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The Impact of Trade Liberalization On Export Supply and Poverty in Guyana: Evidence From Cointegration Analysis
The Impact of Trade Liberalization On Export Supply and Poverty in Guyana: Evidence From Cointegration Analysis
The Impact of Trade Liberalization On Export Supply and Poverty in Guyana: Evidence From Cointegration Analysis
research-article2019
RBPXXX10.1177/0034644619863553The Review of Black Political EconomyModeste
Article
The Review of Black Political Economy
2019, Vol. 46(3) 230–249
The Impact of Trade © The Author(s) 2019
Article reuse guidelines:
Liberalization on Export sagepub.com/journals-permissions
DOI: 10.1177/0034644619863553
https://doi.org/10.1177/0034644619863553
Nelson C. Modeste1
Abstract
Using the cointegration and error correction methodologies, this article studies
the impact of trade liberalization on the supply of exports and poverty in Guyana
from the early 1980s to the mid-2010s. From the empirical results of this study, two
important points emerge. The first point is that, for Guyana, trade liberalization has
resulted in the expansion of the country’s supply of exports and the reduction in its
poverty rate. The second point is that the impact of trade liberalization on export
supply and poverty has been quite small. In addition, this study finds that the real
effective exchange rate and the growth of the economy along with the growth of
the agricultural sector were important drivers for expanding the country’s supply of
exports and reducing its poverty rate over the period covered in this study.
Keywords
Guyana, trade liberalization, export supply, poverty, cointegration analysis
Introduction
In the literature focusing on the impact of trade liberalization on export performance
and poverty, the results from existing studies indicate that more analysis needs to be
done on these two issues. For in the case of those studies by United Nations Conference
on Trade and Development (UNCTAD; 2008), Thomas and Nash (1991), Clarke and
Kirkpatrick (1992), Weiss (1992), Arslan and Van Wijnbergen (1993), Greenaway and
Sapsford (1994), Helleiner (1994), Shafaeddin (1994), Jenkins (1996), Joshi and Little
Corresponding Author:
Nelson C. Modeste, College of Business, Tennessee State University, 330 10th Avenue North, Nashville,
TN 37203, USA.
Email: nmodeste@tnstate.edu
Modeste 231
With these general underlying factors driving the study, the purpose of this article is
twofold. The first purpose of the article is to study the relationship between trade lib-
eralization and export performance. The second purpose of the article is to study the
relationship between trade liberalization and poverty. For the first task, an aggregate
export supply equation is used. In that equation, the main explanatory variables for
Guyana’s supply of exports are the price for the country’s exports, the domestic price
level, the real effective exchange rate, the average export duty rate, and the productive
capacity of the Guyana economy. This model is estimated using data from the early
232 The Review of Black Political Economy 46(3)
Table 1. Brief Literature Review of Studies on Trade Policy, Export Performance, and
Poverty Included in This Analysis.
(continued)
Modeste 233
Table 1. (continued)
Table 1. (continued)
1980s up to the mid-2010s. For the second task, a poverty equation will be estimated.
In that equation, the explanatory variables for poverty in Guyana are the average
export duty rate, the country’s per capita income, education, and the value added in
agriculture production expressed as a percentage of gross domestic product (GDP).
Through the analysis of these two issues, this study will contribute to the literature in
at least three ways. First, it will provide, for the first time, estimates of Guyana’s price
and nonprice elasticities of aggregate export supply. Second, also for the first time, it
will provide estimates showing the response of poverty in Guyana to important mac-
roeconomic variables for the country like the country’s average export duty rate, the
country’s rate of economic growth, education, and the performance of the country’s
agriculture sector. Third, it will investigate the long-run and the short-run interrela-
tionship among the variables in the two models using an autoregressive distributed lag
(ARDL) framework.
The remainder of this article is structured as follows. The section “Guyana’s trade
and exchange rate policies and poverty characteristics” presents a brief overview of
Guyana’s trade and exchange rate policies for the period before and after the adoption
Modeste 235
Source. World Bank (2017), World Integrated Trade Solution (WITS). Retrieved from WITS.worldbank.
org. The World Bank (1994); The World Bank (2018).
