. In addition, the

developing country's government may subsidize activities

which serve these ends (Keesing 1967).

Initially, an outward-looking strategy necessitates the

promotion of exportable goods regardless of the domestic

market's ability to absorb industrial output. Government

intervention ensuring the growth and development of export

industries is essential. An incentive structure reflecting a

pro-export bias is crucial. Lowered exchange rates, export

subsidies, tax credits and the like are several examples of

 14

how outward-looking strategies encourage and ensure the

growth of exports. It is through the growth of exports that

outward-looking nations are able to open their economies,

enter world markets, and to obtain the benefits offered by

world trade and international resource flows.

The terms "outward-looking" and "export-promotion" are

not synonymous. Export-promotion strategies rely on the

exportation of goods as either a means of obtaining foreign

exchange for the importation of goods essential to

development or as an engine of growth. Export-promotion

fosters the exportation of either natural resource intensive

goods or labor intensive goods, depending on the nation's

abundance of resources. These, in turn, are to be replaced

with the exportation of goods requiring higher and higher

levels of both physical and human capital. The primary

objective is to increase the volume of export sales and thus

increase both the nation's holdings of foreign exchange and

its ability to import.

An outward-oriented strategy employs many of the tools

utilized under an export-promotion regime. Tax credits,

favorable exchange rates, reduced price and interest rate

controls, and export subsidies all work toward the promotion

and development of a nation's exports. However, outward-

orientation promotes the exportation of goods primarily for

the sake of obtaining the indirect benefits associated with

international trade. Utilization of technological

 15

opportunities from abroad, comparative advantage, capacity

utilization, and improved human capital are several examples

of the "indirect" gains from trade which are emphasized and

sought under an outward-looking strategy. The direct gains

in foreign exchange and income may remain relatively low

until the country's level of industrialization becomes

relatively far advanced. However, the indirect benefits and

gains from trade are deemed most important and do not merely

depend on the volume of export sales. An outward-looking

strategy emphasizes the direction and quality rather than

the absolute magnitude of industrial development (Keesing

1967).

The following section provides a concise review of the

practices, consequences, and implications of export-led

growth strategies. The terms "export-led", "export-

promotion", and "export-oriented" are synonymous and will be

used interchangeably. It will be shown that despite the fact

that export-oriented policies are an important part of an

outward-looking development strategy, they produce biases

and distortions which are absent from and detrimental to an

outward-looking strategy.

An export-led policy, as opposed to an open market

policy, suggests a policy bias toward the promotion of

exports at the expense of other sectors of the nation's

economy. With an export-promotion policy, in it's truest

sense, the nation's incentive structure implies that the

 16

effective exchange rate for exports is higher than the

effective exchange rate for imports (EERx > E E R m ) .

Government plays a crucial role both in setting goals for

the production of exports and in implementing policies to

achieve those goals. These policies favor the production of

exports and ensure the profitability of such production.

Interest rate controls, investment credits, undervalued

exchange rates, direct subsidies and the like are utilized

in an effort to make the structure of production comply with

the strategy of export-promotion.

The arguments in favor of an export-led strategy have

been cited earlier. Basically, such a policy fosters rapid

rates of economic growth owing to a variety of factors:

economies of scale, capacity utilization, improved capital

flows, etc. These factors suggest that export-led growth

results in both increased productivity gains in the export

sector and positive externalities in the nonexport sector.

Research indicates that there are substantial differences in

marginal factor productivities between the export and

nonexport sectors. In addition there are significant gains

to be made in both sectors due to externality effects (Feder

1982). With respect to the nonexport sector, externalities

are evident when increasing output in the export sector

leads to an increase in output of nonexport sectors when the

resource commitment in the nonexport sectors remain

unchanged. Also, economic growth can be generated by the

 17

reallocation of existing resources from the less efficient

industries (nonexport sector) to the higher productivity

export industries.

The superiority of export-promotion over import-

substitution policies is supported by both indepth studies

of individual countries and cross-country studies (Tyler

1981; Feder 1982; Salvatore 1983; Krueger 1983B; Balassa

1983B and 1988; Kavoussi 1985; Lai and Rajapatirana 1987;

WDR 1987; Ram 1987; Bhagwati 1988). These studies show that

developing nations with favorable export growth have

experienced higher rates of growth of national income than

nations employing an inward-looking strategy. Exports are,

of course, a component of aggregate output and thus one

would expect a positive correlation between export growth

and increased national income or GNP. However, a number of

studies have found that exports contribute proportionately

more to GNP growth than simply the amount of increase in

exports. This topic will be addressed in the final sections

of this chapter when the relationship between export growth

(and outward-orientation) and GNP growth will be examined in

great detail.

Two examples cited most often with respect to the

superiority of export-led growth are South Korea and Brazil.

Both of these countries aggressively pursued export-

promotion development strategies. In the early 1960s, South

Korea switched from import-substitution policies to export-

 18

promotion policies. As a result, export volume in South

Korea grew fourfold between 1963 and 1969, nearly tenfold

during the 1970s, and almost doubled between 1981 and 1986.

Brazil made a similiar switch in 1968 and experienced an

increase in the volume of exports that tripled between 1968

and 1974, and nearly doubled between 1975 and 1980

(excluding c o f fe e ).

These two countries altered their economic systems in

order to provide a bias toward exports. The subsequent

growth far exceeded all expectations. Korea's average annual

real GNP grew by 11 percent between 1963 and 1969, 10

percent between 197 0 and 197 9, and 7.5 percent between 1981

and 1985. Brazil's average annual real GNP growth rate was

10 percent between 1968 and 197 4 and 6.5 percent between

1975 and 1980. An important NBER project suggests that for

both countries, the economic performance up until the late

1970s improved by considerably more than the direct

contribution of the increase in exports (Krueger 1978).

In addition to the volumes of the 1978 NBER study

devoted to individual case studies, several broad empirical

studies investigating the relationship between the growth of

exports and the growth of GNP across developing countries

over time have supported the hypothesis that those

developing countries with higher than average export growth

rates over extended periods have also experienced higher

 19

than average rates of growth of output and income (Tyler

1981; Feder 1982; Kavoussi 1984 and 1985; Ram 1987).

Another noteworthy example of the superiority of

export-led growth is the case of Turkey. Throughout the

1960s and 1970s, Turkey experienced modest rates of growth

while employing an import-substitution strategy. However, if

Turkey's growth strategy had been less import-substitution

oriented, it could have achieved higher rates of growth. The

question of potential growth under an alternative , export-

led development strategy is an important one. Krueger (1978)

concluded that although Turkey's growth was satisfactory up

until the mid-1970s, it could have been substantially

improved if some of the excess costs of import-substitution

were avoided in the future and it's export potential fully

realized.

During the period 1950-1970, Turkey's growth rate was

well above the average for all LDCs. Turkey experienced an

average annual growth rate of 5.7 percent. However, Turkey's

per capita income in 1970 was the lowest in all of Europe.

Krueger estimated that the losses in the manufacturing

sector incurred in the 1960s by overemphasis on import-

substitution were substantial. In addition, she showed that

alternative trade strategies could have resulted in

significant increases in the the rate of growth of

manufacturing output, value added, reduced import

requirements, reduced incremental capital-output ratios, and

 20

increased employment opportunities for the same level of

investment (Krueger 1978). In fact, Turkey's orientation

changed in 1980 from an inward-looking to an outward-looking

strategy that stressed the need for a viable export sector.

The results of the Turkish experience provides convincing

evidence in support of the claim that a change from an

inward-looking strategy of import-substitution to an

outward-looking orientation that recognizes the importance

of a competitive export sector results in increased

efficiency, growth, and development. Although it might be

easy for one to disagree with published "estimates" of the

inefficiencies and costs of an import-substitution strategy,

it is hard to discount or challenge the statistics compiled

on the real world occurrences of the Turkish Republic since

1980 (Balassa 1983B). In fact, statistics available several

years after his 1983 study showed that between 1980-1983,

Turkey's exports doubled and GDP increased by 14 percent.

Before evaluating the experiences and economic effects

of countries employing alternative development strategies,

the distinction between outward-looking and export-led (or

export-oriented) development should be further clarified and

emphasized.

Export-led growth, as mentioned earlier, places heavy

reliance on exports as a means of obtaining foreign exchange

or as an engine of growth. The direct gains in income and

foreign exchange are highly dependent on the volume of

 21

export sales. The growth of the export sector is encouraged

even to the point where it places costs on the nonexport

sector of the economy. The government ensures the

proliferation and profitability of exports through the use

of export subsidies, tax credits, undervalued exchange rates

(devaluations), and the like. The result is a strong bias

against imports and an even greater bias toward the

economy's export sector. In general, there exists a

substantial positive bias favoring exports: EERx > EERm.

An outward-looking development strategy looks toward

world markets and realizes the importance of international

trade. It encourages the exportation of goods and the

development of the economy's export sector. An outward-

oriented strategy realizes the existence of both direct and

indirect gains from specialization and trade to a much

greater degree than simple export-led strategies. The growth

and development of a nation's export sector is fostered, but

not at the expense of the nonexport sector.

In outward-oriented economies, there is a smaller bias in

favor of exports and policies tend to be more neutral i.e.,

EERx is roughly the same as EERm.

The distinction between export-promotion and

outward-looking or outward-orientation is an important one.

A nation employing a strategy of export-promotion, such as

South Korea in the period 1963-1975, clearly discouraged the

importation of goods and encouraged the growth of exports.

 22

This was achieved through the use of exchange rate changes,

export subsidies, investment credits, and other import-

biased policies. Indeed an integral part of an effective

export-promotion strategy is the reduction of imports.

An inward-looking strategy is one in which incentives

are biased in favor of production for the domestic market.

It has previously been stated that this strategy is referred

to as the import-substitution approach to industrial

development. Although the terms "inward-looking" and

"import-substitution" are interchangeable, it must be clear

that the terms "outward-looking" and "export-promotion" are

not.

As the World Development Report (1987) so aptly puts

it, an outward-looking strategy is one in which trade and

industrial policies do not discriminate between production

for the domestic market and exports, nor between the

purchase of domestic goods and foreign goods. Because this

strategy does not discourage international trade, its

nondiscriminatory orientation is (unfortunately) often

referred to as an export-promotion strategy.

One last note regarding semantics. A vast majority of

the research conducted in the 1960s and most of the 1970s

divided trade strategies into two groups, import-

substitution and export-promotion. It was not until the late

1970s (with the exception of Keesing's work) that the

concept of outward or inward-oriented surfaced in the

 23

literature. Consequently, when evaluating the experiences

and economic effects of countries employing alternative

development strategies, the following must be kept in mind.

Nation's employing an export-led or export-promotion

strategy will at times be referred to as outward-looking

with the understanding that the reader keep in mind the

aforementioned differences. The significance of the

distinctions will be made clear in the empirical section of

this paper. At that time it will be necessary to define and

classify a nation's trade strategy in order to determine

it's market orientation.

The following section provides an evaluation of the

experiences and economic effects of countries employing

different industrialization strategies. Virtually all

developing countries began with an inward-oriented strategy.

Some nations changed their market orientation to outward-

looking after the first stage of import-substitution had

been completed and others did so after already having moved

into the second stage. Other nations remained inward-looking

and continued to discourage exports and to employ import-

substitution strategies.

It was pointed out earlier that nations following an

import-substitution strategy utilized various policies that

encouraged production for domestic markets and discouraged

exports. When the first "easy" stage is exhausted, the

second "difficult" stage begins. The second stage usually

 24

involves overvaluation of domestic currency, higher rates of

industrial protection, stronger anti-export biases, as well

as credit rationing and preferences. These policies distort

market incentives and further restrict the operation of

market forces in the economy (Balassa 1 9 8 3 B ) . After having

initially favored industrial growth, the previously cited

characteristics of the second stage have adversely affected

both economic growth and the development of manufactured

exports.

The reduction in exports was aggravated by the decline

in net import savings resulting from the increased demand

for imported materials and machinery at the second stage of

import-substitution. Consequently, economic growth was

increasingly constrained by the limited availability of

foreign exchange. In addition, the savings constraint became

crucial as the high cost, capital intensive production

raised capital-output ratios at the same time that negative

real interest rates reduced the volume of savings available.

Also, credit preferences established to favor domestic

production fostered increased inefficiencies in the

allocation of capital (Balassa 1 9 8 3B ).

The pursuit of an inward-looking strategy beyond the

first stage eventually resulted in decreased rates of

economic growth for those nations that had chosen this

strategy. As a result, policy reforms were undertaken by

several countries. These reforms basically involved

 25

establishing realistic exchange rates, reductions in the

bias against exports, reducing the level of industrial

protection, increases in real interest rates, liberalization

of prices, and decreased credit preferences (Krueger 1978).

Reforms were initiated in Argentina, Brazil, and Colombia in

the mid-1960s; Mexico 1970; Chile and Uruguay in the mid-

1970s; and in Turkey in 1980. These reforms worked to reduce

distortions in market incentives and to provide increased

importance and influence of market forces (Balassa 1983B).

Similiar policies were undertaken by countries that

changed to an outward-orientation once the first stage of

import-substitution had been completed. These nations

include Portugal, Greece, and Spain in the mid-1950s; and

Singapore, Taiwan, and South Korea in the early 1960s.

Countries that had entered the second stage of import-

substitution prior to changing their orientation did not

treat export industries the same as nations that switched

immediately after the first stage had been exhausted. The

former group required that exporters use domestic inputs in

order to protect their domestic industries and compensated

exporters for the resultant increased costs through the use

of explicit export subsidies. Exporters in the latter group

were free to choose between imported and domestic inputs. As

a result, there continued to be a bias against exports and

in favor of import-substitution in the former group. In

addition, due to varying shares of value added and

 26

protection of inputs among export industries within the

countries, there was considerable variation in the ratio of

export subsidies to value added in the nations belonging to

the former group (Krueger 1978; Balassa 1 98 3 B ) .

It is also important to mention the fact that South

Korea, Taiwan, and Singapore made a greater effort to ensure

realistic, stable exchange rates and to establish positive

real interest rates than did the nations which had

previously entered the second stage of import-substitution.

As a result of these measures, these three countries ensured

to a greater degree the operation and influence of market

forces (Balassa 1 98 3 B ) .

In an attempt to compare the relative success of

alternative development strategies, it is useful to compare

growth rates and policy responses of developing countries

for the periods preceeding and following the external shocks

caused by the rapid increase in oil prices in the mid and

late-1970s. It was determined that nations applying an

outward-looking strategy fared better in terms of exports

and economic growth. In addition, policy reforms aimed at

greater outward-orientation resulted in improved economic

performance for countries that had earlier been inward-

looking. Countries that remained inward-oriented during the

entire time period experienced substantially lower rates of

economic growth (Balassa 1984).

 27

During the period 1960-1973, the three Far Eastern

countries experienced the most rapid increases in

manufactured exports. Consequently, the share of exports in

manufactured output rose sharply: from 1 percent in 1960 to

42 percent in 1973 in South Korea, from 11 percent to 43

percent in Singapore, and from 9 percent to 50 percent in

Taiwan. These nations had the highest growth rates of

exports among countries of comparable levels of development

{Balassa 1 9 8 3B ).

As a result of poor economic performance in the first

half of the 1960s, the four Latin American countries changed

their market orientation. In the mid-1960s, Brazil,

Argentina, Colombia, and Mexico reformed their incentive

systems and experienced an increased growth of manufactured

exports. As a result, their shares of exports in

manufactured output rose slightly between 1960 and 1974.

Although their shares were much lower than those of the Far

Eastern countries, they continued to increase their

production of nontraditional exports and to reap the

benefits associated therein.

Those nations that continued to pursue inward-looking

strategies during the same period did poorly in both primary

and manufactured exports. Chile and Uruguay showed a

combined decrease in the share of exports in manufactured

output between 1960 and 1973. During this period, Chile's

 28

share fell from 4 to 1 percent and Uruguay's did not even

reach 1 p e r c e n t .

For the period 1960-1973, Balassa (1983B) estimated

that incremental capital-output ratios were 2.4 in Taiwan,

1.8 in Singapore, and 2.1 in South Korea. For those nations

that remained inward-looking, these ratios were 9.1 in

Uruguay, 5.5 in Chile, and 5.7 in India. For the Latin

American group that had changed orientation, these ratios

declined following their respective reforms.

Outward-looking countries also experienced higher

domestic savings rates {Balassa 1983B and 1984). Lower

capital-output ratios and higher savings ratios tends to

ease the savings constraint experienced by developing

countries. Export expansion also tends to ease their foreign

exchange constraints, which permits the increase in imports

of intermediate and capital goods required to foster further

industrial development.

The aforementioned factors resulted in a positive

correlation between exports and economic growth for the

1960-1973 period {Balassa 1983B and 1984) . Singapore,

Taiwan, and South Korea experienced the highest rates of

growth of GNP. Argentina, Colombia, Brazil, and Mexico

experienced considerable improvements in GNP growth

following their change in orientation. Uruguay, India, and

Chile experienced the smallest gains in GNP and output.

 29

In a study of 28 developing countries, Balassa (1984)

compared the policy responses and economic performances of

outward-oriented and inward-oriented economies in the

periods 1974-1976 and 1979-1981 in response to the external

shocks caused by increased petroleum prices worldwide. In

both periods, he found that the terms of trade losses were

much greater in outward-oriented economies. Athough the

unbalanced trade effects (terms of trade effects estimated

indicating the impact of the rise of import prices on the

deficit or surplus in the balance of trade) were of similiar

magnitude for the two groups of nations, the differences in

pure terms of trade effects (terms of trade effects

calculated on the assumption that the balance of trade

expressed in base year prices was in equilibrium) were quite

noticeable. The explanation provided for the differences in

his results is the larger share of foreign trade in GNP

under outward-looking regimes (28 percent in 1974-1976 and

39 percent in 1979-1981) than under inward-looking (9

percent and 10 percent, respectively). It is important to

note that terms of trade losses were a smaller proportion of

the average value of trade in outward-oriented than in

inward-oriented countries (See Balassa 1984, page 956).

Although one might think that the large share of

exports relative to GNP of outward-looking economies would

result in decreased rates of growth in the face of decreased

worldwide economic activity, the experiences of the periods

 30

following the world recessions in 1974-1975 and 1980-1981 do

not support this view. The balance-of-payments effects of

external shocks did represent a larger proportion of GNP in

outward-looking than in inward-looking countries, but the

superior growth performance of the outward-looking nations

more than compensated for this loss. The factors responsible

for the higher rates of economic growth attained by outward-

looking economies is presented and evaluated below.

Outward-looking countries relied primarily on output-

increasing policies of both export-promotion and import-

substitution to counteract the balance-of-payments effects

of external shocks in the 1974-1976 and 1979-1981 periods.

They accepted a temporary reduction in their rates of

economic growth in order to limit their international

indebtedness. Their output-increasing policies enabled their

economies to exceed rates of growth attained prior to the

external shocks. In Balassa's (1984) sample, the growth rate

of GNP declined from 7.1 percent in 1963-1975 to 5.1 percent

in 1973-1976 but increased to 8.4 percent in the 1976-1979

period for outward-looking countries.

Inward-looking countries did not implement output-

increasing policies. Instead, they opted to finance the

balance-of-payments effects of the external shocks by

foreign borrowing in the first period. Their ability to

borrow in the 197 9-1981 period was hampered by their

 31

increased indebtedness in the previous period and thus

relied on deflationary measures.

