YOUNG LEADERS TRAINING PROGRAM

for Sustainable Development in Asia and the Pacific

30 June-15 July 2006

Kangwon National University

Chunchon, Korea

Introduction to Methodologies in

Development and Trade Analysis

LECTURER

• Prof Tran Van Hoa• Director, Vietnam and ASEAN+ Research Program

• Centre for Strategic Economic Studies• Victoria University, Melbourne, Australia

• Honorary Professor• National Economics University, Vietnam

• National Advanced Training Institute (NATI)• Ministry of Trade, Vietnam

• Consultant/Mentor• AusAID-Cardno, Australia

• Email: jimmy.tran@vu.edu.au• Website: http://www.staff.vu.edu.au/CSESBL/

VARIOUS USES

– Research– Teaching– Training– Policy– National and International Networks

FAST CHANGING WORLD: CURRENT GLOBAL ISSUES

1 Issue 1: Global Economy

2 Issue 2: Global Knowledge

3 Issue 3: Global Commerce and Industry

4 Issue 4: Marching Globalisation

5 Issue 5: Need of Global Competitiveness

6 Issue 6: WTO and FTA Foundation: Global Pure Competitive Market

GLOBAL GOVERNANCE

Finance (IMF)

Commerce (GATT, GATS and WTO)

Justice (The Hague)

War and Peace (United Nations)

REGIONAL TRADE AND DEVELOPMENT ISSUES IN ASIA

Miracle (60-mid 90) and Crisis (97) Years in Asia

IMF Policy Failures in Asia Crises (Mexico to Indonesia)

Slow WTO Negotiations (Doha, agriculture)

Fast (post-98) Recovery of Crisis Economies in Asia

Benign Neglect of Crisis Asia from NAFTA and EU

Support from World’s 2nd Largest Economy

REGIONAL TRADE AND DEVELOPMENT ISSUES IN ASIA

Recent Economic Integration Developments:

Rise of Plurilateral FTA (LAFTA, 05) Rise of Bilateral FTA (AIFTA, AEFTA, 05) Emergence of New Asian Regionalism (ASEAN+3,

00) Emergence of East Asia Regionalism (EAS, 05) Emergence of South Asia Regionalism

SAARC (85), SAFTA (05)

ASIAN REGIONALISM AND FREE TRADE AGREEMENTS

• Asian Regionalism and FTAs are not new • (eg, East Asia proposed by Japan in 1940s)

• Proliferation of plurilateral and bilateral FTAs in Asia and Oceania in recent years.

ASIAN REGIONALISM AND FREE TRADE AGREEMENTS

• EXAMPLES

Current: AFTA, TAFTA, AUSFTA, JSFTA,

ASFTA, ASEAN+3,

Proposed:ASEAN+5, ASEAN+India,

ASEAN+EU, Australia+Emirates, Australia+China, Australia+Japan

ASIAN FREE TRADE AGREEMENTS

• The Foundation of Asian FTAs:

Proximity (Gravity)

Affinity in Consumption and Production

Political Compatibility

Strategic Regional Cooperation

ISSUES IN FTAS

• Mechanics of FTAs:

Liberalisation of trade, investment, services, business and tourism

• Benefits:

• Trade, economic, political in the medium & long term

ISSUES IN FTAS

• Challenges/Costs:

Country interests, NTMs, cultures, histories, religions, national, regional & global crises, current rising oil prices, global competition, exchange rates, etc

• Ideology vs Realism:

Research-based policy versus policy-based (biased) research

ROLE OF POLICY REFORM AND SHOCKS IN REGIONAL FTAS

• Gains from FTAs are affected positively by policy reforms & negatively by shocks

• EXAMPLES:

• South Korea economic reform• China investment policy• Tsunami in South East Asia• Gulf and Iraq wars

Cointegration/unit root taxonomy of policy reforms and shocks

GRADUAL SUDDENTemporary TemporaryLong lasting Long lasting

Examples: Doi MoiChina SOE reform Gulf War, SARS, avian

flu

ROLE OF NTMS IN REGIONAL FTAS

• Non-Tariff Barriers or Measures (NTMS)• 40% of LDC Exports Affected (UNCTAD)• % of Australia/Vietnam Trade Affected if NTMs

Prevail?• % of US/Vietnam Trade Affected if NTMs

Prevail?• % of Australia’s Exports/Investment to China

Affected if NTMs Prevail?

