Trade Openness and Well-Being: Do Complementary conditions Matter?

139 Pages·2008·1.394 MB·English

by  Julio A. Guzmán

ABSTRACT

Title of Document: TRADE OPENNESS AND WELL-BEING: DO
COMPLEMENTARY CONDITIONS
MATTER?

Julio A. Guzman, PhD, 2008

Directed By: Prof. Carol Graham, Public Policy

In the last three decades, most of the existing literature using regression analysis to
explore the effects of trade on development has conferred the first one a leading role in
directly determining cross-country differences on income. Indeed, this should come at
surprise, since what trade theory predicts and what results from General Equilibrium Models
(an econometric-alternative quantitative tool) recently display are not completely aligned
with conventional empirical evidence at hand. According to these sources, the effects of trade
liberalization on welfare are indirect, transmitted through several channels, and dependent on
multiple initial conditions. Much of such discrepancy may be due to measurement error and
omitted variable problems, data limitations, and methodological shortcomings presented in
regression analysis. On one hand, there is agreement over the fact that conventional proxies
of trade openness contain severe measurement errors. In addition, data on control variables
affecting well-being and believed to be correlated with trade became available just recently.
On the other hand, and more importantly, the search for a possible contingent or conditional
relationship between free trade and well-being has not been a priority in the agenda of
mainstream literature with the exception of sporadic and isolated studies, despite the fact that
trade theory has long recognized that possibility. Using newly developed policy-oriented
measures of trade integration built with information from tariff rates, non-tariff-barriers, and
subsidies, and controlling by multidimensional policy areas beyond those found in
conventional literature, this study finds evidence of a contingent relationship between trade
openness and well-being. More specifically, this investigation arrives at two conclusions.
First, unilateral or one-way-street trade liberalization is not associated with higher levels of
well-being, showing neither a direct impact nor a conditional one in the presence of
complementary conditions. Second, gains in international market access, or multilateral trade
openness, do not alone guarantee the achievement of higher levels of well-being, but do
demonstrate significant potential for development in the presence of favorable internal
conditions, such as those linked to business competitiveness and market efficiency, the
promotion and respect of political rights among the citizenry, and the less concentrated
distribution of economic and social opportunities.
TRADE OPENNESS AND WELL-BEING: DO COMPLEMENTARY
CONDITIONS MATTER?

By

Julio A. Guzman

Dissertation submitted to the Faculty of the Graduate School of the
University of Maryland, College Park, in partial fulfillment
of the requirements for the degree of
PhD in Public Policy
2008

Advisory Committee:
Professor Carol Graham, Chair
Professor I.M. Mac Destler
Professor David Crocker
Professor Carlos Vegh
Nohra Rey de Marulanda

© Copyright by
Julio A. Guzman
2008
Dedication
To my father, Julio Ricardo, who inspires everything I do.

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Table of Contents

Dedication.....................................................................................................................ii
Table of Contents.........................................................................................................iii
List of Tables................................................................................................................v
List of Figures.............................................................................................................vii
Chapter 1: Intoduction..................................................................................................1
Chapter 2: Global Trading: A More Integrated World.................................................9
Section 1: Beyond Theory: The Role of Local and Global Political Economy......10
Section 2: The Outcome: The Reduction of Trade Barriers...................................15
Chapter 3: Trade Integration and Well-Being............................................................18
Section 1: Is There an Empirical Link Between Trade Openness and Well-Being?
.................................................................................................................................18
Section 2: Trade Openness and Income: A Related Question................................20
Section 3: The Nature of the Relationship Between Trade Openness and Well-
Being: What Does the Theory Say?........................................................................25
Section 4: New Challenges for Empirical Research: In Search of a Contingent
Relationship Between Free Trade and Well-Being................................................28
Chapter 4: Filling the Gap in Empirical Research: New Ways of looking at the
Relationship Between Trade Integration and Well-Being..........................................32
Section 1: Using Alternative Measures of well-Being...........................................33
Section 2: The Use of Policy-Oriented Measures of Trade Openness....................36
Section 3: Taking Conditionality Seriously............................................................41
Subsection 1: The Conditions.............................................................................42
Chapter 5: Methods to be Employed: Quantitative Strategy.....................................49
Section 1: The Quantittaive Approach....................................................................50
Section 2: A “Building Block” Strategy.................................................................56
Section 3: What to Expect from Panel Regression Analisis?.................................57
Section 4: Then, What to Expect from Cross-Country Regression Analysis?.......61
Chapter 6: Results......................................................................................................66
Section 1: Panel Regression Analysis.....................................................................66
Section 2: Cross-Country Regression Analysis......................................................68
Section 3: South East Asia and Latin America: The Importance of Education and
Structural Inequality Defining Development Gains from Trade Openness............75
Chapter 7: Conclusions and Policy Implications........................................................81
Appendices..................................................................................................................86
Bibliography...............................................................................................................87

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List of Tables

Table Nº 1: Quantitative Strategy: Summary
Table Nº 2: Fixed Effects, Panel Regression Analysis. Cross-Country Panel Data,
1980-2000, five-year periods. Basic equation
Table Nº 3: Fixed Effects, Panel Regression Analysis. Cross-Country Panel Data,
1980-2000, five-year periods. Incorporating Interaction Trade Openness
and Domestic credit
Table Nº 4: Fixed Effects, Panel Regression Analysis. Cross-Country Panel Data,
1980-2000, five-year periods. Incorporating Interaction Trade Openness
and Education Achievement
Table Nº 5: Fixed Effects, Panel Regression Analysis. Cross-Country Panel Data,
1980-2000, five-year periods. Incorporating Interaction Trade Openness
and Public Infrastructure
Table Nº 6: Fixed Effects, Panel Regression Analysis. Cross-Country Panel Data,
1980-2000, five-year periods. Incorporating Interaction Trade Openness
and Macroeconomic Stability
Table Nº 7: Fixed Effects, Panel Regression Analysis. Cross-Country Panel Data,
1980-2000, five-year periods. Incorporating Interaction Trade Openness
and Democratic Practices
Table Nº 8: OLS Cross-Country Regression Analysis. All Trade Openness Measures
Simultaneously
v
Table Nº 9: OLS Cross-Country Regression Analysis. Unilateral Trade Openness:
Interacting with Three “Clubs” of Internal Conditions
Table Nº 10: OLS Cross-Country Regression Analysis. International Market Access
(Multilateral Trade Openness): Interacting with Three “Clubs” of
Internal Conditions
Table Nº 11: Human Development Indicators, 1960
Table Nº 12: Human Development Indicators, 1990
Table Nº 13: Initial Complementary Conditions: Education and Structural Inequality
in East Asia and Latin America

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