Despite large amounts of foreign borrowing by inward-

looking countries in an effort to maintain previous rates of

growth, these rates in fact declined. GNP growth fell from

5.7 percent in 1963-1975 to 5.3 percent in 1973-1976, and

again to 4.5 percent in the 1976-1979 period (Balassa 1984).

The differences in economic performance between inward

and outward-looking economies can be attributed to

differences in the efficiency of investment and in domestic

savings ratios (Balassa 1984). Inward-looking countries

experienced an increase in incremental capital-output ratios

from 3.5 in 1963-1973 to 4.7 in 1973-1979. Their savings

ratios rose from 19.3 percent in 1963-1973 to 21 percent in

1973-1979. In contrast, the capital-output ratio rose from

2.7 to 3.3 and domestic savings ratios rose from 18 percent

to 24.4 percent for outward-looking countries (Balassa

1984).

The policies applied by the two groups explains the

differences in the capital-output ratios and domestic

savings ratios. In inward-looking countries, the system of

incentives discriminated against exports; their price

control practices further aggravated domestic price

distortions; the maintenance of negative real interest rates

discouraged private savings; and government indebtedness

increased. In outward-looking nations, the system of

 32

incentives remained unbiased toward production for domestic

or foreign markets; price controls were not widely employed;

private savings was encouraged through the adoption of

realistic interest rates; government deficits were reduced

and thus helped to limit public dissavings (Balassa 1984).

Rates of growth of GNP declined after 1978 in both

outward and inward-looking nations as a result of the

deflationary measures taken in response to the first shock.

The reduced rate of growth in outward-looking countries was

only temporary. Inward-looking countries experienced a

continued reduction in GNP growth resulting from the

deflationary policies implemented in response to the 197 9-

1980 shocks. As a result, the average difference in GNP

growth rates between the two groups was less than one

percent between 197 9 and 1982 but growth rates averaged 5

percent in outward-looking countries in 1983 as opposed to

stagnation in inward-looking economies (Balassa 1984).

The studies previously cited provide ample theoretical

and empirical evidence of the advantages of outward-looking

over inward-looking development strategies in dealing with

external shocks. In addition, they point to several crucial

factors contributing to the overall superiority of an

outward-looking orientation. An attempt has been made to

identify the factors and forces responsible for the success

of this market orientation. Virtually all current research

(cited previously and in the bibliography) is in agreement

 33

regarding the supremacy of an outward-looking strategy.

However/ economists are not in agreement regarding the

relative importance of the many factors associated with an

outward-looking development strategy.

There is a general agreement that export expansion

appears to have had beneficial effects on economic growth.

Cross-section comparisons show a high correlation between

the growth of GNP and exports. In individual economies/ an

acceleration of exports tends to be accompanied by an

acceleration of the growth of GNP (Michaely 1977; Balassa

1985). These results reflect the benefits derived under an

outward-looking strategy from increased capacity

utilization, economies of scale, comparaive advantage, as

well as from the factors cited earlier in this paper. It is

clear that the expansion of exports and the consequent

growth of GNP have been the result of the incentives

applied. The unbiased approach of outward-orientation forces

policies upon the government that generally leads to and

results in better economic performance by the private sector

(Corbo, Krueger, Ossa 1985). This partially explains why

nations that have changed their market orientation from

inward to outward-looking experienced a growth in both

exports and G N P ,

Trade strategy does indeed have a strong influence on

industrial performance and economic development. However,

the links between a n a t i o n s trade strategy and it/s

 34

macroeconomic performance are not completely clear. The

evidence of current research indicates that outward-looking

trade strategies have been more successful than inward-

looking strategies in fostering increased efficiency,

productivity, exports, and faster rates of economic growth.

It is possible that export growth may well be naturally

entangled with the overall development process when market

oriented liberalization policies are implemented and

economies become more open to international trade. The

empirical evidence supports the view that allowing market

forces and the price system to work promotes economic growth

(World Development Report 1987/ Balassa 1985). Market

liberalization would be typified by the change from an

inward to an outward-looking strategy which fosters a more

liberal trade regime and open economy. Consequently, both

exports and output would tend to increase rapidly as

resources move from import-substitution production to

exports and as import-substitution policy biases diminish.

As an economy moves from inward- to outward-looking, it

moves toward a more neutral market oriented stance rather

than toward the extreme of a policy strictly promoting the

rapid growth of exports. As the economy responds to the more

balanced development policy, the growth of exports is an

integral part of the growth of output and overall economic

growth and development. However, to infer from this growth a

cause and effect relationship may be inappropriate (the

 35

question of "causality" between export growth and economic

growth will be addressed in section 2.5 of this chapter).

SECTION 2.4 SAVINGS, INVESTMENT AND TECHNOLOGY TRANSFER

There exists an extensive body of literature that deals

with the roles of savings, investment and technology

transfer (both individually and jointly) and their impact on

the growth of developing countries. This section does not

attempt to provide a comprehensive review of this

literature. Instead, a narrower and more conscice review of

the literature examining the relationship between trade

policy and savings, investment and technology transfer will

be presented and evaluated. Specifically, the focus of the

following analysis will be the relationship between exports

and savings, investment and technology transfer for

developing countries.

The relationship between a nation7s trade policy

orientation and the formation of savings is quite involved.

First, one must distinguish between domestic and foreign

savings and their interaction. Second, there are a number of

possible linkages between a nation's trade regime and

domestic savings formation. A fairly comprehensive review of

the literature analyzing the relationship between trade

policy and savings (both domestic and foreign) can be found

 36

in the summary volume of the NBER project by Bhagwati (1978,

chapter 6, pages 127-181).

Whenever one begins to consider the constraints on the

growth of developing countries, the most commonly accepted

rationale used to be that of the "two-gap" model. The idea

behind "two-gap" analysis is that there are at least two

independent resource constraints on the growth of LDCs: the

savings constraint and the trade constraint. With respect to

the former, the growth of the economy is limited by the

availability of savings for investment. For the latter, the

growth of the economy is also restricted by the availability

of foreign exchange for importing commodities required for

current production and investment (Weisskopf 1972A).

Recently, the two-gap model has lost some of it's earlier

appeal due to the rigidity and lack of empirical validity of

it's assumptions. Nevertheless, in view of the importance of

savings and the shortage of capital in developing countries,

the effect of trade policy on income growth, savings,

investment and productivity growth is critical.

In preceeding sections it was demonstrated that open-

market policies generated higher rates of income growth in

developing economies than did import-substitution policies.

When focusing on the relationships between trade policy,

income growth and economic growth, the links between exports

and both income and savings must be explored.

 37

Increased exports may significantly effect both

domestic income and savings. Having discussed previously the

connection between export growth and income growth, the

point of interest here is the effects of exports on savings

{the following section of this chapter [2.5] will analyze in

exhaustive detail the relationship between export growth and

economic g r ow th ). It is fairly apparent that increased

exports have an indirect effect on savings through increased

incomes. What is not clear is the notion of any direct

effects of exports on savings.

In his 1968 text entitled "Exports and Economic Growth

of Developing Countries", Alfred Maizels claimed that

changes in exports could result in similiar changes in

domestic savings. This hypothesis, referred to by Lee (1971,

page 341) as the "Maizels hypothesis", was tested by Maizels

using annual data for 11 nations for roughly a ten year

period covering the years from the early 1950s to the early

1960s. The results confirmed his hypothesis in that they

showed a significant degree of correlation between exports

and savings. Specifically, the relationship of export growth

to overall savings was said to to be based on two underlying

functions. The first relates export growth to taxation

{i.e., public savings) and the second links exports to

higher corporate savings through the higher propensity to

save of the firms in the export sector (Bhagwati 1978).

 38

Lee (1971) conducted further tests of the Maizels

hypothesis. In doing so, Lee used a much larger sample of

countries (20 LDCs and 8 DCs) covering a longer period of

time (1950-1967). The results obtained by Lee were

consistent with the Maizels hypothesis. Furthermore, the

results indicated that the savings response was not limited

to Maizels primary-exporting LDCs (Lee 1971, page 349) .

Pesmazoglu (1972) analyzed the relationship between

growth, investment and saving ratios for several different

groups of countries. Annual data for the years 1955-1966 was

compiled for 43 nations that were categorized as follows:

underdeveloped, intermediately developed and developed.

Several conclusions of this study are noteworthy. First,

growth rates of less and intermediately developed economies

appeared to be closely associated primarily with variations

in external savings ratios and much less with the aggregate

domestic savings ratios. Second, real capital formation is

likely to be of considerable importance in intermediately

developed economies, but much less in underdeveloped and

developed economies (Pesmazoglu 1972, page 326).

Papanek (1973) conducted cross-country regression

analysis involving thirty-four countries for the 1950s and

fifty-one countries for the 1960s in an attempt to determine

the relationship between aid, foreign private investment,

savings and growth in LDCs. The results of this study

suggested that exports were highly correlated with savings.

 39

In addition, the results showed that savings rose with per

capita income (page 130).

Again, one must keep in mind the complexity of the

relationship between real capital formation, capacity and

technical progress and economic growth. The relationship

between domestic savings and trade policy is complex and is

not fully understood. In his concluding statement, Bhagwati

maintains that "the matter becomes even more unclear if we

consider the linkages between trade regimes and foreign

savings so that the relationship between trade regimes and

overall investment is, in turn, complex as well". However,

he does maintain that much of the theoretical and relevant

empirical evidence pertaining to the domestic savings issue

persuasively demonstrates that restrictionist exchange

control regimes (inward-looking development strategies) are

inefficient on static grounds and are not likely to

contribute to increased domestic saving and capital

formation over time (Bhagwati 1978, chapter 6, page 174).

Utilizing a simultaneous-equations model that captures

the most important quantitative aspects of the relationship

between trade and development, Salvatore (1983) successfully

demonstrates at least two key notions that are extremely

relevant here. First, that the domestic savings rate in

developing countries can be expected to depend on the level

of real per capita income, the growth of real per capita

income and the rate of exports. Second, "that a higher ratio

 40

of exports to GDP can be expected, ceteris paribus, to lead

to a higher level of private and public savings (through

taxation) and higher imports of investment goods in

developing nations" (Salvatore 1983, page 70).

There are indications that outward-looking policies

might have encouraged higher rates of savings and

productivity growth. Despite the fact that some outward-

oriented countries have achieved significant growth in

savings rates, the lack of relevant empirical work does make

it difficult to establish the relationship between trade

policy orientation and savings rates. However, several

possible links are quite plausible and may be explored.

These are listed below (WDR 1987).

1. A policy shift from inward to outward-orientation

generates additional real income. Since the marginal

propensity to save usually exceeds the average

propensity to save, the increased real income would

raise the average propensity to save.

2. High real interest rates may be an important

incentive for personal savers. Increased distortions

in capital markets of inward-looking economies may

result in unfavorable, and even negative, real

interest rates and thus discourage savings (see Fry

1984, appendix 2).

3. Foreign savings as well as domestic savings may

finance investment. Export industries tend to attract

 41

foreign investment in outward-looking economies as

opposed to tariff-jumping foreign investment which is

commonplace under inward-looking regimes. Foreign

capital is more likely to generate exports and income

for its own servicing in outward-looking economies. In

addition, overvalued exchange rates that are present

in many inward-oriented economies tend to inhibit

foreign capital inflow.

Due to the crucial importance of the responsiveness of

savings to interest rate changes and its effects on economic

growth, a great deal of empirical work has been done.

Arrieta (1988) evaluated the McKinnon-Shaw proposition of a

positive interest responsiveness of savings and the

beneficial effects of liberalization policies on economic

growth in L D C s , His paper critically assessed several recent

contributions to the empirical literature that dealt with

this proposition. The results surveyed were mixed, and the

author states that "the major conclusion that emerges from

the evidence surveyed in this paper is that the debate is

currently far from being settled, even for those countries

on which these studies have focused" (Arrieta 1988, page

603) .

With respect to the magnitude of private direct

investment inflow and its efficiency, both may be argued to

be greater over time under an outward-looking or export-

promoting strategy than under an inward-looking strategy.

 42

Bhagwati and Srinivasan (1979) prove us with the following

rationale.

With regard to the magnitude of investment under an

outward-looking policy, its lack of discrimination against

foreign markets is likely to attract foreign firms on the

basis of factor endowment advantages. An inward-looking

policy provides an incentive for investment by creating

artificial inducements to invest through tariffs and / or

quantitative restrictions. In addition, the artificial

inducement provided by import-substitution policies cause

"tariff-jumping" investments that are oriented to the

domestic market alone (Bhagwati and Srinivasan 197 9, page

130) .

The efficiency of foreign direct investment under an

outward-looking strategy can be argued to be superior to

that found under an inward-looking strategy. "...It can

again be argued that 'tariff-jumping' investments, induced

by the IS strategy, are more likely to imply social losses

or (at minimum) reduced gains than investment attracted by

Heckscher-Ohlinesque factors" (Bhagwati 1978, page 212: also

see Brecher and Diaz-Alejandro 1977 for a full discussion of

this concept). Furthermore, there is some statistical

support in the NBER studies (Behrman 197 6; Krueger 1974;

Bhagwati 19783) which indicates that import-substituting

policies at times may be growth reducing because the import-

substituting industries happen (empirically) to be capital

 43

intensive relative to the exportable industries (Bhagwati

and Srinivasan 1979, page 131).

It is interesting to mention that based on the evidence

available at the time of the NBER studies, Bhagwati found

little evidence that the export-promoting nations were

technically more progressive or that they had higher savings

ratios as a result of larger export sectors (Bhagwati 1978,

page 215).

In a more recent study comparing the technical

efficiency between import-substitution-oriented and export-

oriented foreign firms in a developing economy, Chen and

Tang (1987) found stronger evidence in favor of the

hypothesis that claims higher efficiency under export-

promotion policies. Using micro data from foreign firms in

Taiwan's electronics industry, they tested the hypothesis

that export-oriented firms were technically more efficient

than import-substitution-oriented firms. Their results

showed that firms constrained to export all their products

and thus to compete in world markets tend to be more

efficient than those allowed to sell their products in the

protected local markets, the former namely being the export-

oriented and the latter namely being the import-

substitution- oriented. Depending on the specification of

their model, their results indicated that the export-

oriented firms were six to eleven percent closer to the

 44

production frontier than the import-substitution-oriented

firms.

Caves and Barton (1988} investigated the question of

whether changes in the intensity of international

competition affect the productivity growth of a domestic

industry. Although their primary focus was the relationship

between efficiency and productivity growth in U.S.

manufacturing industries, their secondary findings relating

to the impact of international competition are worth noting.

Based on their statistical analysis, import competition in

concentrated industries was responsible for raising

technical efficiency a significant degree. Although their

study did not deal with LDCs, the evidence of the positive

relationship between international competition and technical

efficiency is relevant.

Technology transfer between developed and developing

countries is an important topic, especially for the LDCs.

The term "technology transfer" is frequently used in

discussions between developed and developing countries

concerning international technology trade. A growth in the

rate of technology transfer is basically defined as an

increase in the growth rate of high technology exports.

"Technology transfer" is indeed a very nebulous concept and

more a political than an economic term (Magee 1977). Perhaps

a more concrete notion is that referred to as technological

diffusion.
 45

Countries at any level of development must rely on

international trade to some extent in order to obtain the

resources that they lack. As Keesing (1967) so clearly

explains, trade must bridge gaps in technological knowhow

and skills as well as in natural resources. Without an

inflow of equipment, machinery, organizational and

technological ideas, economic development in the LDCs would

slow to a standstill. Under an outward-oriented regime,

outside competition will necessitate the adoption of new

technology and efficient methods to a much greater degree

than under the heavy protectionist atmosphere of inward-

looking regimes.

Indeed, international technology transfer is an

important vehicle for the spread of ideas and improvements

that can affect the global patterns of production, trade,

income and welfare. A major focus of a study by Pugel (1981)

was a survey of the literature pertaining to the

international transfer of technology within the framework of

neoclassical theories of international economics. In

addition, he makes a contribution to the analysis assuming

that technological change is endogenous and is responsive to

economic incentives. A majority of the papers surveyed

assumed that the superior technology to be transferred

internationally is exogenous to the economic system modeled

(Pugel 1981, pages 13, 33). Assuming technological change to

be endogenous, Pugel concludes that the possibility of

 46

exploitation of the new technology through international

technology transfer tends to increase technology creation

within the originating country (pages 2 1 - 3 2 ) . Thus, both the

originating and the recipient countries benifit from the

availability of a larger amount of new technology.

Despite the complexity of the relationship between

economic growth, real capital formation, and technical

progress, an attempt has been made in this section to

present a representative survey of the relevant literature.

Although there is a lack of agreement concerning the exact

nature of and the links between economic growth and savings,

investment, and technology transfer, the ensuing chapters of

this dissertation should provide some insight into this

area.

Keeping in mind the scope of this dissertation as

set forth in the introduction, the relationship between

trade policy orientation and economic growth is of

fundamental concern. The relationship between the rate of

growth of GNP and the degree of openness of developing

economies is of particular concern. The role of exports and

the relationship between export growth and economic growth

is of primary concern. There has been a considerable amount

of current research which analyzes the relationship between

exports and economic growth. A review of the findings of

these works, with special attention paid to the affects of

policy orientation, is presented in the following section.

 47

SECTION 2.5 EXPORTS AND ECONOMIC GROWTH

A close empirical relationship between exports and

economic growth has been shown in many studies. Emery

(1967) , Michalopoulos and Jay (1973), Michaely (1977),

Krueger (1978), Balassa (1978 and 1985), Heller and Porter

(1978), Tyler (1981), Ram (1985 and 1987), Singer and Gray

(1988) and Balassa (1988) all found a significant

correlation between exports and GNP or GDP. Varying sample

sizes, time periods, restrictions, and estimation techniques

have produced differentiated yet similiar results.

Emery (1967) presented the hypothesis that there is a

causal relationship between exports and economic growth. He

claimed that this relationship is one of interdependence

rather than of unilateral causation but that it is mainly an

increase in exports that stimulates an increase in aggregate

economic activity rather than the other way around.

This hypothesis was tested empirically using data for

50 countries (including both DCs and LDCs) for the years

1953-1963. The results indicated that for each 2.5 percent

increase in exports, per capita real GNP rose 1 percent. The

correlation between exports and GNP, as well as the

regression estimates, had a relatively high degree of

statistical significance (Emery 1967, page 484). However,

the results did not "prove" causation. Emery's results, like

those of many others to follow, indicated "correlations" and

 48

correlations by themselves can not be claimed to reveal a

great deal about causation {the statistical debate

concerning correlation versus causation is discussed toward

the end of this s e ct io n) . Nevertheless, Emery provided one

of the first empirical works dealing with the relationship

between exports and economic growth and paved the way for

future research in this area.

Michalopoulos and Jay (1973) estimated a neoclassical

production function using data for 39 LDCs for the 1960s.

They first estimated the aggregate production function using

domestic capital, labor and foreign capital as inputs. The

authors then reestimated with the inclusion of exports as an

additional right hand side variable and found that exports

were highly significant and improved the fit of the equation

considerably (as cited in Krueger 1983B, page 42) .

Michaely (1977) found a strong positive relationship

between the marginal export-output ratio and the growth of

per capita GDP for 41 LDCs for the period 1950-1973. The

positive association of the economy's growth with the growth

of exports was particularly strong among the more developed

countries and was nonexistent among the least developed.