CHARACTERISING NTMS

• Lack of transparency• Poor intellectual property-rights enforcement• Quarantine• Customs procedures• Administrative import requirements• Burdensome regulations and standards, and

CHARACTERISING NTMS

• Restricted mobility of business people.

– Pervasive

– Currently Difficult to Quantify

– Politically Sensitive

– But Measurable?

HOW TO BEST MEASURE GAINS/LOSSES FROM FTAS AND WTO?

The Economic/Commerce Policy Scene

Policy Components:

Y: Target, X=Instruments

Expected Action:

Y X : Directional Causal Linkage

Lucas Critique: Y -> X and Y <- X

HOW TO BEST MEASURE GAINS/LOSSES FROM FTAS AND WTO?

Advanced Impact Methodologies

The Keynesian (1940)-SNA93 (1993)

Y = ΠX + V

The Johansen CGE/GTAP (1960)

dlogY = dlogX

HOW TO BEST MEASURE GAINS/LOSSES FROM FTAS AND WTO?

The Cross-Section Gravity Theory (1999)

The Panel Regression (Dollar, EJ, 2004)

The Generalised Gravity Theory (TVH, 2002)

Advanced Impact MethodologiesMORE DETAIL

• The Keynesian (1940)-SNA93 (1993)•  • AY + BX = U, then with A 0• A-1AY + A-1BX = A-1U or• Y = -A-1BX + A-1U or• Y = ΠX + V Reduced Form•

Advanced Impact MethodologiesMORE DETAIL

• The Johansen CGE/GTAP (1960)•• dlogY = dlogX

• Using Euler-Gauss Algorithm to solve

Advanced Impact MethodologiesMORE DETAIL

• The Cross-Section Gravity Theory (Frankel & Romer, 1999)

•• logT = a1 + a2logY + a3logG + u•  • The Panel Regression (Dollar, EJ, 2004)•• logT = a1 + a2LOG(Y) + a3LOG(G) + u

where LOG(Y)=Vector of Y, etc

Advanced Impact MethodologiesMORE DETAIL

• The Generalised Gravity Theory (TVH, 2002)

•  • Y = Y(T,S) Arbitrary Function• T = T(Y,S,FDI,X,Z) Arbitrary Function

• Specifying No Specific Functional Form and Allowing Circular Causality and Temporal Shocks

• or Policy Change

Advanced Impact MethodologiesMORE DETAIL

• Using Planar Taylor Series Expansion

• dY = (Y/T) dT + (Y/S) dS• dY/Y = T(Y/T)(dT/TY) + S(Y/S)(dS/SY)• = E1 dT/T + E2 dS/S, or• Y% = E1 T% + E2 S% + U.

E1=Elasticity of Y on T, etc. And, similarly for T.

HOW TO BEST EMPIRICALLY MEASURE GAINS/LOSSES FROM FTAS AND WTO

WITH COMPREHENSIVE TRADE, POLICY CHANGE & SHOCKS?

• A trilogy of recent stories (research projects) in ASEAN+3 (China, Japan, Korea) FTA (2001) incorporating trade, investment, services, policy reform and shocks

• Case Study 1: China

CHINA TRADE WITH THE WORLD

Chart 1: China's Trade with the World

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CHINA GAINS FROM MULTILATERAL FTA (WTO 2001): More Exports

China's Gains from WTO Membership

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GROWTH MODELLING EVALUATION:China Growth and China-Japan Trade

Chart 2B: Modelling China's Growth for Policy

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GROWTH MODELLING EVALUATION:China Growth and China-ASEAN Trade

Chart 2C: Modelling China's Growth for Policy

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HOW TO CARRY OUT A RESEARCH ON THE CAUSES OF TRADE IN ASEAN+3

• A Graphical Analysis

– Trade Causes Growth?– What Causes Trade?– Find the Causes of Trade– Alternative Approaches– Some Case Studies

Chart 2: Modelling China-Japan Trade

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Chart 3: Modelling China-ASEAN Trade

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Chart 4: Modelling China-EU Trade

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Chart 5: Modelling China-US Trade

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Chart 6: Modelling China-Australia Trade

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Reliability of Merchandise Trade Proxy inModels on China’s Trade with its Five Major Trading Partners

Openness (Exports+Imports)/GDP1981 to 2002

 Model China-ASEAN China-Japan China-US China-EU China-Australia

CorrelationCoeff 0.98 0.98 0.96 0.97 0.94RMSE 3.83 3.6 3.23 4.15 6.42Mean Error 0.00 0.00 0.00 0.00 0.00Um 0.00 0.00 0.00 0.00 0.00Us 0.01 0.01 0.02 0.01 0.03Uc 0.99 0.99 0.98 0.99 0.97_____________________________________________________________________Notes. Ub+Us+Uc = 1. See Pindyck and Rubinfeld (1998) for further detail on these evaluation criteria. The estimates are based on TSP calculation.