Note. GDP = gross domestic product.
of the Economic Recovery Program. It will also present a brief review of the poverty
statistics for Guyana, covering the period from the late 1980s to the early 2010s. The
section “Models underlying the study” outlines basic models for studying the impact
of trade liberalization on export supply and on poverty, respectively. The section “Data
and results” presents the results from estimating the two models that form the basis of
this study. In the final section of the article, a summary with policy implications of the
study is presented.
236 The Review of Black Political Economy 46(3)
With these measures in place, however, there was a steady decline in the country’s
output of goods and services. To reverse this downward slide in the economy, the
authorities in Guyana in 1988 adopted an Economic Recovery Program that was sup-
ported by the international financial community. This new program outlined a differ-
ent government strategy for growing the economy. Instead of import substitution
industrialization, the new strategy for growing the economy became one of export
expansion. To implement this strategy, the government lowered taxes on internation-
ally traded goods, removed in almost all instances prohibitions and quotas on imported
goods, and liberalized the government’s import-licensing system, among other things.
As far as the exchange rate policy of Guyana was concerned, the reform led to a
movement away from a fixed exchange rate system. In its place, the authorities intro-
duced a system where the exchange rate would be more freely determined by market
forces. A major factor contributing to this transition was the steady deterioration in the
country’s balance of payments in the 1970s and 1980s even though the following mea-
sures were adopted by the authorities:
Given the inability of the official foreign exchange market to completely meet the
country’s demand for foreign currency, there emerged an illegal parallel, or black,
market for foreign currency. To halt the growth of this market and to streamline opera-
tions within a legal framework, the policy makers in Guyana introduced measures to
overhaul operations in the country’s foreign exchange market and make market forces
of demand and supply play a greater part in determining the price for foreign currency.
This was done in three phases. In Phase 1, the authorities passed the Dealers in Foreign
Currency (Licensing) Bill. With this legislation, in November 1989, the nonbank
Modeste 237
dealers of foreign currency in the parallel market for foreign currency were given legal
status. In Phase 2, the authorities combined the bank and nonbank dealers of foreign
currency into a CAMBIO system. Starting with the introduction of this system in
March 1990, the price for foreign currency in the CAMBIO system was now to be
determined freely by market forces of supply and demand. The next phase—Phase
3—came into effect, a year later in February 1991, when the foreign exchange rate in
the CAMBIO system became the official foreign exchange rate for Guyana.4 For
almost 28 years, this market-based system for determining the price of foreign cur-
rency has prevailed in Guyana.
•• About 75% of the persons living in poverty live in the rural areas of the
country.
•• About 85% of the persons who are heads of poor households have neither a
high school diploma nor a bachelor’s degree.
•• A poor household is just as likely to be headed by a male as it is likely to be
headed by a female.
•• A mix of people who are unemployed, self-employed, or employed at jobs that
do not provide a living wage comprise the poor in Guyana.
for exports goes up, there is an increase in the potential for making more profits. As a
result, with all other factors being held constant, there should be an increase in the
production and sale of exports. An increase in the price for domestic goods is, how-
ever, expected to contribute to a reduction in the production and sale of exported
goods. For as the price for domestic goods goes up, the relative profitability of produc-
tion for export falls. In this study, an increase in the real effective exchange is expected
to lead to a reduction in exports. For as the REER increases, the competitiveness of the
country’s exports falls as exports become more expensive. An expansion in the econ-
omy’s productive capacity is also expected to contribute to an increase in the supply of
exports. This is possible because as the economy expands and more goods are pro-
duced, there will be more goods available for exports. Trade liberalization, meanwhile,
by lowering the duties that are applied to exports, is expected to contribute to an
increase in exports. For as the tax rate that is applied to exports is reduced, exporters
stand to earn more profits from their exports. Given these views, it is anticipated that
in the model, α1 and α4 will have positive signs, whereas α2, α3, and α5 will have nega-
tive signs.
where POV = the poverty rate, XDTY = the average export duty rate, RY = real per
capita income, EDU = education proxied by the secondary school enrollment rate,
AGR = agriculture value added as a percentage of GDP, L = the natural logarithm,
t = time, and µ = the error term.