Specifically, 23 countries with a 1972 per capita income

above $300 exhibited this positive relationship while 18

countries with incomes of $300 or less provided results that

were insignificant.
 49

Furthermore, an alternative hypothesis was tested that

the higher the ratio of exports to total output {rather

than the change in this ratio), the more rapid the nation's

rate of growth. This modified version of the export

hypothesis did not prove to be valid. Thus, the conclusions

drawn were two-fold. First, a rapid growth of exports

accelerates an economy's rate of economic growth. Second, to

simply have a large proportion of an economy's output

devoted to exports has no bearing on the rate of growth.

Balassa (1978) investigated the relationship between

exports and economic growth in a group of eleven developing

economies that had already established an industrial base.

The study period covered the years 1960-1973. The hypothesis

tested was that export-oriented policies lead to better

growth performance than import-substitution policies. In

addition, the relationship between export growth and the

growth of GNP net of exports was examined. The results

indicated a significant correlation between export

performance and the growth of non-exported GNP. The

relationship was much stronger for the late 1960s and early

1970s than for the early part of the study.

In a study consisting of the same 41 LDCs used by

Michaely (1977), Heller and Porter {1978) correlated the

growth of exports and non-exported GDP per capita and

obtained highly significant results. However, when growth

 50

rates for the seven best performing nations were extracted,

no significant correlation was found.

The empirical relationship between export expansion and

economic growth for 55 middle income developing countries

covering the years 1960-1977 was analyzed by Tyler {1981).

Bivariate tests revealed significant positive correlations

between GNP growth and investment, manufacturing output,

total exports, and manufactured exports. This study differed

from Michaely's in that it involved a different choice in

measuring the export growth variable, the evaluation of

additional relationships, the use of a later data period,

and the inclusion of more countries in the sample.

Tyler's results presented additional empirical evidence

demonstrating a strong cross-country association between

export performance and the growth of GNP, thereby extending

Balassa's earlier work. Also, the results indicated that

performance of the nation's export sector, as well as the

rates of capital formation, were important in explaining the

variance in the rates of growth of GDP between countries.

In evaluating the effects of liberalization on economic

growth, Krueger (1978) regressed GNP on a set of explanatory

variables that included dummies for different types of trade

regimes, an autonomous time trend for each nation, and

exports. The results obtained stressed the importance of

autonomous elements, provided statistically insignificant

effects of trade regimes, and a very small coefficient for

 51

the export variable. When export performance was used as a

dependent variable, the results obtained still showed a

large unexplained trend for each country with ambiguous

effects on trade regimes.

Although it was not possible to detect significant

effects on growth performance resulting from the numerous

microeconomic changes that accompany liberalization, the

author believes that these effects are basically too complex

for the simple test that failed to reveal them. Krueger

concluded with the following thought:

It would appear that the dictates of an export-

promotion strategy bring about a variety of conditions
which make more rapid growth possible and, at the same
time, constrain policy in such a way as to reduce
variance in incentives and increase rationality of the
regime (Krueger 1978, page 299).

Several researchers have made extensions along the same

line of Michalopoulos and Jay's work by introducing the

export level as one of the arguments of a production

function (Balassa 1978; Tyler 1981; Feder 1982; Kavoussi

1984; Ram 1987) and some have utilized a Solow-type analysis

(see Solow 1957) to determine the relative contributions of

labor force expansion, capital accumulation, and exports to

the growth of GNP. Balassa's (1978) estimation produced a

small coefficient for the export variable which indicated

that a 10 percent increase in exports would result in an

additional 0.4 percent growth of GDP (Ocampo 1986). The

results obtained by Tyler (1981) yielded a coefficient of

0.55-0.57 percent. However, Feder (1982) provided a complete

 52

formulation of the production function model and was able to

obtain the most significant results.

Feder (1982) developed an analytical framework for the

quantitative assessment of factor productivity differentials

between export and nonexport sectors using aggregate data.

The sample consisted of 31 semi-industrialized countries for

the years 1964-1973. The results obtained indicated that

there are, on average, substantial differences in marginal

factor productivities between the export and nonexport

sectors. In addition, economies that shift resources into

exports will experience greater benefits than inward-looking

economies as a result of beneficial externalities generated

by the export sector. Feder's estimates led him to conclude

that a 10 percent growth of exports would result in a 2

percent growth of GDP, as opposed to the estimates of 0.4

percent by Balassa and 0.55-0,57 percent by Tyler.

In a study examining the relationship between the rate

of growth of exports and economic performance for a sample

of 73 developing countries over the years 1960-1978,

Kavoussi (1984) determined that higher rates of economic

growth are associated with higher rates of export growth.

Unlike the results of Michaely (1977), this positive

correlation between exports and growth held for both middle-

and low-income countries. The author concludes that in both

low and middle-income countries, an important reason behind

this positive correlation between the growth of exports and

 53

GNP is the increased productivity resulting from the

expansion of exports. In addition, there are indications

that export growth has a tendency to accelerate the rate of

capital formation. Lastly, although primary exports tend to

increase factor productivity at low levels of income, their

effectiveness tends to diminish as countries become more

advanced. Productivity gains from export expansion for

middle-income countries were significant only in those

nations that shift to exports of manufactured products.

In an extension of his 1978 study, Balassa {1985}

examined the relationship between exports and economic

growth in the period of external shocks following the 1973-

1974 petroleum price increases and subsequent world

recession. Although several previous studies were successful

in having shown the favorable effects of exports on economic

growth (Michalopolous and Jay 1973; Tyler 1981; Feder 1982),

the question of the detrimental effects of a deterioration

in the world economic environment on the success of an

outward-looking growth strategy had to be addressed.

The author re-estimated the equations of his 1978 study

for the years 1973-1979, expanded the sample size to cover

43 developing countries, and combined the proceedures

applied previously in a single estimating equation. The

results obtained indicate that trade orientation

significantly affected the rate of economic growth. The

export-promotion and import-substitution variables exhibited

 54

a high degree of statistical significance and all the

regression coefficients had positive signs. The regression

coefficient of the export-promotion variable exceeded that

of the import-substitution variable by a considerable amount

(two to two-and-a-half times), which indicated that

increased reliance on export-promotion strategies in

response to external shocks enabled nations to reach higher

rates of GNP growth.

Intercountry differences in rates of growth were found

to be affected by differences in the rate of growth of the

labor force, differences in investment rates, by initial

trade policy stance and by the adjustment policies applied,

as well as by the product composition of exports and the

overall level of economic development. Most importantly, the

results indicated that an outward-looking policy stance at

the onset of the shocks, in addition to the reliance on

export-promotion strategies in response to the shocks,

favorably affected economic growth and industrial

performance.

The relationship between economic growth,

industrialization, and exports is undoubtedly simultaneous

in nature. A vast majority of empirical studies which

analyzed the contribution of development strategies and

international trade to economic development have been of a

single-equation type. Thus, they are somewhat limited in

their ability to examine the interrelatedness of the many

 55

factors affecting economic growth. Salvatore (1983)

developed a simultaneous equations model that captured the

most important quantitative aspects of the relationship

between international trade and economic development. The

model was tested with pooled data for 52 developing

countries for the period 1961-1978, and was estimated by

Full Information Maximum Likelihood. In addition, the model

was validated by dynamic policy simulations. Consequently,

this model represents a break from the past into an

essentially new direction and provides us with valuable

results and implications.

The relationship between international trade and

economic growth was found to be unmistakably positive. The

results indicate that trade can be very important to the

process of economic development but that trade is more a

handmaiden than an engine of growth. Although the results of

the dynamic policy simulations appear to indicate that the

relationship between exports and growth is not impressively

strong, the reader must keep in mind that an outward-looking

policy orientation is of primary concern — not simply an

export-promotion strategy which fosters biases that are

absent in the former to a great e x te nt . Furthermore, the

results unequivocally confirm the conclusion that pursuit of

a strongly inward policy of import-substitution can hinder

economic growth.
 56

The results of the dynamic policy simulations also seem

to indicate that developing nations as a whole can expect to

experience difficulties in the near future in achieving

substantially higher growth rates than those attained in

recent years. These difficulties pose important policy

questions for LDCs, "...especially in a world of sharply

rising energy prices, stagnating levels of real foreign aid,

and the emergence of neomerchantilism among developed

nations, themselves facing serious economic problems"

(Salvatore 1983, page 86).

Ram (1985) investigated the relationship between

exports and economic growth for 7 3 LDCs over two distinct

time periods: 1960-1970 and 1970-1977. This study sought to

determine if the importance of exports for economic growth

changed over the 197 0s and to further examine the

differential impact of exports in low-income and middle-

income LDCs. Although the model used was not a simultaneous

equations model, the author tested the assumption of

homoscedasticity of the data as well as the validity of the

use of a single-equation model.

The results showed that export performance was an

important determinant of economic growth and that their

importance grew during the 1970s. During the first period,

the impact of export performance on growth was fairly large

for middle-income LDCs but was small for the lower-income

LDCs. Over the second period, the differential nearly

 57

disappeared and the positive effect of exports on growth

again seemed quite large. With respect to the problems

associated with the use of single equation models, the White

test statistic indicated the absence of most major

specification errors as well as the absence of

heteroscedasticity (Ram 1985, page 421).

In a subsequent study, Ram (1987) further investigated

the relationship between exports and economic growth in

developing countries. The author notes that although nearly

all empirical research to date indicates the beneficial

effects of exports on growth, a common drawback is the use

of cross-section data covering various groups of LDCs for

different time periods. Consequently, Ram provides estimates

of two models for 88 countries using annual time-series data

for each nation. In addition, cross-section estimates of the

models are presented for two subperiods: 1960-1972 and 1973-

1982.

The first model estimated was based on an aggregate

production function in which the level of exports was

included as an input in the production proccess along with

capital and labor. The second model used was derived from

the framework used by Feder (1982) in which the output of

the export sector generates externalities on the production

of the nonexport sector, the production functions for the

two sectors are different, and the relative marginal

products of the inputs differ across the two sectors

 58

(Ram 1985; Ram 1987, page 53; Feder 1982).

The general results obtained from the country-specific

analysis using time-series data provided the following:

1. The fit differed between middle-income and low-

income LDCs: the regression F-statistic was

significant in roughly 80 percent of the former and

only 50 percent of the latter cases.

2. The export-growth connection was found to be

positive for more than 80 percent of the countries

(Ram 1987, page 55) .

The cross-section results showed that the fit of both

models was good for most samples and was basically of the

same order as those reported in similiar studies. Both

models fit nearly equally as well in practically all the

samples to which they were applied. Moreover, the estimated

coefficients of the export variables were positive in all

cases and were statistically significant in nearly all of

the samples with the exception of the low-income LDCs over

the 1960s.

The results for individual countries based on time-

series data and those for various cross-section groupings

both demonstrate the importance of the inclusion of exports

in explaining economic growth. In most cases, the role of

exports in economic growth was predominantly positive and

the cross-section results reinforced those obtained using

time-series data (Ram 1987, page 63). Ram's statistical

 59

results will be explored in greater detail in the following

chapters of this dissertation.

Lai and Rajapatirana (1987) surveyed a number of the

most significant empirical studies that demonstrated the

static gains resulting from a movement toward free trade and

also reviewed studies of the dynamic effects of the growth

of exports on that of per capita income. Citing the results

of Michalopoulos and Jay (1973), Michaely (1977), Krueger

(1978) , Balassa (1978) and Feder (1982), the authors

conclude that these studies do indeed confirm a statistical

relationship between export growth and income growth.

The statistical link between exports and growth has

been shown to be both positive and significant. As in most

statistical matters, though, the authors note that even this

relationship has been disputed. Citing the results of

Helliner's (1986) study of low-income Sub-Saharan Africa in

which no significant statistical relationship between the

change in exports share of GDP and growth during the 1960-

1980 period was found (Lai and Rajapatirana 1987, page 193).

Helliner's results, however, are not detrimental to the

argument favoring the beneficial effects of exports on

economic growth for at least two reasons (Lai and

Rajapatirana 1987, pages 193-4):

1. Similiar results were obtained by Michaely (1977)

when he found that the relationship was particularly

strong among the more developed countries and to be

 60

nearly nonexistent among the least developed causing

him to speculate that growth is affected by export

performance only once countries achieve some minimal

level of development (Michaely 1977, page 52) .

2. Most of the low-income nations in Helliner's sample

did not truly pursue outward-looking policies.

All of the empirical studies reviewed use standard

statistical tests in order to establish the relationship

between exports and growth. There are substantial grounds

for believing in a causal relationship between exports and

economic growth and also for believing that a rise in

exports stimulates an increase in economic activity, rather

than vice versa. However, strictly speaking, empirical

relationships are more an indication of correlation as

opposed to causation. As noted by Lai and Rajapatirana

(1987, pages 195-197), a new school of econometrics has

sought to make "causal" statements soley on the basis of a

particular statistical technique called vector auto

regression (VAR) and of a Granger-Sims causality test that

attempts to determine whether over time a particular

variable consistently preceeds another.

Jung and Marshall (1985) performed causality tests

between exports and growth for 37 LDCs using data for the

years 1950-1981 in order to determine the validity of an

export-promotion development strategy. Using the Granger

notion of causality provided evidence in favor of export

 61

promotion in only 4 out of the 37 countries tested. The

authors conclude that their results strongly suggest that

the evidence in favor of export promotion is weaker than

previous statistical studies have indicated. However,

immediately following this statement appears the following

word of caution: "Naturally, one should not go too far in

making inferences from these test results. Admittedly they

do have their shortcomings" (page 11). With respect to these

shortcomings, the author warns the reader that the

interpretation of the causality tests should certainly be

made with caution primarily because of the following two

potential problems. First, the Granger statistical

definition of causality is not equivalent to many

"philosophical" notions of causation. Second, the exclusion

of variables from the test information set may result in

specification errors (page 6).

Chow (1987) investigated the causal relationship

between export growth and industrial development in 8 NICs

over the 1960-1980 period. Application of Sims' causality

test indicated that for a majority of the countries there

was a strong bidirectional causality between industrial

development and the growth of exports. The author also

states that his results support an export-led strategy in

that the growth of exports leads to structural

transformation of the developing nations as well as

promoting the growth of national income (pages 59-61).

 62

Hsiao (1987) applied Sims7 unidirectional exogeneity

test and Granger's causality test in an effort to detect the

existence and the direction of causality between exports and

GDP for South Korea, Hong Kong, Singapore, and Taiwan. The

results of the Sims' test indicated a feedback relationship.

The Granger test results showed no causal relationship

between exports and GDP with the exception of Hong Kong for

which both tests indicated unidirectional causality from GDP

to exports without feedback. Thus, both tests showed a lack

of support for the hypothesis of unidirectional causality

from exports to GDP (page 156). The author concludes,

however, that " ...the developing countries can learn from

the experience of the major Asian NICs to achieve their

economic growth by the policies of both export promotion and

domestic growth" (page 157). This closing note does not

appear to be quite as "anti export promotion" as the

author's detailed econometric investigation results may have

indicated.

Three points raised by Lai and Rajapatirana (1987)

should be noted (pages 195-197) :

1. These statistical tests are testing for the growth-

enhancing effects of a development strategy that

biases incentives towards exports: they are not

concerned with free trade or an unbiased incentive

framework. Most proponents of outward-orientation do

not favor a heavily export-biased incentive scheme.

 63

2. The statistical studies based on Granger causality

basically test for the precedence of one variable over

another: it does not in fact reveal anything about

causation as the term is normally understood.

3. When studying dynamic historical processes such as

the relationship between exports and economic growth,

judgments based soley on new techniques of statistical

inference may not be very useful.

In an article entitled "Causality In Temporal Systems:

Characterizations And A Survey", Pierce and Haugh (1977)

reviewed and analyzed several proceedures used for the

empirical detection of causal relationships between

variables. The authors explain and demonstrate the

qualifications and limitations of the various methods used

to determine causality on a strictly statistical-inference

basis. They successfully show how measurement error,

instantaneous causality, spurious causal ordering and the

like necessitates the use of caution on the part of the

researcher when evaluating the results of econometric tests

of causal relationships.

Bhagwati (1988) evaluated the issues and evidence of

export-promoting trade strategy and determined that an

export-promoting industrialization policy remains the

preferred option for developing countries. After detailed

analysis of the experiences of both import-substitution and

 64

export-promotion, he concludes that although an export-

promotion strategy is the best alternative,

...an equally important factor is that their

successful adoption will require collaborative and
intense efforts to ensure that the protectionist
threat is not allowed to break out into actual
protection on a massive scale (page 48).

One point that should be made regarding Bhagwati's

argument concerns his terminology. In the article, a

recommendation is made that we refer to an export-promotion

policy where the EERx is roughly equal to the EERm due to

the "neutral" nature of the incentive structure under

outward-looking regimes. This differs from the common

perception of the definition of an export-promotion policy

in which the EERx > EERm. The author argues that a situation

where EERx > EERm should be referred to as an "ultra-EP"

strategy (page 33).

In an extension of Kavoussi's 1984 study, Singer and

Gray (1988) further analyzed the relationship between trade

policy and growth. With the addition of a third time period

covering the years 1977-1983, the authors were able to

examine the relative changes in Kavoussi's estimates which

were based on the periods 1963-1973 and 1973-1977.

Their results showed that countries achieved high

growth rates of export earnings only when external demand

was strong: the world demand factor was found to be larger

on average than the trade policy factor. In addition, the

correlation between growth and export orientation was strong

 65

only under favorable market conditions and was weaker for

low-income countries for all periods. The authors conclude

that although outward orientation was beneficial, their

results illustrate that "...outward orientation cannot be

considered as a universal recommendation for all conditions

and for all types of countries" (page 403).

Balassa (1988) provides an overview of the development

experience of East Asia in which he discusses the

relationship between exports and economic growth. Based on a

review of the empirical and theoretical evidence of the many

studies available, the author reviews the economic

performance of many of the East Asian countries. The

following conclusions were reported (page S 2 8 8 ) :

1.The lack of discrimination of the incentive system

against exports has led to rapid export growth in the

Far Eastern NICs which has, in turn, contributed to

high rates of economic growth.

2. The lack of discrimination against exports has been

associated with the stability of the incentive system

in much of East Asia.

3. There were fewer policy-imposed distortions in

labor and capital markets, and greater reliance has

been placed on private enterprise.

4. The neutrality and stability of the incentive

system, along with limited government interventions,

well-functioning labor and capital markets, and

 66

reliance on private capital appear to be the main

determinants of the successful economic performance of

East Asia.

All of the aforementioned factors (Balassa 1988) are

indeed interdependent. The important point is that the

neutrality of an outward-looking strategy fostered increased

exports, efficiency and economic growth in the development

experience of East Asia.

One can find flaws with many of the preceeding studies.

Feder's production function assumes no diminishing returns

to an increasing export share. Krueger's empirical results

indicate that autonomous elements are responsible for many

observed differences in growth rates. The nations that

experienced the best performance with export-promotion

strategies in Michaely's and Heller and Porter's samples are

far from being liberal, and may reflect very different

conditions and strategies that might lead to successful

growth (Ocampo 198 6).

Despite these potential problems, the general consensus

of the results of a vast majority of current research

indicates the superiority of an outward-looking development

strategy. Although many results were obtained utilizing a

partial analysis, the simultaneous results tend to reinforce

the advantages of outward-orientation and the disadvantages

associated with inward-looking economies. Furthermore, after

careful examination of the performance of developing

 67

countries since the early 1960s, the World Development

Report (1987) concluded that rapid economic growth and

efficient industrialization are usually associated with

outward-oriented trade policies, and that economies which

followed inward-looking strategies have performed poorly.

