Capital mobility, openness, and saving-investment relationship in Asia

Abstract

The main objective of this paper is to investigate the relationship between openness to trade and saving-investment behaviour in Asia during the period 1990–2006. We use this relationship to examine whether those Asian countries that are more open to trade and enjoy less trade barriers have also higher degree of capital mobility. Cluster analysis is used to classify the countries into different groups according to the share of trade in their gross domestic products and their average tariff rates. The goal is to place the countries that are similar to each other in terms of their trade policy in one group. We apply the Generalized Least Square (GLS) technique to a set of balanced panel error correction models to estimate the short- and long-run relationship between saving and investment. The estimation results indicate that there exist long-run equilibrium relationships between domestic saving and investment in all groups regardless of their degree of trade openness. Moreover, contrary to Amirkhalkhali and Dar (2007) for the case of OECD, we find out that more openness in terms of trade policy is associated with higher degree of capital mobility for the case of Asian countries. One policy implication of this result for the Asian economies is that trade openness can be used as a strategy to attract capital from abroad. Our findings also confirm the prediction of new open economy macroeconomic models regarding the short- and long-run behaviour of current account.