 

SUBSTANTIVE EMPIRICAL (ECONOMETRIC) FINDINGS 1

• Table 1• Impact of Trade, Services, FDI, Policy Reform and Shocks on China’s Growth• Generalised Gravity Theory in Flexible Structural Form• 1981 to 2001

China-ASEAN China-Japan China-US• Variables OLS 2SLS 2SHI OLS 2SLS 2SHI OLS 2SLS 2SHI

__________________________________________________________________________________________• Constant 9.30** 9.24** 8.93** 9.74** 9.40** 8.23** 9.78** 9.41** 8.80**• Openness/GDP 0.03** 0.03** 0.03** 0.02@ 0.02@ 0.02@ 0.04@ 0.05@ 0.05@• Services/GDP 0.01 -0.01 -0.01 0.003 -0.003 -0.003 -0.004 -0.02 -0.02• FDI/GDP 0.04** 0.05** 0.04** 0.04** 0.05** 0.04** 0.04** 0.05** 0.04**• Stock Crash 871.12@ 1.18* 1.14* 1.44 1.68* 1.58* 1.13 1.43@ 1.34@• China Turmoil 89 -6.97** -6.96** -6.73** -7.42** -7.28** -6.83** -7.46** -7.29** -6.82**• Gulf War 91 4.90** 4.70** 4.54** 4.45** 3.92** 3.68** 4.83** 7.53** 4.17**• China Reform 93 2.15** 2.32** 2.24** 2.33** 2.75** 2.58** 2.15** 4.46** 2.21**• Asia Crisis 97 -2.84** -2.79** -2.69** -2.67** -2.56** -2.40** -2.75** 2.36* -2.50**• R2 0.97 0.73 0.99# 0.96 0.91 0.98# 0.96 0.95 0.98• F 43.07** 39.57** 4.80** 25.57** 21.88** 5.49** 25.84** 21.06** 5.13**• DW 1.71 1.77 1.32& 2.10 2.15 1.36& 2.19 2.17 1.32&

SUBSTANTIVE EMPIRICAL (ECONOMETRIC) FINDINGS 2

• China-EU China-Australia• Variables OLS 2SLS 2SHI OLS 2SLS 2SHI

_______________________________________________________________________________________________________• Constant 10.37** 10.10** 9 .35** 9.72** 9.61** 8.75**• Openness/GDP -0.009 -0.003 -0.003 0.01 -0.004 -0.004• Services/GDP 0.009 0.009 0.008 0002 0.003 0.003• FDI/GDP 0.04** 0.05** 0.04** 0.05** 0.06** 0.05**• Stock Crash 870.41 0.72 0.67 1.36 1.02 0.93• China Turmoil 89 -7.17** -7.25** -6.72** -7.59** -7.02** -6.40**• Gulf War 91 4.48** 4.35** 4.04** 4.56** 3.58** 3.26**• China Reform 93 2.66** 2.72** 2.55** 2.56** 3.35** 3.05**• Asia Crisis 97 -2.80** -2.75** -2.55** -2.76 -2.59** -2.36**• R Square 0.95 0.94 0.97# 0.95 0.93 0.97#• F 19.54** 18.64** 3.20** 19.88** 14.74 5.49** • DW 2.44 2.40 1.35& 2.24 2.42 1.21&

HOW TO MEASURE REGIONAL/SECTORAL GAINS/LOSSES

FROM FTAS?

• The Required Share Data

– Global– National– Regional– Sectoral, etc

REGIONAL/SECTORAL GAINS/LOSSES FROM FTAS?

• Modelling National Gains/Losses

• Modelling Regional/Sectoral Gains/Losses

Modelling More Disaggregated ActivitiesUrban and Regional Productivity/Wages

Income Inequality

Employment/Unemployment

Education and Jobs

IMPACT OF NTMS

• An Important Current Research Subject for WTO and FTA Impact

AUSTRALIA TRADE WITH THE WORLD AND ITS FUTURE & STRATEGY

Figure 1: Australia's Exports to the World

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ALL EASTASIA

ASEAN NAFTA EU INDIA OTHER OECD APEC

Trading Blocs

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Figure 2: Australia's Imports from the World

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