In view of the evidence presented above, it is not

surprising that one finds a growing dissatisfaction with

inward-looking development strategies and increased interest

in outward-looking policies. In recent years, there has been

a renewed interest in trade policy reforms that increase the

degree of neutrality in trade regimes and result in more

competitive exchange rates. Despite the potential gains, few

nations have successfully reformed their trade strategies.

Until recently, relatively little attention has been paid to

the valuable lessons to be learned from their experiences.

Consequently, there exists an opportunity to make a

contribution to the literature that will enable developing

countries to better understand both causal and contributing

factors associated with outward-looking development

s trategies.

SECTION 2.6 EXTENSIONS OF THIS PROJECT

It has been shown that the arguments put forth in

support of the superiority of an outward-looking strategy

over an inward-looking approach center upon the increased

efficiency of resource use. Under inward-looking regimes,

 68

inefficiencies are cited owing to a variety of costs which

are placed on the economy resulting from losses in

production, consumption, employment, income, and the so

called x-inefficiency argument (WDR 1987). The potential

gains to be derived under an outward-looking strategy arise

from the dismantling of overly-regulated administrative

systems and the increased level of economic activity

fostered by outward-looking regimes. Increased employment,

output, income, and economies of scale are all more likely

under an outward-oriented trade strategy. Although these

factors are both apparent and important, the magnitude and

persistence of the growth rate differentials between

strongly outward-looking economies and the others suggests

the existence of more subtle economic forces that might also

have been at work (WDR 1987). These forces may very well

prove to be the foundation upon which the link between trade

strategy and economic performance can be built:

technological innovation; self-correcting policies;

investment efficiency; and productivity growth.

A convincing intuitive argument can be made that the

more competitive environment faced by firms in outward-

looking nations could result in more incentives for

increased productivity through technological innovations.

Although little is known about technological innovation in

relation to trade policy, there is increasing evidence that

adoption of new technology has been faster in outward-

 69

looking than in inward-looking developing economies, with

respect to self-correcting policies, outward-looking regimes

provide several self-correcting mechanisms which serve to

adjust the macroeconomic variables that affect growth. An

example of this is exchange rate adjustment under

alternative trade strategies. Under outward-orientation, an

overvalued exchange rate causes a deficit in the nation's

trade balance whereas the effect of this overvaluation would

take the form of rising import premiums on import licenses

under an inward-looking regime (WDR 1987).

In an article entitled "Trade And Development: Theory

And The Asian Experience", Findlay (1984A) surveyed the

economic growth and performance of 13 Asian nations over the

past 20 years. The author first presents an overview of the

potential links between trade and economic development from

various theoretical perspectives and then evaluates the role

of foreign trade and investment in the economic development

of the Asian countries.

Aside from presenting a concise analysis of development

strategies and a wealth of current statistics demonstrating

Asia's accomplishments, a crucial point is raised: there is

a "missing link" in the debate of import-substitution versus

export-oriented development strategies (page 26). The

superior performance of export-promoting over import-

substituting nations does not necessarily mean that export

orientation is growth-inducing. Again, the question of

 70

"causation" versus "correlation" comes into play. However,

as the author points out, a more thorough evaluation must be

u nd er t a k e n :

...including direct determinants of growth such as the

rates of capital formation and technological progress,
unless it is claimed that theses variables themselves
are positively related to the trade regime, in which
case evidence would have to be presented (page 2 6).

In this dissertation, emphasis will be placed on the

role of exports, investment, productivity growth, and

technological growth in an effort to establish the link

between increased income under outward-orientation and

increased economic growth. According to the World

Development Report (1987), there are a few indications that

outward-looking policies might have encouraged higher rates

of savings and productivity growth but that much work

remains to be done concerning the role of savings,

investment, the stock of capital and its level of

productivity growth in inward versus outward-oriented

regimes. Although some outward-looking nations have achieved

dramatic growth in savings rates, the lack of empirical work

makes it difficult to establish the relationship between

savings rates and trade orientation.

With respect to productivity growth, the empirical

evidence is far from being conclusive. However, the

experience of productivity growth in developing economies

indicates that trade strategy is important. Total factor

productivity for several developing economies increased more

 71

rapidly in the strongly outward-oriented countries than in

the strongly inward-oriented economies. The annual growth

rate was more than 4 percent in Hong Kong and Korea during

the period 1960-midl970s as compared to 1.5 percent or less

for Argentina, Chile, and Peru, In addition, recent World

Bank studies of Turkey and Mexico showed that total factor

productivity growth was low during periods when foreign

exchange control and protection increased. Another World

Bank study showed that total factor productivity grew faster

in most exporting industries than in most import-

substituting industries (WDR 1987). The arguments and

evidence concerning marginal factor productivities were

covered earlier (Tyler 1981; Feder 1982; Kavoussi 1984) .

Specifically, we know that trade policy affects the

level of income and that income affects the rate of growth.

The static link between trade policy and income has been

studied by many economists. This link has been evaluated and

explained in terms of changes in the efficiency of resource

allocation. However, the dynamic link between income and

economic growth / industrialization is far from being

resolved. This dissertation will attempt to show that it is

through capital formation and technological growth that the

link is formed.

Efficient capital formation requires both increased

savings and increased utilization. Two ways to increase

savings is through increased income and increased savings

 72

rates. It has been shown that income growth is positively

related to export growth and that outward-looking economies

grew faster in terms of income and output than did inward-

looking economies. However, the literature is not in

complete agreement with respect to the behavior of savings

and savings rates along with their impact on the rate of

growth.

A second avenue relating to capital formation is the

utilization of capital and the efficiency of investment. It

will be shown that outward-oriented economies foster both

increased and more efficient investment than inward-looking

e c on om ie s.

In addition to the rate of capital formation, the

relationship between the rate of technological growth and

the rate of economic growth will be examined. The factors

affecting the rate of growth of technology will be

identified, tested, and evaluated. Through the analysis of

capital-output ratio proxies and measures of

industrialization efficiency, it will be shown that outward-

looking economies experienced greater rates of technological

growth and efficiency than inward-looking countries. In

addition, the relationship between exports and these factors

will be explored.

Outward-looking strategies are indeed associated with

rapid economic growth and efficient industrialization. The

factors responsible for the link between economic growth and

 73

trade strategy are not yet clearly understood. The

aforementioned factors will be tested and evaluated in an

effort to define this link.

As stated in the introduction, the scope of this

dissertation is to examine a large group of developing

countries, both lesser-developed and newly-industrialized,

and to compare the rates of growth of GNP to the degree of

openness of the economies over an extended period of time.It

will be shown that as countries switch from inward-looking

{closed) toward outward-looking {open) policies, they will

experience higher rates of growth. These potential gains

will be estimated and evaluated within the body of the

paper. Most importantly, the factors responsible for the

link between trade strategy and macroeconomic performance

will be presented, tested, and evaluated in an attempt to

explain why outward-orientation does indeed result in better

economic performance.
 74

CHAPTER THREE

THE MODEL, DATA AND ESTIMATION TECHNIQUE

SECTION 3.1 THE MODEL

In order to further examine the relationship between

trade policy and growth, the link between income growth

(GDP) and investment / industrial development will be

investigated. As stated in the previous section, this study

will identify, test, and evaluate several factors thought to

be responsible for this link. In addition, the relative

importance of deteriorating external conditions {i.e.,

decreased world demand and / or external shocks) on the

performance and effectiveness of outward-looking development

will be tested and evaluated.

The following objectives of this study were considered

prior to the formulation of an empirical model:

1. Examine the actual growth rates for each group of

nations for two time periods: period I (1963-1973) and

period II (1973-1985) .

2. Obtain estimates from a model for all of the

countries both individually (time-series) and grouped

(cross-section) for periods I and II.

3. Compare the model's estimation results for each

group of countries between the two periods.

 75

4. Evaluate the estimation results and relative

c oe fficients.

5. Evaluate / determine the sources of growth between

time periods and country groups.

6. Hope to show that "X" (ratio of exports to GDP) is

the most important variable i.e., that the "degree of

openness" is the most important variable in determing a

country's rate of economic growth.

7. Demonstrate how and explain why a shift from

inward to outward orientation generates increased real

income.

8. Investigate empirically the relationship between

investment, efficiency, productivity and export

growth in inward-looking versus outward-looking

r e g im es .

9. Provide evidence of the adoption of newer, more

efficient technology (i.e., technology transfer) in

outward-oriented nations.

10. Explain why countries that change from inward

looking to outward looking between time periods

experience higher rates of growth.

11. Examine the relative effects and importance of

external conditions on trade orientation and growth

between the two time periods.

12. Show that outward orientation leads to better

economic performance and not vise-versa.

 76

Through examination of the aforementioned objectives,

this study will provide evidence enabling a better

understanding of the link between trade strategy and

economic growth.

With these objectives in mind, the following model was

developed :

Ln Yt = bQ + b^ Ln Xt + b 2 Ln It + bg Ln R t

Y = GDP (in constant prices)

X = Exports as a percentage of GDP

I = Investment as a percentage of GDP

R = Industrial Production as a percentage of GDP

Gross domestic product (GDP) was chosen as the

dependent variable rather than gross national product,

following the lead of Tyler (1981), Feder (1982), Salvatore

(1983), and Ram (1987).

The export variable (X) is defined as the ratio of

exports to gross domestic product. This variable indicates

the degree of openness of the economy. In addition, it

provides a measure of growth of the economy.

Investment (I) is defined as the ratio of investment

(gross fixed capital formation) to gross domestic product.

Investment was defined as such for two reasons. First, to

look at investment in a meaningful way one must examine the

size of investment spending relative to the overall size of

the economy. Failure to do so would result in either an

 77

overestimation or underestimation of the true significance

of changes in the level of, or rate of growth of,

investment spending. Second, the ratio of investment to

output can be viewed as a measure of, or a proxy for, the

capital-output ratio of a nation or a group of nations. By

examining this ratio, one can determine both the relative

efficiency of investment spending and the relative size of

investment expenditures.

The variable selected as a measure of the degree of

industrialization is "R" and it is defined as the ratio of

industrial production to gross domestic product. This

variable indicates the extent of industrial development

relative to the size of the nation. Since industrial

production is a result of past investment, it also provides

a measure (or an indication) of the efficiency and

productivity of past investment spending.

The model will be used to estimate the relative

contributions toward growth of the variables defined for a

single time period (1963-1985) with the individual

countries and for two time periods (1963-1973 and 1973-

1985) for the groups of countries. A lack of a sufficient

number of observations prevents the reliable estimation of

this model for two time periods with the individual

c ountries.

After the model is estimated in the form shown above,

it will be estimated for the individual countries with a

 78

trend variable included:

Ln Yt = b 0 + b^ Ln Xt + lc>2 Ln It + b 3 Ln Rt + b 4 Tt

The variables Y, X, I, and R will be the same as described

earlier. The trend variable will be defined as follows:

T = TREND VARIABLE : T = 1 for the year 1963

T = 2 for the year 1964

T = 3 for the year 1965

II f t II f t I I TT II II I I II II II

T = 22 for the year 1984

T = 23 for the year 1985

This model will be estimated for a single time period for

all 21 of the individual countries. The sample period will

begin at 1963 and will cover through 1985. A more thorough

discussion of the relevance and implication of the inclusion

of a trend variable will be presented in the following

chapter when the empirical results are discussed.

After the model is estimated in the form shown above,

it will be estimated for the individual countries with a

dummy variable replacing the trend variable:

Ln Yt = b 0 + b]_ Ln Xt + b 2 Ln It + b 3 Ln Rt + b 4 Dt

The variables Y, X, I, and R will be the same as described

earlier. The dummy variable will be defined as follows:

 79

D = DUMMY VARIABLE :D = 0 for the years 1963-1973

D = 1 for the years 1973-1985

The use of a dummy variable will allow a test for the

effects of the adverse economic conditions post 1973 (i.e.,

after the 1973 oil shock) for the individual countries. The

single sample period will begin at 1963 and will cover

through 1985. A more thorough discussion will be presented

in the following chapter when the empirical results are

presented and evaluated.

SECTION 3.2 THE DATA

The following points regarding the data to be used in

this study should be noted:

1. Data to be used will be obtained from the IMF

publication entitled International Financial

Statistics and will be supplemented with industrial

production data obtained from United Nations

Industrial Production Yearbook and investment data for

Bangladesh that was obtained from United Nations

Yearbook Of National Account Statistics.

2. Pooled cross-section and time-series data for each

country will be used.

3. Annual data for the years 1963-1985 will be widely

employed.

4. GDP data is in real terms: i.e., 1980 constant

 80

prices.

5. Real GDP for Senegal, Turkey, and the Philippines

was obtained by deflating nominal amounts.

6. The following countries were excluded from the

original sample due to the unavailability of data for

industrial production: Hong Kong, Thailand, Brazil,

Burundi, Ethiopia, Ghana, Sudan, and Tanzania.

SECTION 3.3 ESTIMATION TECHNIQUE

Ordinary Least Squares will be used to estimate the

model in log-linear form, SORITEC is the statistial computer

software package that will be used.

As mentioned earlier, the model will be estimated for

both the individual countries and the groups of countries.

The criteria used to determine the classification of a

nation's market orientation combines the following

quantitative and qualitative indicators: effective rate of

protection, use of direct controls (quotas and import

licensing), use of export incentives, and degree of exchange

rate overvaluation. Data for the years 1963-1985 for 21

countries will be collected and utilized to divide the

countries into the following four categories: strongly

outward-oriented, moderately outward-oriented, moderately

inward-oriented, and strongly inward-oriented. A fifth group

of countries (Chile, Turkey, and Uruguay) that changed their

 81

market orientation from strongly inward to moderately

outward will also be included.

The aforementioned time framework and sample size, as

well as the criteria for the determination of each country's

classification, are almost identical to that followed by the

World Development Report (1987, ch.5: see appendix A at end

of this p a p e r ) . One noteworthy exception is the sample size:

the World Bank study was based on 41 countries while this

empirical study is based on 21 countries. The nations that

changed from moderately-inward looking to moderately-outward

looking and vice versa were omitted. Furthermore, the

countries that changed from strongly-inward looking to

moderately-inward looking and vice versa were also omitted.

These exclusions decreased the sample size to 29 countries.

Lastly, after eliminating those nations for which there was

no data available on industrial production, the final sample

size of 21 countries was established.

Despite the possibility of disagreement over the

determination of the two intermediate subgroups, the

countries classified as extreme cases are not subject to

dubious scrutiny. Listed below are the countries included in

this study and their classification of market orientation:

 82

1) Period One = 1963 - 1973

* Strongly Outward : Singapore, Korea

* Moderately Outward : Israel, Malaysia

* Moderately Inward : El Salvador, Honduras, Kenya,

Mexico,Nicaragua, Philippines, Senegal, Yugoslavia

* Strongly Inward : Dominican Republic, India, Peru,

Zambia, Argentina, Bangladesh,

*Chile, *Turkey, ^Uruguay

2) Period Two = 1973 - 1985

* Strongly Outward : Singapore, Korea

* Moderately Outward : Israel, Malaysia, *Chile, *Turkey,

*Uruguay

* Moderately Inward : El Salvador, Honduras, Kenya,

Mexico,Nicaragua, Philippines, Senegal, Yugoslavia

* Strongly Inward : Dominican Republic, India, Peru,

Zambia, Argentina, Bangladesh,

The following point is worth noting. Because the model

is estimated in log-linear form, an individual regression

coefficient can be interpreted as an elasticity: i.e., if

one of the independent variables, (Xt ) for example, changes

by one percent while the others are held constant, then the

dependent variable will change by (b^) percent. This

interpretation, as opposed to the normal definition of the

regression coefficient, provides added significance to the

 83

relative sizes of the estimated coefficients when evaluating

the effects of the independent variables on GDP.

 84

CHAPTER FOUR

EMPIRICAL RESULTS

SECTION 4.1 OVERVIEW

There has been a multitude of research conducted aimed

at the determination! of a better understanding of the

relationship between trade policy orientation and economic

growth. An overview of the fundamental arguments of outward-

looking versus inward-looking development strategies

presented in the second chapter gives one an idea of the

complexity and difficulty involved in examining the linkages

between trade and growth. The role of exports in economic

growth has indeed been assessed by many researchers with a

majority of the empirical work concluding that exports are

associated with better growth. However , despite the many

studies that confirm a strong correlation between exports

and growth, there exists an opportunity to contribute to our

understanding of the causal structure.

The results of this study are presented in sections 4.2

and 4,3. Section 4.2 will present the empirical results of

the variables estimated and will evaluate their relative

importance in explaining the links between exports and

economic growth. An appraisal of the overall performance of

the model will be covered in section 4,3. An analysis of the

 85
policy implications, along with the summary and conclusions

of this study, are left for the fifth and final chapter.

Before evaluating the variables used in the estimation

of this study, a brief review of the export variables as

defined in the most important studies reviewed in chapter

two are cited below.

As noted in section 2.5, Michalopoulos and Jay (1973)

estimated an aggregate neoclassical production function for

a group of countries. Their results showed that GNP growth

was significantly correlated to the rate of growth of

exports and exports were found to be highly significant.

Their export variable was defined as the change in exports

relative to the change in GNP i.e., the incremental export-

GNP ratio. Michaely (1977) examined the change in the

proportion of exports to GNP in relation to the rate of

growth of GNP in 41 developing countries. In order to avoid

autocorrelation between exports and GNP, Michaely used the

change in the share of exports in GNP to represent the

growth of exports which was then regressed against the rate

of change of per capita income (1977, pages 50-51) . His

results showed a significant correlation between the two.

Krueger (1978) regressed GNP growth for 10 countries

against the rate of export growth and found a significantly

positive relationship between the two. In her study, the

export variable was defined as the increase in exports as a

proportion of the exports in the initial period (1978, page

 86
273). Balassa (1978) reestimated Michaely's equations with

modifications that incorporated factors tested by

Michalopoulos and Jay for 11 LDCs. He found a strong

relationship between exports and GNP growth. His export

variable was defined as the incremental export-GNP ratio,

the same as in Michalopoulos and Jay's study (1978, page

186). Feder's research (1982) also found a positive

correlation between exports and GDP growth. In addition,

evidence supporting the hypothesis that export-oriented

policies resulted in optimal resource allocation and

improved productivity was presented. The export variable in

this study was defined as the increase in exports as a

proportion of GNP in the initial period (1982, page 65).

Tyler's work (1981) differed from Michaely's in that it

involved a different choice in measuring the export growth

variable (annual average real growth rate of total exports),

the analysis of additional relationships, the inclusion of

more countries, and the restriction of the use of only

middle income countries (1981, pages 123, 127). However,

Tyler's results reinforced Michaely's in that a significant

positive correlation between GNP growth and exports was

found.

Kavoussi (1984) examined the relationship between

exports and economic growth using a production function

approach in which the growth rate of exports (average annual

real growth rate of merchandise exports) was found to be

 87
positively correlated with GNP. The author found that an

important cause of this association is an increase in total

factor productivity resulting from the expansion of export

production (1984, page 127).

Balassa (1985) examined the export-economic growth

relationship in the period of external shocks after 1973 in

an effort to determine whether export orientation was still

an effective growth strategy despite a deterioration in the

world economic environment. The author reestimated the

equations used in his 1978 study with the inclusion of a

trade orientation and an export promotion variable. The

export variables used were defined as the change in

merchandise exports between 1973 and 197 8 as a percentage of

the 1973 value and the ratio of merchandise exports to GNP;

the 1973 share of manufactured goods in total exports; and

the ratio of merchandise exports to GNP in 1973 (1985, pages

25, 27). The results showed that the rate of growth of

exports importantly affected the rate of economic growth.