As set out in Equation 2, the model used to study the impact of trade liberalization on
poverty also controls for the country’s real per capita income, education, and output of
the country’s agricultural sector. In keeping with studies by Dollar and Kraay (2004) and
Krueger (1983), among others, it is anticipated that trade liberalization would reduce
poverty. This outcome is expected because trade liberalization is expected to enhance the
growth of the economy. As the latter occurs, it is consequently expected that there would
be an improvement in employment opportunities and wages for all workers in the econ-
omy, including the poor.8 The relationship between real income and poverty is expected
to be negative, in the sense that as income grows the poverty rate should fall. This out-
come is expected because income growth is likely to increase employment opportunities
and wages for all workers in the economy, including the poor. The expansion of educa-
tion is another factor that can reduce poverty. According to the literature on education,
growth, and poverty, the expansion of human capital that occurs through education can
make workers more productive. As a result, workers can earn higher incomes, which can
lead to a reduction in the poverty rate. Given that agriculture accounts for a significant
proportion of the economy’s output of goods and services, the growth of agricultural
production is also expected to contribute to the reduction of poverty in the country. For
Modeste 239
Table 3. Descriptive Statistics for Variables in the Aggregate Export Supply Equation.
Note. QX = the volume of exports; PX = the price for exports; PD = the price for domestic goods;
REER = the real effective exchange rate; PGDP = the 3-year moving-average of real GDP; XDTY = the
average export duty rate; GDP = gross domestic product.
as this sector expands, it is expected that there would be an increase in farm income, a
lower price for food, and the creation of more employment opportunities in rural areas
of the country that will ultimately benefit the poor. In the poverty model, the estimated
coefficients for β2, β3, and β4 in Equation 2 are expected to be negative. Meanwhile, the
estimated coefficient for β1 is expected to be positive.
To investigate the impact of Guyana’s trade liberalization initiatives on export sup-
ply and poverty, respectively, the ARDL approach is used to conduct the Pesaran et al.
(2001) bounds test for cointegration as well as estimate error correction models for the
export supply model and the poverty equation. The underlying ARDL expressions for
each model are shown in Supplemental Appendix A, for the export supply model, and
Supplemental Appendix B, for the poverty model.
Table 4. Descriptive Statistics for Variables in the Determinants of Poverty Model.
Note. POV = the poverty rate; XDTY= the average export duty rate; RY = real capita income; EDU
= education proxied by the secondary school enrollment rate; AGR=Agriculture value added as a
percentage of GDP; GDP = gross domestic product.
Table 5. Bounds Test for Cointegration of the Variables in the Two Models.
Note. Critical lower bound I(0) and critical upper bound I(1) values are 2.55 and 3.82 at the 10% level of
significance as derived from Narayan (2005).
Table 6. Estimated Long–Run Elasticities for the Export Supply Model.
Note. The dependent variable is LQX. L= the natural logarithm; QX = the volume of exports; PX =
the price for exports; PD = the price for domestic goods; REER = the real effective exchange rate;
XDTY = the average export duty rate; PGDP = the 3-year moving-average of real GDP; GDP = gross
domestic product. The asterisks,
***, indicate that the t-statistics is statistically significant at the 10 % level.
Those results indicate that, at the 10% level of significance, the estimated coeffi-
cients for the variables LEER, LPD, and LPGDP are statistically significant and cor-
rectly signed. Indeed, when there is a 1% reduction in LEER and LPD, exports would
increase by 0.44% and 0.52%, respectively. In addition, when there is a 1% increase in
the country’s productive capacity, the results indicate that there is a 0.52% increase in
exports, allowing for a lag of 1 year.
Looking now at the results for the short-run model, which are reported in Table 7, the
analysis indicates that the estimated coefficients for four variables in the model
Modeste 241
Table 7: Estimated Short-Run Elasticities for the Export Supply Model.
Note. Χ2 auto (2) is the Breusch – Godfrey LM test for no serial correlation within an AR (2) model;Χ2
norm (2) is Jarque – Bera normality test;Χ2 ARCH (1) is the Engle’s LM test statistic for autoregressive
conditional heteroscedasticity. At the 5% level, the critical values for X2 (2) = 5.9914 and X2 (1) = 3.84.