When estimated utilizing the product of export growth and

the share of exports in GDP (instead of export growth

alone), the results were only slightly different (1985,

pages 27, 30). Furthermore, the estimation results indicated

that an outward-oriented policy stance at the beginning of

the period and reliance on export promotion in response to

external shocks improved the nation7 s growth performance

(1985, page 34).

 In Ram's (1985) study, a production function model was

estimated in which exports were treated as a production

input along with capital and labor. This straightfoward

technique is the same as that used by previous researchers

who employed a production function approach (cited ea r l i e r ) .

The export variable used was defined as the average annual

rate of growth of exports (percentage c h a n g e ) . The

estimation results showed that exports were important for

economic growth and that this importance increased during

the 1970-1977 period compared to the 1960s (1985, page 419).

In an extension of the 1985 study, Ram (1987) provides

estimates of two models of the export-growth linkage using

annual time-series data for each of a large group of L D C s .

In addition, cross-section estimates of the models are

reported for two separate periods: 1960-1972 and 1972-1982.

The first model was based on an aggregate production

function in which exports were treated as an input in the

production process and were measured the same as in the 1985

work. The second model was derived from the framework

employed by Feder (1982) in which the following assumptions

were made: separate production functions were specified for

the export and nonexport sectors; the output of the export

sector is explicitly postulated to generate an externality

effect on the output of the nonexport sector; relative

factor productivity is modeled to differ between the export

and nonexport sectors (1987, page 54). The export variable

 89
used was defined as the average annual rate of growth of

exports (%) times the ratio of exports to GDP (1987, page

53). The results, as discussed earlier, supported the

positive effect of exports on economic growth.

Utilizing a completely different framework of analysis,

Salvatore's (1983) study developed a simultaneous equations

model in which exports appeared in all four of the model's

equations. Exports appeared as right-hand-side variables in

the industrial output equation, the investment equation, and

the growth equation. In the growth function, the export

variable was defined as the growth in the percentage of

exports to G D P . In the investment equation and the

industrial output equation, the export variable was defined

as exports as a percentage of GDP. For the final equation of

the model, exports appeared as the left-hand-side variable

and was defined as exports as a percentage of GDP (1983,

page 77). As cited earlier, the results of the estimation

and dynamic simulation of this model showed that trade /

exports were very important for development but to be more a

handmaiden than an engine of growth (1983, page 89).

The empirical results of this dissertation also

indicate that exports are indeed more a handmaiden than an

engine of growth. However, through careful analysis of the

regression results, one finds evidence that increased

efficiency of investment, production, and resource

allocation are integral parts of the identification and

 90
formulation of the nebulous link between trade policy,

exports and economic growth.

Having established the specific formulation of the

export variables in the aforementioned studies, the

following section presents the empirical results of the

variables estimated in this study and will evaluate their

relative importance in explaining the links between exports

and economic growth. In addition, the important distinctions

between the variables chosen and the results obtained by

this study and its predecessors will also be addressed.

SECTION 4.2 EVALUATION OF VARIABLES

The empirical results of the variables estimated in

this study are presented below (the reader may wish to note

that a comprehensive listing of all regression results along

with their descriptive statistics can be found at the end of

this paper in appendices B through E immediately following

the bibliography). The first table presents the results of

the cross-section estimates of the countries grouped

according to their trade orientation for two time periods:

1963-1973 and 1973-1985. The second table lists the

regression results for the individual countries covering a

single time period (1963-1985) with the inclusion of a trend

vari a bl e.

As cited in the third chapter, all of the variables

utilized in this study are defined as follows:

Y = GDP {in constant 1980 prices)

X = Exports as a percentage of GDP

I = Investment as a percentage of GDP

R = Industrial Production as a percentage of GDP

T = Trend Variable

D = Dummy Variable

The primary variables (Y, X, I, R) will be analyzed first.

The secondary variables (T and D) used in the estimation of

the individual country regressions will then be addressed.

The dependent variable, gross domestic product (GDP) ,

was measured in real terms. The rationale for dealing with

real rather than nominal amounts is to eliminate any

apparent growth that is simply the result of price

increases. GDP was selected instead of GNP as the dependent

variable primarily because current researchers prefer it as

a better measure when examining the relationship between

exports and growth (Tyler 1981; Feder 1982; Salvatore 1983;

Findlay 1984A; Ram 1987; Balassa 1988).

 92

CROSS-SECTION GROUP ESTIMATES: ADJUSTED FOR AR(1)

[T-Statistics in Parentheses]

TRADE ORIENTATION X I R

TIME PERIOD ONE: 1963- 1973

Strongly Outward: * 0.65 1.00 1. 61

(3.32) (5.55) (5.93)

Moderately Outward: 0.12 0.46 - 0.58

(1.55) (5.52) (-42.64

Moderately Inward: 0.19 0. 68 - 0.89

(2.82) (4.23) (-26.90

Strongly Inward: - 0.37 0.19 - 0.14

(-1-74) (0.68) (-2.22)

Changed Orientation: ** 2.22 - 2.37 - 0.38

(11.08) (-8.45) (-9.63)

TIME PERIOD TWO (1973- 1985)

Strongly Outward: *** 0.12 0.36 - 0.13

(1.82) (3.39) (-2.38)

Moderately Outward: 0 .19 0.84 - 0.25

(1.12) (1.47) (-3.22)

Moderately Inward: 0.37 0.55 - 0.59

(2.97) (4.08) (-14.54

Strongly Inward: - 0.18 - 0.31 - 0.21

(-2. 69) (-12.39) (-13.62

Changed Orientation: - 1.21 - 0.79 0.04

(-2.91) (-1.36) (0.57)

* (I) Strongly Outward Period I results remained in the

INDETERMINANT RANGE of the DW statistic regardlesi
of the adjustment process and are thus reported
UNADJUSTED (i.e. OLS)
* * (II) Changed Orientation Period I did not require
adjustment and is thus reported UNADJUSTED.
*** (III) Strongly Outward Period II results were adjusted
for A R (2)
 93

INDIVIDUAL COUNTRY REGRESSIONS WITH TREND VARIABLE

1963-1985 ADJUSTED FOR AR(1) fT-Stat1stics In Parentheses1

Country X I R T

Singapore ** 0.037 0.239 0.125 0.083

(0.588) (1.18) (1.17) (8.43)

Korea - 0.110 - 0.041 0.377 0.084

(-1. 669) (-0.641) (3.805) (7.312)

Israel ** 0.001 0.21 0.05 0.07

(0 .07) (2.93) (5.76) (18.13)

Malaysia - 0.19 0.27 - 1.13 0. 05

(-0.498) (1.281) (-1.453) (1.607)

El Salvador 0.009 0.13 - 0.23 - 453.2

(0.144) (2.946) (-2.928) (-4.273)

Honduras 0.61 0.17 - 0.29 0.062

(1.456) (0.515) (-1.158) (3.034)

Kenya 0.227 0.171 0.171 0.061

(2.921) (2.166) (1.665) (9.877)

Mexico - 0.03 0.117 0.179 272.65

(-1.450) (3.307) (3.868) (2.298)

Nicaragua - 0.054 0.17 - 0.086 - 592.9

(-0.858) (3.803) (-0.479) (-2.862)

Philippines - 0.15 0. 049 - 0.345 0.008

(-2.957) (0.439) (-2.623) (0.775)

Senegal 0.075 0.142 - 0.013 - 0.001

(0.925) (0.824) (-0.093) (-0.141)

Yugoslavia 0.007 0.168 0.111 0.068

(0.217) (2.219) (2.196) (8 .714)

Chile - 0.155 0.164 0.012 0.032

(-3.266) (3.122) (0.843) (3.060)

Turkey 0.085 - 0.010 0.223 0.124

(1.175) (-0.094) (2.607) (5.685)

Uruguay - 0.082 0.189 - 0.0004 0.019

(-1.770) (4.418) (-0.008) (0.918)
 94

INDIVIDUAL COUNTRY REGRESSIONS WITH TREND VARIABLE

1963-1985 ADJUSTED FOR AR(1) \T-Statistics in Parenthesesl

Country X I R T

Argentina 0.001 - 0.017 0.010 0.003

(0.078) (-0.596) (0.428) (0.133)

Bangladesh - 0.077 0.036 - 0.042 0. 031

(-1.202) (1.628) (-0.680) (4.354)

Dominican 0.082 0.170 0.225 0.074

Republic (1.613) (3.652) (2.502) (8.685)

India - 0.113 0.136 - 0.106 0.032

(-1.607) (0.804) (-0.831) (2.983)

Peru ## - 0.03 0.07 0.10 0.05

(-1.52) (2.30) (10.44) (25.70)

Zambia - 0.104 - 0.082 - 0.315 - 0.105

(-1.239) (-0.783) (-2.148) (-4.252)

** Singapore and Israel both remained within the

INDETERMINANT RANGE of the DW statistic regardless
of the adjustment process and are thus reported
UNADJUSTED.
## Peru falls within the ACCEPTABLE RANGE of the DW
statistic both with and without adjustment and is
thus reported UNADJUSTED.

The primary reason for preferring GDP as opposed to GNP is

that the former measure is restricted to output / income

that is actually produced or generated within the country

(i.e., local production) whereas the latter measure includes

output f income produced or generated by domestic firms

operations abroad and thus is not truly related to the home

country's trade policy stance.

 With the exception of Krueger (1978) , the dependent

variable in virtually all of the studies cited earlier was

the rate of growth of GNP or GDP. One can not estimate the

absolute level of GNP or GDP due to fact that exports are

themselves a component of the economy's output and thus are

most likely positively correlated with output. The dependent

variable must be transformed in order to overcome this

correlation problem. In this study, output was transformed

through the use of logarithms: the log of GDP rather than

the rate of growth of GDP was estimated. Krueger also opted

for this method of transformation when estimating the

contribution of exports to economic growth in her NBER

summary text (1978, page 273).

Before proceeding with the analysis of the independent

variables, one should keep the following point in mind. The

primary statistical analysis of this study is based on the

cross-section estimates of the countries grouped according

to trade orientation for two time periods. The individual

country regressions are secondary in that they serve as an

additional source of information and validation of the

cross-section results. The lack of a sufficient number of

observations prohibits one from obtaining reliable estimates

of the individual country regressions for two time periods.

Consequently, the individual country regressions were

estimated for a single 23 year time period utilizing a dummy

variable which served to distinguish between the two time

 96
periods for which the country groups were estimated.

Although these results are not directly comparable to those

of the country groups, they do serve as a test of the

relative importance of external conditions or "exogenous

shocks" on the individual countries during the two time

periods. The individual country regressions that contained a

trend variable are also secondary in that they merely

provide a test for the possibility of missing variables. A

more thorough analysis of both the dummy and trend variables

will be presented at the end of this section. An evaluation

of the primary variables estimated, with special focus on

the cross-section country groups, is presented below.

The export variable estimated in this study (X) is

defined as the ratio of exports to gross domestic product.

This variable indicates the degree of openness of the

economy: the higher the proportion of exports to GDP, the

more open the economy. At the onset of this study, one of

the objectives was to demonstrate that "X” was the most

important variable: i.e., that the degree of openness was

the most important variable in determining a nation's rate

of economic growth.

Upon inspection of the results of both the grouped and

individual country regressions, one discovers that the

expectations of the relative importance of exports at the

onset of this study are not supported empirically. The

export variable did not prove to be the most important in

 97
explaining the superior growth performance of the outward-

looking nations. It was, however, positive and significant

for outward-looking and negative and significant for the

inward-looking country groups.

In the first time period, the coefficient of the export

variable was 0.65 (t-statistic value of 3.32) for the

strongly outward-looking country group compared to -0.37 (t-

statistic value of -1.74) for the strongly inward-looking

group. For the second time period, the export variable's

coefficient was 0.12 with a t-statistic of 1.82 for the

strongly outward-looking group opposed to a value of -0.18

with a t-statistic of -2.69 for the strongly inward-looking

group. These statistics clearly indicate a positive

correlation between exports and GDP growth for the strongly

outward-looking country group and a negative correlation for

the strongly inward-looking group during both the 1963-1973

and the 1973-1985 periods.

These results support the proposition of the existence

of a strong cross-country association between export

performance and GDP growth: higher rates of economic growth

are indeed associated with higher rates of export growth.

For the strongly outward-looking countries, the combined

average annual growth of GDP was 10.6 percent for the first

period and 7.6 percent for the second period as compared to

4.3 percent and 2.8 percent respectively for the strongly

inward-looking country group. The average annual growth rate

 98
of manufactured exports for the strongly outward-looking

group was nearly three times larger than those of the

strongly inward-looking group over both time periods.

The estimation results for the intermediate groups were

neither as supportive or encouraging as those of the extreme

country groups. The export variable for the moderately

outward-looking group had an estimated coefficient of 0.12

for the first time period and 0.19 for the second time

period. However, in both instance the variable was not

statistically significant. The t-statistic was only 1.55 for

the earlier time period and 1.12 for the second period.

Despite the expected positive relationship between the

export variable and GDP, the results are not strong enough

to justify any substantive conclusions.

A possible explanation for the lack of statistically

significant results for the export variable in the

moderately outward-looking group as well as for the

surprisingly strong positive results for the moderately

inward-looking group can be traced to the method of

classification through which the nations were grouped (see

appendix A for a comprehensive interpretation of the

determination of trade orientation). Although the factors

considered in determining a country's market orientation

were many (extent of trade controls; licensing arrangements;

effective exchange rates; and overall incentive structures),

 99
the ability to distinguish between the two intermediate

groups is quite difficult.

Generally speaking, for a nation to be considered

strongly outward-oriented, trade controls are either very

low or nonexistent and the effective exchange rates for

importables and exportables are roughly equal. For strongly

inward-looking countries, the overall incentive structure

strongly favors production for the domestic market and

direct controls and licensing disincentives to the

traditional export sector are pervasive. In addition,

positive incentives to nontraditional exportables are either

few or nonexistent and the exchange rate is significantly

overvalued (WDR 1987, pages 82-83). The determination of

these two extreme orientations does not appear to pose any

problems: one could hardly mistake a strongly inward-looking

trade policy for a strongly outward-looking one. The ability

for one to distinguish between a moderately outward-looking

and a moderately inward-looking policy stance is not nearly

as straightfoward.

In order to determine whether a country is moderately

outward-oriented as opposed to moderately inward-oriented,

one must examine the relative "degree" of, rather than the

presence or absence of, trade controls and licensing

arrangements. With respect to the effective exchange rate

for importables and exportables, a distinction between

slightly favoring one over the other is paramount. Unlike

 100
the determination of the extreme orientations, the

classification of the moderately-oriented countries is far

less certain and is subject to scrutiny.

The imprecision with which the distinction between

moderately inward-oriented and moderately outward-looking is

made renders their results to be more in the nature of a

"grey area" than an area in which one can draw specific

conclusions with a high level of certitude. Consequently,

when examining the export variable as well as the other

variables estimated in this study, one has to be extremely

careful not to place too much emphasis on the distinction

between and the estimation results obtained by both the

moderately outward-oriented and the moderately inward-

oriented country g ro u p s .

The results of the export variable for the group of

countries that changed orientation are quite peculiar. For

the 1963-1973 period, the coefficient was 2.22 with a t-

statistic of 11.08. For the 1973-1985 period, the estimated

coefficient was -1.21 with a t-statistic of -2.91. The

results indicate a strong, statistically significant

positive relationship between exports and growth for the

period during which the three countries were classified as

strongly inward-looking and negative for the period in which

they were classified as moderately outward-oriented.

According to the logic presented both in the propositions of

this study and in the results of virtually all preceding

 101
research, one would expect a negative coefficient for the

first period and a positive coefficient for the second

period. However, these unexpected results might have been

caused by problems that arose from macroeconomic

mismanagement during the transition to a more open economy

(Krueger 1974; Corbo and deMelo 1987).

Although the countries in this group (Chile, Turkey,

and Uruguay) did change their trade policies from a strongly

inward-looking to a more outward-looking orientation, the

relative success of each country's efforts is a

controversial topic. Turkey was eventually successful in

increasing its exports considerably in the 1980-1985 period.

Following a tumultuous period during the late 1970s,

Turkey's real exchange rate appreciated 22 percent in 1979.

However, the subsequent re-establishment of the real

exchange rate to its earlier level resulted in a rapid

increase in exports. Between 1980 and 1983, Turkey's exports

doubled and GDP increased by 14 percent. Despite adverse

world economic conditions, Turkey was able to increase

exports and experience a healthy rise in her rate of growth.

The estimates obtained for Turkey in the individual

country regressions support the correlation between exports

and growth. The coefficient of the export variable was 0.085

with a t-statistic of 1.175 when estimated with the

inclusion of the trend variable and was 0.065 with a t-

statistic of 1.082 when estimated with the dummy variable.

 102
Although the levels of significance are a little low, the

results do indicate the positive contribution of exports. In

addition, the coefficient of the dummy variable was 0.120

with a t-statistic of 2.57. This indicates that the adverse

effects of external conditions during the second time period

were not as detrimental as some have claimed (the dummy

variable's significance will be addressed at the end of this

s ection). These results cited lend support for the relative

success of Turkey's outward-looking policy stance adopted in

the mid-1970s.

Despite Turkey's improved performance in the 1980s, it

experienced many problems as did the other two nations in

their attempt to change their trade policy orientation

(Krueger 1974 and 1978; Bhagwati 1978; Behrman 1976) . All

three countries, with different timing and intensity,

removed many price controls, reduced restrictions on trade

and capital flows, liberalized interest rates, and partially

deregulated their labor markets. The degree of stabilization

and liberalization attained by the countries varied

considerably, as did the strength with which the policies

were implemented. In Turkey's and Chile's case, reforms were

fairly widespread (see Krueger 1978 NBER summary text for a

complete analysis of liberalization attempts and results).

Trade liberalization in Uruguay was not as extensive as in

Turkey and Chile, and in all three cases the liberalization

was a gradual process (Behrman 197 6) . In the process of

 103
attempting to change their market orientations, each nation

encountered a variety of problems (Behrman 1976; Krueger

1974 and 1978; Bhagwati 1978; Balassa 1980; Corbo and deMelo

1987). In many respects, Chile's and Uruguay's efforts to

open their economies and to maintain a stable macroeconomic

environment failed and the resultant problems and pressures

were instrumental in the collapse of their economies in the

early 1980s. Turkey's reforms appear to have had a much more

favorable impact on its economy's performance, especially

during the 1980s.

The reasons for the inability of Chile and Uruguay to

successfully change their orientation is not a subject of

mutual agreement among economists. However, as Corbo and

deMelo (1987) explain, many of the microeconomic reforms

were quite successful but mismanagement of the macro economy

during the transition rendered their efforts futile (Corbo

and deMelo 1987, page 111) . Regardless of ones beliefs

concerning the reasons for their unsatisfactory performance,

the focus of this study is on the relationship between

exports, trade policy and economic growth — not on the

process by which nations successfully implement and maintain

an outward-looking policy stance. Thus, at this time what is

relevant is an explanation of the estimation results for

this country group with respect to the export variable.

Having shown the beneficial effect of exports on growth in

the case of Turkey, an evaluation of the estimated

 104
coefficients of the export variable for Chile and Uruguay

will help to explain the curious results obtained for the

group as a whole.

Both the rate of growth of GDP and the performance of

exports for Chile and Uruguay appear to have been

satisfactory during both time periods. However, when one

takes into account the effect of price increases, the gains

posted decline considerably. In real terms, Chile's GDP grew

an average of about 3 percent annually during the first

period and a little over 2 percent annually during the

second period. Uruguay experienced an average annual

increase in real GDP of about 1.5 percent and 1.2 percent

respectively. In nominal terms, the exports of Chile grew at

an average annual rate of roughly 9 percent during the 1963-

1973 period and 14 percent during the 1973-1985 period.

Uruguay experienced an increase in exports from an average

annual rate of growth of 8 percent to about 13 percent

between the two periods. Relatively speaking, both countries

were able to increase exports during the second time period.

However, unsuccessful stabilization policies resulted in

widespread inflation during the second period in both cases.

Both countries did experience a higher rate of growth of GDP

in the second period, but the detrimental effects of

inflation rendered these gains smaller in real terms than

those of the earlier period.

 105
The estimated coefficient of the export variable for

Chile was negative and significant in all regressions,

regardless of whether or not a trend or dummy variable was

included. Uruguay's results also showed a relatively strong

negative relationship between exports and GDP. However,

these results are for the single 1963-1985 period. It is

quite possible that the positive relationship between

exports and GDP that showed up in the first period group

results either went undetected or were very much distorted

as a result of the turbulent internal economic conditions in

both countries during the second time period. Even though

these three countries were classified as inward-looking

during the first time period, they all experienced a modest

rate of growth of exports as cited above. Thus, for the

1963-1973 period, the coefficient of the export variable of

2.22 with a t-statistic of 11.08 for the group regression is

not too surprising. For the second period, the estimated

coefficient of -1.21 with a t-statistic of -2.91 is

surprising because it is during this period that they were

classified as moderately outward-oriented. These results do

indicate a negative relationship between exports and GDP but

one must consider the nature of and the extent of the

prevalent market distortions and subsequent misalignments

present in the economy of both Chile and Uruguay.

With respect to the strongly outward-looking versus

strongly inward-looking cross-section results, the

 106
estimation results of the export variable in this study do

not differ significantly from those obtained by previous

researchers: exports are positively related to growth but

are more a handmaiden than an engine of growth. Attention is

now turned to the other primary variables estimated in this

study in an attempt to illustrate their relative importance

in explaining the links between trade policy, exports and

economic growth.

The investment variable estimated in this study (I) is

defined as the ratio of investment (gross fixed capital

formation) to gross domestic product. Investment was defined

in this manner for two reasons. It is important to examine

the size of investment spending relative to the overall size

the economy — failure to do so would result in either an

overestimation or underestimation of the true significance

of changes in the level of investment spending. Moreover,

the ratio of investment to output can be taken as a measure

of, or a proxy for, the capital-output ratio of a nation or

a group of nations. By examining this ratio, one can

determine both the relative efficiency of investment

spending and the relative size of investment expenditures.

Within the general production function framework

discussed earlier (i.e., Y = f[L, K, X]), which has its

origins with Solow's 1957 work , researchers have examined

growth by converting the variables from levels to rates of

growth, taking total derivatives and manipulating terms such

 107
that the rate of growth of output is found to be a function

of the rate of growth of labor, capital, and exports (Tyler

1981; Feder 1982; Ram 1985 and 1987). Since the rate of

growth of capital input is usually unknown for most

countries, the equation can be reformulated by replacing the

rate of growth of capital with the ratio of the change in

capital to the change in output. This variable approximates

the ratio of investment to income and with still further

manipulation, the final form estimated utilizes the ratio of

investment to income as the capital-growth variable (Feder

1982; Ram 1985). A valuable by-product of this formulation

is that the coefficient of the investment variable (the

ratio of investment to output) provides an estimate of the

marginal productivity of capital (Feder 1982; Ram 1985 and

1987). With this framework of analysis in mind, the validity

and relevance of the investment variable estimated in this

study should be clear.

The results of the cross-section regressions lend

strong support to the outward-looking development argument.

The estimated coefficients of the investment variable were

positive and significant in both time periods for the

strongly outward-looking group and were positive but

insignificant in the first period and negative and

significant for the second period for the strongly inward-

looking group.In the first time period, the coefficient of

the investment variable was 1.00 (t-statistic value of 5.55)

 108
for the strongly outward-looking country group compared to

0.19 (t-statistic value of 0.68) for the strongly inward-

looking group. For the second time period, the investment

variable's coefficient was 0.36 with a t-statistic of 3.39

for the strongly outward-looking group opposed to a value of

-0.31 with a t-statistic of -12.39 for the strongly inward-

looking group.

The estimation results for the moderately oriented

country groups were not as encouraging as those of the

strongly oriented groups. The coefficient of the investment

variable for the moderately outward-looking class was 0.4 6

with a t-statistic of 5.52 for the 1963-1973 period and 0.84

with a t-statistic of 1.47 for the 1973-1985 period.

Although it remained positive, it's level of significance

declined considerably during the second time period. For the

moderately inward-looking group, the coefficient was 0.68

with a t-statistic of 4,23 for the earlier time period and

0.55 with a t-statistic of 4.08 for the latter. Again, one

must exercise a certain degree of caution when drawing

conclusions based soley on the distinction between the

moderately oriented country groups due to the process that

distingushes the two orientations (discussed earlier in

connection with the analysis of the export v a ri ab le ).

Nevertheless, the results indicate several valuable points.

First, the estimated coefficient (i.e., the proxy for

the marginal product of capital) declined for the strongly

 109
outward-looking group in the second period: although it

remained statistically significant, the productivity of

capital or investment spending declined. This does not

necessarily mean that investment became inefficient for

these countries. It could simply indicate that as the

countries in this group continued to grow and mature into

newly industrialized countries (NICs) during the 1970s, the

rate of increase in the productivity of capital declined.

This would not be unexpected as an economy makes the

transition from an LDC to an NIC: the rapid rates of growth

of the adoption of new technologies and the initial dramatic

advances in efficiency are almost inevitably bound to

decline after some point in time. In this case, the period

of external shocks and the deterioration in the worldwide

economic environment could have had an impact on the

timetable of the aforementioned productivity slowdown.

Second, the results of the strongly inward-looking

class illustrate a considerable decline in the efficiency

and productivity of investment. Not only did the coefficient

decline, it changed from slightly positive to strongly

negative. During the first period, the results were not

statistically significant but they at least indicated a

positive relationship. For the 1973-1985 period, the results

show a marked decline in the productivity of investment

spending. These results support the arguments put forth in

favor of outward-looking development and confirm the claims

 110
of inefficiency and counter-productivity waged at proponents

of inward-looking development strategies (see Brecher and

Diaz-Alejandro 1977).

Third, the moderately outward-looking group's

investment variable declined in significance although its

coefficient increased from 0.46 to 0.84. These results

indicate that the relative efficiency of investment

increased over the two time periods. A possible reason for

the decline in the significance of this variable's influence

on GDP during the second time period is the inclusion of the

three countries that changed orientation and were classified

as moderately outward for the 1973-1985 period. The results

of these three countries estimated separately as a single

group will be discussed after those of the moderately inward

group below.

Fourth, the estimates for the moderately inward class

remained positive and significant during both time periods.

It is possible that the relative inefficiencies fostered by

inward-looking development did not have an effect on the

first period's results because the economies were still in

the first "easy" stage of import substitution and thus did

not yet reach the point where noticeable misallocation and

inefficiency set in. As for the second period, the t-

statistic remained strong (4.08 versus 4.23 earlier) but the

coefficient declined slightly. Thus, the relative efficiency

 Ill
of investment spending appears to have declined for the

group as a whole although the decline was rather small.

Finally, the group that changed orientation lend a

considerable amount of support in favor of the outward-

looking argument. For the 1963-1973 period during which they

were classified as strongly inward, the coefficient of

investment was negative and quite strong statistically:

-2.37 with a t-statistic of -8.45. However, for the second

period when their policies were more open, the coefficient

became less negative. The degree of inefficiency declined

considerably, which indicates a more productive use of

investment (or capital) spending during the second --

despite adverse external conditions. Also noteworthy is the

idea that the negative coefficient for this group of three

nations may have been responsible for pulling down the

significance of the results of the moderately outward group

with which they were included during the second time period

(point number three a b o v e ) .

The results obtained by Feder (1982) and Ram (1985 and

1987) are not truly comparable to the estimates cited above.

Although their definition of the investment variable is the

same as that used in this study, the following differences

are crucial. Feder's estimates were based on a mix of both

inward-looking and outward-looking nations for the years

1964-1973 (Feder 1982, pages 71-72). Ram's 1985 results were

obtained utilizing two different time periods (1960-1970 and

 112
1970-1977) but also were based on a group of countries

employing varied trade orientations (Ram 1985, page 423). In

the 1987 follow-up study, Ram's time periods were widened to

cover the years 1960-1972 and 1973-1982 and distinguished

between middle-income and low-income countries but again did

not take into account trade orientation (Ram 1987, pages 52,

64-68). Despite the aforementioned distinctions, the results

obtained by both researchers indicated that the investment

variable is strongly significant, although the degree of

significance declined as the country's level of income

declined (Ram 1987, pages 60-61).

In Salvatore's (1983) dynamic model of trade and

development, investment was determined both endogenously and

exogenously. In both equations, the investment variable was

defined as gross fixed capital formation as a percentage of

GDP. The investment equation made investment a function of

real per capita income, the growth of real per capita

income, exports as a percentage of GDP, and capital inflow

as a percentage of GDP. In the growth function, investment

was exogenous. The model was tested for 52 nations which

were grouped as follows: large (population of 20 million or

more = L ) ; small industry-oriented (SI) ; and small primary-

oriented (SP) (Salvatore 1983, page 73).

The estimated coefficient of the investment variable in

the growth equation was 0.056 for SI, 0.186 for SP, and

0.696 for L. An explanation offered for the relatively large

 113
value of the coefficient for the L group in relation to SP

group is that the existence of a fairly well developed

infrastructure enables investment to go directly into

productive uses. With respect to the SI class, the larger

coefficient for the L group may in part be due to the high

level of subsidy and exchange benefits provided to investors

in their strong push for industrialization through import

substitution (Salvatore 1983, pages 76-78). Although the

countries were not grouped according to their trade policy

orientation, valuable insights are obtained through the

model's dynamic policy and counterfactual simulations which

help to explain the simultaneous and dynamic relationship

between international trade and economic growth. These

results will be discussed further in the subsequent sections

of this study.

The variable selected as a measure of the degree of

industrialization is "R" and it is defined as the ratio of

industrial production to gross domestic product. This

variable provides an indication of the extent of industrial

development relative to the size of the nation. Since

industrial production is a result of past investment, it

also provides a measure of the efficiency and productivity

of past investment spending.

This 'industrialization' variable (R) was utilized by

Salvatore (1983) in his dynamic model of trade and

development cited earlier. The theoretical logic behind the

 114
formulation and definition of this variable is indeed

unique, as is the notion of a simultaneous equations model

capable of examining the dynamic relationship between

international trade, industrialization, and exports. As

discussed in chapter two, this simultaneous equations model

represents a break from the past into an essentially new

direction in that all models of trade and development, both

prior to and subsequent to Salvatore's model, are either of

the single equation or simple correlation type. Although the

model estimated in this study is not simultaneous, it

incorporates many of the theoretical uderpinnings that were

hypothesizes and empirically verified by Salvatore. The

rationale behind the industrialization variable is presented

below.

The aggregate production function models discussed

earlier do not address the effects of structural changes on

growth and development. In the development process, capital

and labor move from agriculture and other traditional

sectors in which productivity is low to a more efficient

industrial sector. The speed with which this process takes

place depends on the rate of capital formation. The

industrialization variable (R), which is the current ratio

of aggregate output originating in industry, reflects the

rate of past investments. Thus, R can be used as a proxy for

the rate of investments in previous years when formulating a

growth equation. In addition, a relatively high and rising R

 115
indicates that the developing country probably has many of

the prerequisites for continued growth, such as basic

infrastructures and some skilled labor (Salvatore 1983:

pages 68, 75-78, 82-84).

The cross-section empirirical results of the

industrialization variable (R) obtained by this study for

the different trade orientations were quite interesting. A

proponent of outward orientation would expect to find the

estimated coefficient of R to be larger the more open a

nation's economy. This would indicate that higher levels of

investment spending in previous years has resulted in

increased capital formation which has, in turn, enabled the

factors of production to change over to a more efficient

industrial sector and thus to contribute significantly to

the level of output or income. Although R is only a proxy

for the rate of investment in previous years, the causal

relationship between investment spending (capital formation)

and industrialization has been demonstrated and tested

(Salvatore 1983, pages 68-79).

The estimated coefficient of R for the strongly

outward-looking group was 1.61 (with a t-statistic of 5.93)

for the first period and -0.13 (t-statistic of -2.38) for

the second period. For the strongly inward-looking country

group, the coefficient was -0.14 (t-statistic of -2.22) for

the 1963-1973 period and -0.21 (t-statistic of -13.62).

 116
The positive and highly significant results for the

strongly outward-looking group for the first period lends

strong support in favor of the outward-looking trade

a g ru me nt . However, for the second time period, the

coefficient became negative and less significant. Following

the logic presented above, one would expect the coefficient

to have remained positive. A possible explanation offered by

Salvatore for a negative coefficient for his estimates of

the large country group was that it indicates that the

relatively more industrialized nations tend to grow more

slowly than those relatively less industrialized as import

substitution becomes more costly in terms of lost efficiency

(Salvatore 1983, page 78). In this case, however, we are

dealing with nations employing outward-looking policies. One

explanation offered at this time is the following: it is

possible that the phenomenal rates of industrialization and

growth achieved during the first time period were not

sustainable and that, in conjunction with a decline in the

world economy and demand, the relative efficiency gains of

past investment expenditures were unable to continue their

upward trend. This does not necessarily mean that past

investment expenditures were inefficient; it could imply

that the level or degree of efficiency simply declined.

Another more interesting explanation for the negative

coefficient of the industrialization variable (R) might be

that the more industrialized a country becomes, the slower

 117
will be the growth rate of output for a given level of

investment spending: i.e., as a nation becomes capital

intensive, the responsiveness of output or GDP to investment

spending declines. As a result of higher capital-labor

ratios, higher levels of investment spending are required to

produce a given increase in output as opposed to a situation

in which the capital-labor ratio is low.

The negative and highly significant results for the

strongly inward-looking group for both periods also lends

strong support in favor of the outward-looking development

agrument. The fairly strong and significant negative

coefficient of R for the first period may very well indicate

inefficiencies associated with overly sheltered and

regulated markets. What is of particular importance is the

fact that for the second period, the coefficient increased a

considerable amount and the level of significance rose

sharply {t-statistic went from -2.22 to -13.62). This could

very well be the result of increased inefficiencies incurred

as a result of the continued reliance on import substitution

beyond the first "easy" stage discussed in chapter two.

Regardless of the fact that the coefficient was negative in

the first period, the level of significance and "degree of

negativity" rose considerably for the second period.

The results for the moderately oriented groups were

negative and statistically significant for both time

periods. The coefficient of R for the moderately outward-

looking group was -0.58 {t-statistic of -42.64) for the

1963-1973 period and -0.25 (t-statistic of -3.22) for the

1973-1985 period. Again, the negative results could be

expected based on the "capital-intensity" argument presented

on the preceding page. However, for the second period the

results became less negative and much less significant. This

indicates a movement toward less inefficient i.e., more

efficient investment and industrialization. The moderately

inward-oriented results also indicate a movement toward more

efficient industrialization. The coefficient of R was -0.89

(t-statistic of -26.90) for the first period and -0.59

(t-statistic of -14.54) for the second. Only two points

concerning these results need be noted. First, despite the

significantly negative results for the moderately outward-

looking group in the first period, the results became much

less negative for the second period which indicates a

relative increase in the degree of efficiency. Second, as

noted earlier, one must be careful not to place too much

emphasis on the results of the moderately oriented groups

due to the manner in which the distinction between outward

versus inward is made.

Turning to the group of countries that changed

orientation, one finds that the estimation results provide

additional support for the outward-looking argument. The

coefficient of the industrialization variable was -0.38 and

was statistically significant (t-statistic of -9.63) for the

 119
first time period during which their orientation was

strongly inward-looking. For the second period, when their

policies were classified as moderately outward-looking, the

coefficient was positive (0.04) although it was not

statistically significant (t-statistic of 0.57). Again, two

points are worth mentioning. First, the relative degree of

efficiency may have risen a considerable amount in that the

coefficient changed from strongly negative to positive —

although the second period's results were not statistically

significant. Second, these results may support the outward-

looking proposition because it is clear that the countries

in this group did indeed adopt more open trade policies in

that they started out as strongly inward-looking. Again,

because the second period's results were not statistically

significant, it is difficult to draw any concrete

conclusions. However, as was noted through the examination

of the strongly outward-looking versus the strongly inward-

looking group, the degree of inefficiency was much greater

for the strongly inward-looking group and became worse

during the second period.

Having completed the analysis of the primary variables

estimated in this study, the following section presents a

brief evaluation of the use of both trend and dummy

variables in this study. The sole purpose of this discussion

is to provide the reader with the rationale behind the use

of these two types of estimation tools. The significance of

 120
their implimentation and the estimation result obtained are

discussed in the final section of this chapter when the

performance of the model is addressed.

Generally speaking, if the constant term of an

estimated equation is very large and highly significant, the

implication is that the equation is missing something. If

the equation is not specified correctly and a relevant

explanatory variable (or variables) has been omitted, the

effect of the missing variable is captured by the constant

term. A trend variable can be included in an equation in

order to help determine whether or not a relevant variable

has been omitted.

The estimation results of the equation containing the

trend variable should show a decline in the relative size

and significance of the constant term. If the trend variable

turns out to be highly significant, the indication is that

the equation is not fully capturing or explaining the

factors responsible for determining the value of the

dependent variable. Thus, a trend variable is often used in

order to test for a trend which is not being captured by the

equation or model.

In this application, the trend variable was utilized in

order to test whether or not the individual country time-

series regressions were missing any trends that were

possibly effecting the cross-section group estimates. The

trend variable took on the same value for each year and
 121
changed between years of the single time period (as cited

in chapter three: 1963 = 1, 1964 = 2, and so o n ) .

The variables estimated in regression equations usually

take on values over some continuous range. However, in some

instances, researchers may wish to use an independent

variable that is restricted to taking on two or more

distinct values. This type of variable is referred to as a

dummy variable and is especially helpful when dealing with

qualitative data.

The dummy variable is most commonly assigned a value of

0 for one classification and 1 for the other. It is treated

the same as any other variable in the regression equation.

In this study, the dummy variable was set equal to zero for

the years 1963-1973 and was equal to one for the years 1973-

1985. By including the dummy variable in the following

fashion, it is used to capture changes or shifts in the

intercept:

Ln Yt = b 0 + b^ Ln Xt + b 2 Ln It + b 3 Ln Rt + b^ Dt

The dummy variable was utilized in this study in order

to test the individual country regressions for the effects

of the adverse economic conditions post 1973 (i.e., after

the 1973 oil s h oc k) . By allowing one to separate the single

23 year time period (1963-1985) into two distinct periods,

one can compare the relative shifts in the intercepts of the

regression equations. If the estimated coefficient of the

 122
dummy variable is negative and significant, the implication

is that world economic conditions deteriorated a

considerable degree during the 1973-1985 period. If the

coefficient is positive and significant, it means that

economic conditions were not as detrimental as some have led

us to believe. Admittedly, the possibility exists that the

effects of the adverse economic conditions could be

partially incorporated into the variables already estimated.