L= the natural logarithm; At the 5 % level, the critical values forΧ2 (2) = 5.9914 andΧ2 (1) = 3.84. L=
the natural logarithm; PX = the price for exports; PD = the price for domestic goods; REER = the real
effective exchange rate; XDTY = the average export duty rate; PGDP = the 3-year moving-average of
real GDP; GDP = gross domestic product; ECT = error correction term. The asterisks, ***, indicate
that the t-statistic is statistically significant at the 10 % level.
are correctly signed and statistically significant at the 10% level. Those four estimated
coefficients are for the variables ΔLREER, ΔLPD, ΔLXDTY, and ECT(−1) (error correc-
tion term). The empirical analysis, furthermore, indicates that a 1% reduction in ΔLREER,
ΔLPD, and ΔLXDTY will increase exports by 0.51%, 1.16%, and 0.16%, respectively.
Meanwhile, the estimated coefficient for the ECT variable suggests that the speed of
adjustment for exports back to its long-run equilibrium path following a shock is quite
rapid. As far as the goodness-of-fit tests for the error correction model equation are con-
cerned, the results indicate that the R-squared and the adjusted R-squared values are .63
and .50, respectively. Moreover, the diagnostic tests results indicate that one cannot reject
the null hypotheses of no serial correlation, homoscedasticity, and normality in the distri-
bution of the residuals for the model. Figures 1 and 2 for the CUSUM and the CUSUM of
squares tests also indicate that one cannot reject the null hypothesis that there is stability in
the regression coefficients for the error correction version of the export supply model.
Table 8: The Estimated Unrestricted Error Correction Model for Determinants of the
Poverty Equation.
Note. DM is a dummy variable with a value of 0 from 1982 to 1987 and a value of 1 from 1988 to 2013;
Χ2 auto (2) is the Breusch – Godfrey LM test for no serial correlation within an AR (2) model; Χ2 norm (2)
is Jarque – Bera normality test; Χ2 ARCH (1) is the Engle’s LM test statistic for autoregressive conditional
heteroscedasticity. At the 5% level, the critical values for X2 (2) = 5.9914 and X2 (1) = 3.84. L= the
natural logarithm; EDU = education proxied by the secondary school enrollment rate; RY = real per
capita income; AGR = agriculture value added as a percentage of GDP; GDP = gross domestic product;
XDTY = the average export duty rate; POV = the poverty rate. The asterisks, *,**, and **** indicate
that the t-statistics are statistically significant at the 1% level, 5% level, and 15% level, respectively.
short-run component of the model. According to those results, the estimated coeffi-
cients for the variables, ΔLAGR, ΔLRY, and ΔLXDTY carry their expected signs. In
addition, the estimated coefficients for the variables ΔLRY and ΔLAGR, are statisti-
cally significant at the 1% level of significance. The estimated coefficient for the other
variable, ΔLXDTY, meanwhile, is statistically significant at the 15% level of signifi-
cance. The value of this estimated coefficient is noticeably small with a value of 0.01.
For the other two variables, ΔLAGR and ΔLRY, the estimated coefficients are −0.78
and −0.47, respectively. At the same time, the estimated coefficient for the remaining
variable, ΔLEDU, is not statistically significant. These results for the short-run com-
ponent of the model suggest that poverty reduction is more likely to be influenced by
overall growth in the economy and growth in the agricultural sector than by trade lib-
eralization. The second reason stems from the long-run component of the model.
244 The Review of Black Political Economy 46(3)
According to those results, the growth in total output, agricultural output, and trade
liberalization are important drivers for reducing the poverty rate in Guyana. The esti-
mated long-run coefficients for these three variables have their correct signs and are
statistically significant at the 5% level of significance. However, given values of
−0.45, –0.76, and 0.05, respectively, for the elasticity of the poverty rate with respect
to real per capita income, agricultural output, and trade liberalization, these results also
indicate that the impact of trade liberalization on poverty reduction is small in com-
parison with the impact of GDP growth and the expansion of the agricultural sector on
poverty reduction. The goodness-of-fit test results for this model indicate that the
model accounted for 68% of the variations in the dependent variable after adjusting for
the number of explanatory variables in the model. The unadjusted R2 value is .79. The
diagnostic test results, meanwhile, indicate that one could not reject the null hypothe-
ses of no serial correlation, homoscedasticity, normality of the residuals, and stability
of the parameters that were estimated in the poverty model. Figures 3 and 4 display the
CUSUM and CUSUM square plots for the parameter stability test.