SECTION 4.3 EVALUATION OF MODEL'S PERFORMANCE

The formulation of the primary model estimated in this

study was described fully in the third chapter, along with

the data used and the estimation technique employed. The

empirical results of the model, along with an evaluation of

the relevance of the variables estimated, was presented in

the preceding section. A complete listing of the estimation

results, including all relevant statistics for the primary

cross-section group model and the individual country

regressions both with and without the inclusion of the trend

and dummy variables, is contained in appendices B through E

immediately following the bibliography. The purpose of this

section is to examine the overall performance of the model

employed and to address several key issues raised by the use

of a single equation model and cross-section data.

The estimation results obtained from the primary model

are quite encouraging. The superior economic performance of

 123
outward-looking countries is well documented and universally

accepted (see WDR 1987, chapter 5). However, the

explanations for their higher rates of growth are not nearly

as well defined or accepted. The purpose of this study is to

investigate empirically the relationship between investment,

efficiency, productivity, and export growth in inward-

looking versus outward-looking regimes in an attempt to

better explain the links between exports and economic

growth. As we saw in the second section of this chapter, the

estimation results provided evidence in support of the

proposed causal factors or links between trade strategy and

growth through the analysis of the signs and levels of

significance of the relative coefficients across the

differently oriented country groups. Although the statistics

for the moderately oriented groups were not as convincing as

those of the strongly oriented group, the overall results

obtained for the various country groups over the different

time periods are promising.

The variables of the model estimated were both

informative and statistically significant. However, if the

overall regression equation is not significant, then one can

not draw conclusions with any degree of confidence. Thus,

the statistical significance and performance of the overall

regression equation must be addressed.

The coefficient of determination was very large for

both the individual and group regression equations (see

 124
appendices B through E ) . Thus, the estimated regression

equations fit the data fairly well.

The regression F-statistics were also very high for all

of the grouped regressions and for all of the individual

country regressions with the exception of those for Senegal.

All of Senegal's regressions were statistically significant

at the 95 percent level of confidence, without exception,

all of the other regressions estimated were significant at

the 99 percent level of confidence. Consequently, the

regression equations performed very well and one need not be

concerned with the problem of drawing conclusions based on

unreliable equations.

Due to the nature of the classification of trade

orientation, the extended time periods, and the formulation

of the model's variables, the results of this study are

somewhat unique. Although research has been done using time-

series data for individual countries (Ram 1987), the primary

model of this study utilized cross-sectional data. Other

research that used cross-section data either grouped the

countries in a very different fashion (e.g., middle income

versus low income, primary versus industry oriented) or

estimated models substantially different from the one

estimated in this study.

The exception to the immediately preceding statement

was the research conducted by Salvatore (1983). The

definition of the investment and the industrialization

 125
variables are the same in this study as those utilized by

Salvatore. As cited earlier, Salvatore's analysis was unique

due to the fact that it employed a simultaneous equations

model. Due to the differences in sample size, period of

analysis, country classification, and most importantly the

method of formulation and estimation, these studies are not

directly comparable. However, as was shown throughout this

study, the results obtained and subsequent analysis provided

by Salvatore'research help to establish the dynamic

relationships between international trade and economic

development and thus are quite relevant to this study.

Although the relationship between trade policy,

exports, industrialization and growth is undoubtedly

simultaneous in nature, the complexities and difficulties

involved in successfully modeling trade and development

simultaneously has resulted in the widespread use of single

equation models. However, the application of single equation

models using cross-section data has been criticized on

several grounds. One of the most important questions raised

is the claim that cross-section models fail to meet the

assumption that the disturbance term is

h omosce da st ic . Another question raised is whether a single

equation model is adequate in providing reliable estimates

regarding causal structures (see Ram 1985).

With respect to the problem of heteroscedasticity, a

test developed by White enables one to determine whether the

 126
disturbance term is homoscedastic. Furthermore, several

researchers have claimed that the White test is also capable

of determining whether there is significant simultaneous-

equations bias (Ram 1985, pages 421 and 425).

In an effort to further demonstrate the validity and

significance of the estimation results provided by the model

specified in this study, the White test was performed on all

of the grouped country regressions. The outcome of the tests

indicated the absence of heteroscedasticity and other major

specification errors. The same test was also applied by Ram

(1985) to his model which estimated the relationship between

exports and growth for 73 LDCs for the 1960-1970 and 1970-

1977 periods (cited in chapters two and four of this s t u d y ) .

Ram's results also indicated no presence of

heteroscedasticity or other major specification errors (Ram

1985, page 422).

In order to further demonstrate the significance and

validity of the estimation results provided by the model

specified in this study, individual regressions were

estimated for each country included in the various trade

oriented groups. These regressions were first estimated

utilizing the exact same specification as the group

regressions and then with the inclusion of a trend variable.

Upon inspection of the coefficients of determination, the F-

statistics, and the relative significance of the trend

 127
variables, the results also indicate that the model was

correctly specified {see appendices C, D, and E ) .

The individual country regressions were also estimated

replacing the trend variable with a dummy variable in an

effort to test the relative significance of the effects of

the adverse economic conditions in the post-1973 period. The

coefficient of the dummy variable was positive for a

majority of the regressions, although in most cases it was

not statistically significant. However, of the few that were

significant, all of them were positive {appendix E ) . These

results indicate that external economic conditions were not

as detrimental as some believe. In addition, all but one of

the regressions were significant at the 99 percent level

with the other significant at the 95 percent level of

confidence. These statistics lend additional support with

respect to the validity of the specification of the original

model.
 128

CHAPTER FIVE

SUMMARY AND CONCLUSIONS WITH POLICY IMPLICATIONS

SECTION 5.1 SUMMARY AND CONCLUSIONS

This study examined a large group of developing

countries, both lesser-developed and newly-industrialized,

and compared the growth rates of GDP to the degree of

openness of the economies over an extended period of time.

The theoretical hypothesis purported was that a nation's

"openness" determined it's rate of growth: the more open the

nation, the faster would be it's rate of economic growth.

Specifically, the more outward-oriented a nation's

industrialization strategy, the faster will be it's rate of

growth of GDP. This study attempted to illustrate and

evaluate the relationship between trade policy and GNP (or

G D P ) . Despite fairly widespread recognition of a strong

correlation between export growth and GDP growth, there is

little agreement with respect to the dynamic links between

trade policy and economic growth.

In addition to providing evidence supporting the

superiority of outward-looking over inward-looking

development strategies, the links between trade strategy and

economic performance were explored. The most important

factors suggested by some economists that might be

 129
responsible for the link between outward-orientation (trade

policy) and economic growth were presented and evaluated. An

attempt was made to go beyond the current body of literature

by exploring several key factors purportedly responsible for

this link and by developing an empirical model which will

enable us to better understand the nature and operations of

this link.

The rate of growth of exports as a percentage of GDP

was selected as the variable which signified the degree of

openness of an economy and was thought to be the most

important causal factor in determining a nation's growth

rate. A single equation model was utilized to represent the

relationship between various factors responsible for the

determination of GDP. Ordinary least squares was used to

estimate the equation in order to determine the relative

importance of several factors, of which the variable

representing the degree of openness of the economy was

thought to be the most important. The other variables

utilized attempted to test for the proposed links between

trade strategy and macroeconomic performance in an attempt

to better explain the beneficial aspects of export-promotion

and outward-looking development strategies on economic

development and performance.

The estimation results indicated that the more open a

nation's trade and industrialization policies, the

greater was the efficiency of investment and the level of

 130
industrialization. The more closed or inward-oriented the

nation, the lower was the rate of growth and the level of

efficiency. The export variable did not prove to be the

most important in explaining the superior growth

performance of the outward-looking nations. It was,

however, positive and significant for outward-looking and

negative and significant for the inward-looking groups of

nations. The results indicate that although export

production does not directly account for the superior

performance, the outward-looking economies experienced

larger gains in investment and productivity resulting from

their involvement in world trade.

Thus, the empirical results of this dissertation

clearly indicate that exports are indeed more a handmaiden

than an engine of growth. However, through careful analysis

of the regression results, one finds evidence that increased

efficiency of investment, production, and resource

allocation are integral parts of the identification and

formulation of the nebulous link between trade policy,

exports and economic growth.

When the performance for the various groups were

compared between the two time periods, the outward-looking

nations were better able to cope with the detrimental

effects of the oil shocks and the resultant world-wide

downturn in economic activity. Despite the decline in the

 131
growth of world trade, outward-looking nations maintained

higher levels of growth and efficiency than inward-

looking countries.

The effort to provide evidence of the adoption of

newer, more efficient technology (i.e., technology transfer)

in outward-oriented nations did not truly materialize. The

only evidence offered in support of this hypothesis were the

results that demonstrated higher levels of investment

efficiency and higher rates of industrializion in the

strongly outward-looking versus the strongly inward-looking

country groups. Although these results are only indirect

indications of the potential for the adoption of newer, more

efficient technology, they do provide evidence enabling a

better understanding of the links between trade strategy and

economic growth.

The estimation results obtained and the overall

conclusions of this study are quite interesting. Despite

agreement concerning the beneficial aspects of

industrialization, there is much disagreement when it comes

to the determination of the optional policies that nations

should employ in an effort to industrialize and in the

interpretation of the links between trade /

industrialization strategy and economic growth. However, the

findings of this study are clear: strongly outward-oriented

trade policies result in higher levels of exports and

increased efficiency of both investment spending and

 132
industrialization. Furthermore, it is through the increased

efficiency of investment that strongly outward-looking

nations are able to achieve their goal of becoming

industrialized. Strongly inward-looking policies, on the

other hand, were found to foster inefficiencies in

investment spending and to adversely affect the nation's

overall level of industrialization. In addition, those

countries that changed their trade policy orientation from

strongly inward-looking to moderately outward-looking

experienced increased rates of growth. What is of particular

importance here is that exports were not found to be the

cause of the improved economic performance. Rather, the

benefits derived from the outward-oriented policy stance

were found to be the result of increased efficiency of

investment and the overall improvement in the level of

industrialization.

SECTION 5.2 POLICY IMPLICATIONS

Although there are many problems associated with the

ability to change a nation's market orientation, it has

been accomplished by several countries which have continued

to demonstrate qualities superior to their inward-looking

counterparts despite the downward trend in world trade and

adverse economic conditions. The focus of this study was

restricted to the evaluation of the relationship

 133
between industrialization policy orientation and economic

growth and did not specifically address the question of how

nations should proceed when implementing policies directed

at the liberalization of their trade regimes. This topic has

by itself generated a substantial amount of research which

has been far from conclusive (see Bhagwati [1978] and

Krueger [1978] NBER summary texts ; Corbo and deMelo 1987).

However, based on the recent experiences of several

developing countries and the estimation results and

resultant insights provided by this study, it does appear

that to pursue a policy promoting the expansion of exports

which neglects the necessary liberalization of both domestic

financial markets and the system of regulatory protection

(the use of direct controls and licensing arrangements), the

increase in exports and the resultant benefits associated

with export promotion will be short lived and will be

incapable of prompting a substantial improvement in the

nation's rate of industrialization and economic growth.

 134

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 146
APPENDIX A

I. Classification of Orientation**

"Strongly Outward-Oriented": Trade controls are either

nonexistent or very low in the sense that any disincentives
to export resulting from import barriers are more or less
counterbalanced by export incentives. There is little or no
use of direct controls and licensing arrangements, and the
exchange rate is maintained so that the effective exchange
rates for importables and exportables are roughly equal.

"Moderately Outward-Oriented": The overall incentive

structure is biased toward production for domestic rather
than export markets, but the average rate of effective
protection for the home market is relatively low and the
range of effective protection rates relatively narrow. The
use of direct controls and licensing arrangements is
limited, and although some direct incentives to export may
be provided, these do not offset protection against imports.
The effective exchange rate is higher for imports than for
exports, but only slightly.

"Moderately Inward-Oriented": The overall incentive

structure distinctly favors production for the domestic
market. The average rate of effective protection for home
markets is relatively high and the range of effective
protection rates relatively wide. The use of direct import
controls and licensing is extensive, and although some
direct incentives to export may be provided, there is a
distinct bias against exports, and the exchange rate is
clearly overvalued.

"Strongly Inward-Oriented": The overall incentive structure

strongly favors production for the domestic market. The
average rate of effective protection for the home market is
high and the range of effective protection rates relatively
wide. Direct controls and licensing disincentives to the
traditional export sector are pervasive, positive incentives
to nontraditional exportables are few or nonexistent, and
the exchange rate is significantly overvalued.

** As per World Development R e p o r t (1987) pages 82-83

 147
APPENDIX B

SUMMARY STATISTICS Cross-Country Sample

TIME PERIOD ONE (1963-1973)_rT-Statistics In Parentheses!

Strongly Outward * [Unadjusted]* _

LnY = 17.79 + 0.65 LnX + 1.00 Lnl + 1 . 6 1 LnR R-Sq - 0.747
(13.38) (3.32) (5.55) (5.93) DW = 1.55
Moderately Outward [Hildreth-Lu A R ( 1 ) ] _
LnY = 5605.0 + 0 . 1 2 LnX + 0.46LnI - 0.58 LnR R-Sq = 0 . 9 9
(3.45) (1.55) (5.52) (-42.64) Rho = 0.99
DW = 2.15 (1024.69)
Moderately Inward [Hildreth-Lu A R ( 1 ) ] _
LnY = 7.41 + 0.19 LnX + 0.68 Lnl - 0.8 9 LnR R-Sq - 0.985
(17.74) (2.82) (4.23) (-26.90) Rho = 0.90
DW = 1.88 (19.25)
Strongly Inward [Hildreth-Lu AR(1)] _
LnY = 8.35 - 0.37 LnX + 0 . 1 9 Lnl - 0.14 LnR R-Sq = 0.783
(10.00) (-1.74) (0.68) (-2.22) Rho = 0.90
DW = 1.95 (18.00)
Changed Orientation * [Unadjusted]* _
LnY = 9.87 + 2.22 LnX - 2.37 Lnl - 0.38 LnR R-Sq = 0.894
(21.89) (11.08) (-8.45) (-9.63) DW = 1.95

TIME PERIOD TWO (1973-1985)

Strongly Outward [Hildreth-Lu A R ( 2 ) ] _

LnY = 6788.0 + 0.12 LnX + 0.36 Lnl - 0.13 LnR R-Sq = 0.987
(8.61) (1 .82) (3. 39) (-2.38) Rho (1) = 0.80
i—j
O ')
CO
Q
S

Rho (2) = 0.19

II

Moderately Outward [Hildreth- Lu A R (1)]

LnY = 10.10 + 0.1 9 LnX + 0.84 Lnl - 0.25 LnR R-Sq 0.894
(5.99) (1. 12) (1. 47) (-3.22) Rho = 0 .90
DW = 1.96 (16. 51)
Moderately Inward [Hildreth- Lu AR (1) ]
LnY = 7.69 + 0.37 LnX + 0.55 Lnl - 0.59 LnR R-Sq = 0. 966
(17.18) (2. 97) (4.08 ) (-14.54) Rho = 0 .90
DW = 1.72 (20. 95)
Strongly Inward [Hi ldreth- Lu A R (1)]
LnY = 6.68 - 0.18 LnX - 0.31 Lnl - 0.21 LnR R-Sq ■
0.994
(40.21) (-2 .69) (-12. 39) (-13.62) Rho = 0 .90
DW = 1.73 (16. 51)
Changed Orientation [Hildreth-Lu AR(1)] _
LnY = 10753.0 - 1.21 LnX - 0.79 Lnl + 0.04 LnR R-Sq = 0.90
(1.08) (-2.91) (-1.36) (0.57) Rho = 0.99
DW = 1.57 (1378.39)

** Unadjusted: (I) S.O. Pd. I results remained in the

INDETERMINANT RANGE of the DW Statistic
regardless of adjustment process.
(II) Changed Orientation Pd. I results did
not require adjustment.
 148

APPENDIX C

INDIVIDUAL COUNTRY REGRESSIONS WITH TREND VARIABLE

1963-1985 ADJUSTED FOR A R (1) : HILDRETH-LU
fT-Statlstlcs in Parentheses 1

Singapore **
LnY = 9.41 + 0.037 LnX + 0.239 Lnl + 0.125 LnR + 0.083 T
(25.79) (0.588) (1.18) (1.17) (8.43)
R-Bar-Sq = 0 . 9 9 3 DW - 1.67 **
Korea
LnY = 10.53 - 0.110 LnX - 0.041 Lnl + 0.377 LnR + 0.084 T
(26.87) (-1.669) (-0.641) (3.805) (7.312)
R-Bar-Sq = 0.997 DW = 1.94 Rho = 0.94 (9.684)
Israel **
LnY = 3.65 + 0.001 LnX + 0.21 Lnl + 0.05 LnR + 0.07 T
(27.86) (0.07) (2.93) (5.76) (18.13)
R-Bar-Sq = 0.983 DW = 1.24 **
Malaysia
LnY = 4.00 - 0.19 LnX + 0.27 Lnl - 1.13 LnR + 0.05 T
(1.080) (-0.498) (1.281) (-1.453) (1.607)
R-Bar-Sq = 0.982 DW = 1.89 Rho = 0.50 (2.708)
El Salvador
LnY = {.5 E + 0 8 } + 0.009 LnX + 0.13 Lnl - 0.23 LnR - 453.2 T
(4.27) (0.144) (2.946) (-2.928) (-4.273)
R-Bar-Sq = 0.979 DW = 1.54 Rho = 0 . 9 9 (1048.80)
Honduras
LnY = 7.24 + 0.61 LnX + 0.17 Lnl - 0.2 9 LnR + 0.062 T
(10.79) (1.456) (0.515) (-1.158) (3.034)
R-Bar-Sq = 0.948 DW = 1.80 Rho = 0 . 4 0 (2.047)
Kenya
LnY = 11.194 + 0.227 LnX + 0.171 Lnl + 0.171 LnR + 0.061 T
(31.63) (2.921) (2.166) (1.665) (9.877)
R-Bar-Sq = 0.991 DW = 1.56 Rho = 0.00 (0.00)
Mexico
LnY= {-.2 E + 0 8 } - 0.03 LnX + 0.117 Lnl + 0.179 LnR + 272.65 T
(-2.297) (-1.450) (3.307) (3.868) (2.298)
R-Bar-Sq = 0.998 DW = 1.36 Rho = 0.99 (1048.80)
Nicaragua
LnY = {.5E + 0 8 } - 0.054 LnX + 0.17 Lnl - 0.086 LnR - 592.9 T
(2.862) (-0.858) (3.803) (-0.479) (-2.862)
R-Bar-Sq = 0.910 DW = 1.55 Rho = 0.99 (1048.80)
Philippines
LnY = 5.11 - 0.15 LnX + 0.049 Lnl - 0.345 LnR + 0.008 T
(32.25) (-2.957) (0.439) (-2.623) (0.775)
R-Bar-Sq = 0.985 DW = 1.61 Rho = 0.70 (4.597)
Senegal
LnY = 6.80 + 0.075 LnX + 0.142 Lnl - 0.013 LnR - 0.001 T
(16.82) (0.925) (0.824) (-0.093) (-0.141)
R-Bar-Sq = 0.357 DW = 2.01 Rho = 0.40 (2.047)
 149
APPENDIX C

INDIVIDUAL COUNTRY REGRESSIONS WITH TREND VARIABLE

1963-1985 ADJUSTED FOR A R m : HILDRETH-LU : Continued
TT-Statistics in Parenthesesl

Yugoslavia
LnY = 6.51 + 0.007 LnX + 0 .168 Lnl + 0.111 LnR + 0.068 T
(40.91) (0.217) (2.219) (2.196) (8 .714)
R-Bar-Sq = 0.995 DW = 1.7 3 Rho = 0.20 (0.957)
Chile
LnY = 6.38 - 0.155 LnX + 0 .164 Lnl + 0.012 LnR + 0.032 T
(38.13) (-3.266) (3.122) (0.843) (3.060)
R-Bar-Sq = 0.887 DW = 1.65 Rho = 0.50 (2.708)
Turkey
LnY = 7.07 + 0.085 LnX - 0 .010 Lnl + 0.223 LnR + 0.124 T
(31.32) (1.175) (-0.094) (2.607) (5.685)
R-Bar-Sq = 0.988 DW = 1.67 Rho - 0.60 (3.517)
Uruguay
LnY = 11.19 - 0.082 LnX + 0.189 Lnl - 0.0004 LnR + 0.019 T
(73.86) (-1.770) (4.418) (-0.008) (0.918)
R-Bar-Sq = 0.932 DW = 1.7 9 Rho = 0.20 (0.957)
Argentina
LnY = 10.19 + 0.001 LnX - 0.017 Lnl + 0.010 LnR + 0.003 T
(19.68) (0.078) (-0.596) (0.428) (0.133)
R-Bar-Sq = 0.921 DW = 1.99 Rho - 0.90 (9.684)
Bangladesh
LnY = 4.608 - 0.077 LnX + 0.036 Lnl - 0.042 LnR + 0.031 T
(84.27) (-1.202) (1.628) (-0.680) (4.354)
R-Bar-Sq = 0.989 DW = 2.15 Rho = 0 . 6 0 (3.517)
Dominican Republic
LnY = 8.61 + 0.082 LnX + 0 .170 Lnl + 0.225 LnR + 0.074 T
(46.92) (1.613) (3.652) (2.502) (8.685)
R-Bar-Sq = 0.993 DW = 1.62 Rho = 0.7 0 (4.597)
India
LnY = 6.28 - 0.113 LnX + 0 .136 Lnl - 0.106 LnR + 0.032 T
(18.73) (-1.607) (0.804) (-0.831) (2.983)
R-Bar-Sq = 0.983 DW = 1.90 Rho = 0.30 (1.475)
Peru ##
LnY = 7.90 - 0.03 LnX + 0.07 Lnl + 0.10 LnR + 0.05 T
(114.82) (-1.52) (2.30) (10.44) (25.70)
R-Bar-Sq = 0.988 DW = 2.25 ##
Zambia
LnY = 9.14 - 0.104 LnX - 0.082 Lnl - 0.315 LnR - 0.105 T
(22.01) (-1.239) (-0.783) (-2.148) (-4.252)
R-Bar-Sq = 0.926 DW = 2.27 Rho = 0.90 (9.684)

** Remained in the INDETERMINANT RANGE of DW statistic

regardless of adjustment.
## Within the ACCEPTABLE RANGE of DW statistic both
with and without adjustment.
 150
APPENDIX D

INDIVIDUAL COUNTRY REGRESSIONS WITHOUT TREND VARIABLE

1963-1985 ADJUSTED FOR A R (1) : HILDRETH-LU
(T-Statistics in Farenthesesi

Singapore
LnY = 8585.3 + 0.077 LnX - 0.029 Lnl - 0.053 LnR
(5.50) (0.88) (-0.20) (-0.31)
R-Bar-Sq - 0.992 DW = 1.91 Rho = 0.99 (1048.8)
Korea
LnY = 10660.6 - 0.010 LnX + 0.004 Lnl + 0.285 LnR
(8.12) (-0.16) (0.06) (2.56)
R-Bar-Sq = 0.995 DW = 1.59 Rho = 0.99 (1048.8)
Israel
LnY = 4.94 - 0.001 LnX + 0.0 9 Lnl - 0.02 LnR
(47.11) (-0.176) (1.83) (-1.67)
R-Bar-Sq = 0.988 DW = 1.24 Rho = 0.90 (9.68)
Malaysia
LnY = -1.25 - 0.46 LnX + 0.30 Lnl - 2.31 LnR
(-0.69) (-1,26) (1.38) (-8.18)
R-Bar-Sq = 0.980 DW = 1.92 Rho = 0.50 (2.708)
El Salvador
LnY = 8.94 + 0 .11 LnX + 0.16 Lnl - 0 .13 LnR
(42.30) (1.74) (3.05) (-2.85)
R-Bar-Sq —0.974 DW = 1.28 Rho = 0.80 (6.25)
Honduras
LnY = 6.84 - 0 .01 LnX + 0.05 Lnl - 0 .49 LnR
(5.52) <-0.036) (0.10) (-1.58)
R-Bar-Sq = 0.944 DW = 2.10 Rho = 0.90 (9.68)
Kenya
LnY = 4897.1 + 0 . 0 3 LnX + 0 . 1 2 Lnl + 0 . 0 1 LnR
(4.51) (1.91) (1.30) (0.09)
R-Bar-Sq = 0.989 DW = 2.30 Rho - 0.99 (1048.8)
Mexico
LnY - 7500.6 - 0.05 LnX + 0 . 1 3 Lnl + 0 . 0 8 LnR
(12.33) (-1.91) (3.38) (3.26)
R-Bar-Sq = 0.997 DW = 1.25 Rho = 0.99 (1048.8)
Nicaragua
LnY - 11.08 - 0.10 LnX + 0.20 Lnl + 0.13 LnR
(18.07) (-2.02) (4.69) (1.21)
R-Bar-Sq = 0.910 DW = 1.74 Rho = 0.90 (9.68)
Philippines
LnY = 5.18 - 0.16 LnX + 0.01 Lnl - 0.39 LnR
(31.89) (-3.75) (0.13) (-5.89)
R-Bar-Sq = 0.985 DW - 1.73 Rho = 0 . 8 0 (6.25)
Senegal
LnY = 6.78 + 0.07 LnX + 0 . 1 3 Lnl + 0.005 LnR
(18.20) (0.95) (0.84) (0.10)
R-Bar-Sq = 0.392 DW = 2.05 Rho = 0.40 (2.047)
 151
APPENDIX D

INDIVIDUAL COUNTRY REGRESSIONS WITHOUT TREND VARIABLE

1963-1985 ADJUSTED FOR A R m : HILDRETH-LU : Continued
TT-Statistics in Parenthesesl

Yugoslavia
LnY = 7831.0 - 0.04 LnX + 0.05 Lnl + 0.17 LnR
(5.96) (-0.99) (0.57) (2.28)
R-Bar-Sq = 0.993 DW = 2.08 Rho = 0.99 (1048.8)
Chile
LnY = 3639.0 - 0.14 LnX + 0.14 Lnl + 0.016 LnR
(2.20) (-3.00) (2.92) (0.78)
R-Bar-Sq = 0.859 DW = 1.94 Rho = 0.0.99 (1048.8)
Turkey
LnY = 8329.6 + 0.04 LnX + 0.01 Lnl + 0.08 LnR
(3.78) (0.67) (0.11) (0.95)
R-Bar-Sq = 0.986 DW = 1.93 Rho = 0.99 (1048.8)
Uruguay
LnY = 11.20 - 0.07 LnX + 0 . 1 5 Lnl - 0.04 LnR
(74.36) (-1.63) (3.51) (-8.74)
R-Bar-Sq - 0.935 DW = 1.67 Rho = 0.40 (2.04)
Argentina
LnY - 10.26 + 0.001 LnX - 0.01 Lnl + 0.008 LnR
(60.17) (0.05) (-0.59) (0.463)
R-Bar-Sq = 0.925 DW = 2.01 Rho = 0.90 (9.684)
Bangladesh
LnY = 3220.5 - 0.06 LnX + 0.036 Lnl - 0.02 LnR
(4.06) (-1.15) (1.49) (-0.51)
R-Bar-Sq = 0.987 DW = 2.63 Rho = 0 . 9 9 (1048.8)
Dominican Republic **
LnY = 7.8 6 + 0 .13 LnX + 0 . 6 8 Lnl - 0 .61 LnR
(23. 98) (0.97) (4.43) (-7.91)
R-Bar-Sq = 0. 943 DW = 1.55 **
India
LnY - 6.50 - 0 .09 LnX + 0.37 Lnl - 0 .46 LnR
(16.11) (-1.21) (2.11) (-8.83)
R-Bar-Sq = 0 .977 DW = 1.57 Rho = 0.50 (2.70)
Peru
LnY = 8.7 6 - 0 .05 LnX + 0.11 Lnl + 0 .01 LnR
(60.57) (-1.56) (2.37) (0.85)
R-Bar-Sq —
0. 973 DW = 2.61 Rho = 0.90 (9.68)
Zambia
LnY = 7.84 + 0 .002 LnX - 0.05 Lnl - 0.02 LnR
(40.98) (0.02) (-0.42) (-0.25)
R-Bar-Sq = 0.909 DW = 2.21 Rho = 0.70 (4.59)

** Dominican Republic remained in the INDETERMINATE

RANGE of the DW statistic regardless of adjustment and
is reported here UNADJUSTED,
 152
APPENDIX E

INDIVIDUAL COUNTRY REGRESSIONS WITH DUMMY VARIABLE

1963-1985 ADJUSTED FOR A R ( 1 ) : HILDRETH-LU
TT-Statistlcs in Parentheses!

Singapore
LnY = 7981.0 + 0.15 LnX + 0.069 Lnl - 0.19 LnR - 0.09 D
(5.02) (1.487) (0.427) (-1.005) (-1.364)
R-Bar-Sq = 0.992 DW = 2.08 Rho = 0.99 (1048.8)
Korea
LnY = 10730.2 - 0.015 LnX + 0.007 Lnl + 0.283 LnR - 0.245 D
(7.79) (-0.218) (0.093) (2.470) (-0.245)
R-Bar-Sq = 0.995 DW = 1.58 Rho = 0.99 (1048.8)
Israel
LnY = 4.94 - 0.001 LnX + 0.09 Lnl - 0.02 LnR + 0.00004 D
(41. 66) (-0.170) (1.759) (-1. 614) (0.001)
R-Bar-Sq = 0.987 DW = 1.24 Rho = 0.90 (9.684)
Malaysia
LnY = -1.49 - 0.59 LnX + 0.22 Lnl - 2.30 LnR + 0.09 D
(-0.797) (-1.401) (0.841) (-8.030) (0.639)
R-Bar-Sq = 0.980 DW = 1.97 Rho = 0 . 5 0 (2.708)
El Salvador
LnY = 9.25 + 0.11 LnX + 0.16 Lnl - 0.08 LnR - 0.016 D
(31.12) (1.730) (2.967) (-1.270) (-0.421)
R-Bar-Sq = 0.973 DW = 1.28 Rho = 0.90 (9.684)
Honduras
LnY = 6.81 - 0.04 LnX + 0.12 Lnl - 0.55 LnR - 0.109 D
(5.41) (0.108) (0.402) (-1.682) (-0.667)
R-Bar-Sq = 0.942 DW = 1.81 Rho = 0.90 (9.684)
Kenya
LnY = 4916.1 + 0.035 LnX + 0.117 Lnl - 0.013 LnR - 0.027 D
(4.456) (1.874) (1.218) (-0.092) (-0.665)
R-Bar-Sq = 0.988 DW = 2.29 Rho = 0.99 (1048.8)
Mexico
LnY = 7500.6 - 0.05 LnX + 0.13 Lnl + 0.088 LnR - 000007 D
(11. 96) (-1.856) (3.259) (3.156) (-0.0003)
R-Bar-Sq = 0.997 DW = 1.25 Rho = 0.99 (1048.8)
Nicaragua
LnY = 10.69 - 0.101 LnX + 0.18 Lnl + 0.107 LnR + 0.125 D
(28.12) (-2.017) (4.937) (1.392) (2.202)
R-Bar-Sq = 0.924 DW = 1.39 Rho = 0.80 (6.253)
Philippines
LnY = 5.28 - 0.14 LnX + 0.008 Lnl - 0.49 LnR - 0.07 D
(25.64) (-2.639) (0.108) (-7.225)(-1.145)
R-Bar-Sq = 0.985 DW = 1.75 Rho = 0.70 (4.597)
Senegal
LnY = 6.81 + 0.103 LnX + 0.143 Lnl - 0.039 LnR - 0.058 D
(19.01) (1.192) (0.927) (-0.644) (-0.961)
R-Bar-Sq = 0.384 DW = 2.02 Rho = 0.30 (1.475)
 153
APPENDIX E

INDIVIDUAL COUNTRY REGRESSIONS WITH DUMMY VARIABLE

1963-1985 ADJUSTED FOR A R I D : HILDRETH-LU : Continued
fT-Statistics in Parenthesesl

Yugoslavia
LnY = 7929.8 - 0.05 LnX + 0.019 Lnl + 0.192 LnR + 0.033 D
(6.10) (-1.254) (0.189) (2.513) (1.203)
R-Bar-Sq = 0.993 DW = 1.99 Rho = 0.99 (1048.8)
Chile
LnY = 3956.8 - 0.140 LnX + 0.137 Lnl + 0.026 LnR + 0.044 D
(2.257' (-2.842) (2.668) (0.996) (0.638)
R-Bar-Sq = 0.854 DW = 1.75 Rho = 0.99 (1048.8)
Turkey
LnY - 7879.2 + 0.065 LnX - 0.013 Lnl + 0.090 LnR + 0.120 D
(4.086) (1.082) (-0.122) (1.164) (2.570)
R-Bar-Sq - 0.989 DW = 2.19 Rho = 0.99 (1048.8)
Uruguay
LnY - 11.19 - 0.079 LnX + 0.148 Lnl - 0.043 LnR + 0.010 D
(68.18) (-1.610) (3.025) (-5.130) (0.239)
R-Bar-Sq = 0 . 9 3 1 DW = 1.67 Rho = 0 . 4 0 (2.047)
Argentina
LnY = 10.24 + 0.003 LnX - 0.017 Lnl + 0.008 LnR + 0.035 D
(58.68) (0.145) (-0.611) (0.703) (0.806)
R-Bar-Sq = 0.924 DW = 2.03 Rho = 0.90 (9.684)
Bangladesh
LnY = 3791.6 + 0.016 LnX - 0.016 Lnl + 0.042 LnR + 0.106 D
(5.049) (0.262) (-0.591) (0.720) (2.327)
R-Bar-Sq = 0.990 DW = 2.37 Rho = 0 . 9 9 (1048.8)
Dominican Republic **
LnY = 8.12 - 0.020 LnX + 0.713 Lnl - 0.442 LnR + 0.145 D
(21.04) (-0.108) (4.613) (-2.673) (1.204)
R-Bar-Sq = 0.944 DW = 1.59 **
India
LnY = 6.62 - 0.059 LnX + 0.391 Lnl - 0.493 LnR - 0.056 D
(15.719) (-0.620) (2.211) (-8.023) (-1.173)
R-Bar-Sq = 0.977 DW = 1.55 Rho = 0 . 6 0 (3.517)
Peru
LnY = 8.72 - 0.052 LnX + 0 . 1 0 Lnl + 0.018 LnR + 0.030 D
(56.742) (-1.519) (2.086) (0.882) (0.815)
R-Bar-Sq = 0.972 DW = 2.63 Rho = 0.90 (9.684)
Zambia
LnY = 7.89 + 0.006 LnX - 0.066 Lnl - 0.0001 LnR + 0.04 D
(38.96) (0.078) (-0.516) (-0.001) (0.773)
R-Bar-Sq = 0.907 DW = 2.20 Rho = 0.70 (4.597)

** Dominican Republic remained in the INDETERMINATE

RANGE of the DW statistic regardless of adjustment and
is reported here UNADJUSTED.
Thomas M, Hatcher

B.A., Iona College

M.A., Fordham University

Outward-Looking Verses Inward-Looking Industrialization

Strategies: The Effect On GNP Growth In Developing

Countries Over Time

Dissertation directed by Dominick Salvatore, Ph.D.

The relationship between the rate of growth of

developing countries and the industrialization strategies

adopted was evaluated for the 1963-1985 period. Higher

rates of growth were hypothesized to be the result of more

open or outward-looking development policies.

A cross-section study was conducted using data for 21

developing countries. The nations were grouped into four

categories: strongly outward, moderately outward, moderately

inward and strongly inward-looking. The combined growth

rates of the countries within each of the four groups

was compared for two different time periods: 1963-1973 and

1973-1985.

Higher growth rates were achieved the more outward

oriented the nation's development strategy. The criteria

used to determine the classification of a nation's market

orientation combined the following quantitative and

qualitative indicators: effective rate of protection, use of

direct controls (quotas and import licensing), use of export

incentives, and degree of exchange rate overvaluation.

A single equation model was utilized to represent the

relationship between various factors responsible for the

determination of GNP (or G D P ) . Ordinary least squares was

used to estimate the equation in order to determine the

relative importance of several factors, of which the export

variable was thought to be the most important. In addition,

an attempt was made to identify and evaluate the links

between trade strategy and macroeconomic performance in

order to better explain the beneficial aspects of export-

promotion and outward-looking development strategies on

economic development and performance.

The empirical results of this dissertation indicate

that exports are indeed more a handmaiden than an engine of

growth. However, through careful analysis of the regression

results, one finds evidence that increased efficiency of

investment, production, and resource allocation are integral

parts of the identification and formulation of the nebulous

link between trade policy, exports and economic growth. The

estimation results show that the more liberal a nation's

trade and industrialization policies, the greater was the

efficiency of investment and the level of industrialization.

Furthermore, the impact of trade policy orientation on the

efficiency of investment and the level of industrial

development was found to be more important than its impact

on exports in explaining economic growth.

 When the performance for the various groups were

compared between the two time periods, the outward-looking

nations were better able to cope with the detrimental

effects of the oil shocks and the resultant world-wide

downturn in economic activity. Despite the decline in the

growth of world trade, outward-looking nations maintained

higher levels of growth and efficiency than inward-

looking countries.
 VITA

Thomas M. Hatcher, son of Charles W. Hatcher and

Patricia Hatcher, was born on October 15, 1959 in Abeline,

Texas. After graduating Westlake H.S. in Thornwood, New

York, in June 1977, he entered St. Anselm College in

September 1977. He then transferred to Iona College in

December 197 9 where he received the Bachelor of Arts degree

in 1981. He began working at his father's land development

firm in June, 1981 and entered Hagan Graduate School of

Business in September, 1982. He then transferred to Fordham

University in January, 1983 where he was accepted as a

graduate student in the Graduate School of Arts and Sciences

and majored in Economics. In September, 1983 he was awarded

a graduate assistantship/teaching fellowship and he received

the degree of Master of Arts in 1984.

In October, 1987 he was offered a position of

Adjunct Lecturere in the Business-Economics Department of

Manhattanville College in Purchase, New York, which he held

until May, 1988.

In September, 1988 he was offered a position of

Adjunct Lecturer in the Economics Department of Iona

College in New Rochelle, New York and in December, 1988 he

was offered the same position in the Economics Department at

Fordham University, both of which he held until May, 1989.