productive capacity of the Guyana economy over the period from 1985 to 2016, was
studied within a cointegration and error correction framework. From the results based
on this model, one can say that trade liberalization has exerted a positive impact on
Guyana’s export supply over the short run. Apart from this result, the study indicated
that Guyana’s export performance has been significantly influenced in the short run
and the long run by the country’s real effective exchange rate. In light of this finding,
the recommendation to policy makers in Guyana is that they should adopt measures
that would keep the real effective exchange rate as low as possible to make the coun-
try’s exports competitive.
The analysis of the impact of trade liberalization on poverty is undertaken within an
unrestricted error correction model that controls for other factors than can affect pov-
erty, such as the country’s economic growth rate, level of education, and growth of the
country’s agricultural sector. Based on the results from the poverty model, one can say
that trade liberalization has had a very small but statistically significant impact on
poverty reduction in Guyana, particularly in the short run and the long run. In addition,
the regression results indicate that the impact on poverty reduction is greater when
there is growth in the macroeconomy and the agricultural sector of the economy.
Based on these findings, the recommendation to policy makers is that they should
pursue policies that would grow the economy as a whole and expand activity in the
agricultural sector of the economy. Some additional policy recommendations for
improving the conditions of the poor in Guyana include the following:
246 The Review of Black Political Economy 46(3)
•• The provision of at least a living wage for all workers in the country.
•• The expansion of microfinancing opportunities for the poor in the country.
•• The creation of an enabling environment that would generate employment and
good jobs for the poor.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of
this article.
ORCID iD
Nelson C. Modeste https://orcid.org/0000-0002-4519-4043
Supplemental Material
Supplemental material for this article is available online.
Notes
1. The relationship between trade liberalization and economic growth for Guyana has been
examined by Modeste (2016).
2. Almost 40 years ago, Guyana’s economy was in the midst of a severe recession. The econ-
omy was contracting. The government’s budget and the country’s balance of trade were
regularly recording deficits. In the foreign exchange market, shortages of foreign exchange
were prevalent. Moreover, the country’s foreign debt had become an overwhelming prob-
lem for the country’s policy makers. At the height of this economic crisis, in 1988, the
policy makers in Guyana with assistance from the major international financial institutions
changed the strategy for growing the economy. Instead of import substitution industrializa-
tion, the policy makers switched to a policy of promoting exports as a strategy for grow-
ing the economy. This new policy was expected to bring a turnaround in the economy by
having
For more discussion on the conditions in Guyana that led to trade liberalization and the
adoption of export promotion as a policy for growing the economy, see Egoumé-Bossogo,
et al. (2003); Gafar (2003); and Modeste (2016), among others.
Modeste 247
3. For a good discussion of Guyana’s economic problems over the 1970s and 1980s, and
the measures adopted to improve conditions in the economy, see Egoumé-Bossogo et al.
(2003) and Gafar (2003).
4. For a description of Guyana’s CAMBIO system, see Thomas and Rampersaud (1991).
5. For a more detailed analysis of poverty in Guyana in the 1980s through to the early 2010s,
see the reports on poverty by the World Bank (1994), the International Monetary Fund
(2006) and Richa Sekhani (2017).
6. Ahmed (2000) used a similar model to study the impact of trade liberalization on export
supply for Bangladesh.
7. For more discussion of this model, see the study by Faini (1994).
8. This positive relationship between trade liberalization and poverty is often based on the
standard Heckscher–Ohlin model and the Stopler–Samuelson theorem. In more recently
developed trade theories, it has, however, been suggested that trade liberalization can pos-
sibly increase poverty. For more discussion of this issue, see Chaudhry and Imran (2013).
9. The data on poverty for specific years were derived from the International Monetary Fund
(2006) report on Guyana’s Poverty Reduction Strategy Progress Report 2005, the World
Bank (1994) report on Guyana’s Strategies for Reducing Poverty Report No. 12861-GUA,
and the World Bank (2018) news release titled “World Bank Supports Financial and Fiscal
Resilience in Guyana.” For the missing years, the interpolation technique was used to
complete the series.
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