Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985

During the late 1970s and early 1980s, many African countries experienced a profound slowdown in economic growth. The growth rate of real per capita GDP fell from 0.4% per year during the 1973-80 period to 1.2% per year during the 1980-89 period.' The causes-internal and external-of Africa's economic decline and the strategies for restoring economic growth are much debated. Nevertheless, broad consensus has emerged on the importance of (i) increasing total investment and (ii) promoting private-sector development and increasing its share of total investment for long-term growth.2 It is widely recognized that gross domestic investment fell substantially in Africa during the 1980s and remains severely depressed across the region. The proportion of total domestic investment in GDP fell from 20.8% per year during 1973-80 to 16.1% per year during 1980-89. In some countries, investment has fallen to less than 10% of GDP-a level that is insufficient even to replace depreciated capital. In Africa, the minimum investment needed to replace depreciated capital is estimated at 13% of GDP.3 In recent years, there has also been a growing recognition among many African leaders, faced with new realism and pragmatism, that the private sector could play a significant role in economic development. The focus in the longer term of structural adjustment programs and sectoral reforms adopted by these countries is on creating more appropriate incentives and a framework for private-sector development as the basis for achieving sustainable economic growth. In addition, multilateral and bilateral institutions have developed new initiatives with priorities for private-sector development. In 1989, the International Finance Corporation, an affiliate of the World Bank, es-

This paper analyzes the effects of changes in relative commodity prices on the distribution of income among factors of production in the context of two models of a simple, two-good economy. In the first model capital is treated as a specific factor in each industry, with labor mobile between industries. The assumption of specificity determines the direction of factor income changes, with magnitudes depending on substitutability between factors and on intensities of factor use within the two industries. In the second model, capital is viewed as a quasi-fixed factor. For the short run, this model is identical to the model first considered. For the long run, this model is identical to the Stolper-Samuelson model in which the direction and magnitude of factor income changes depend solely on relative factor intensities. The difference between the short-run and long-run determinants of changes in factor incomes gives rise to a conflict between factor owners' short-run and long-run interests.

Nearly all developing countries actively seek capital and technology from the advanced countries. Although private direct foreign investment (mainly in the form of multinational enterprise) is viewed with ambivalence by many developing countries, it is nonetheless true that direct investment remains a substantial source of capital and is sometimes the only source of specific technologies. Indeed, given the slow growth in official external assistance, developing countries are becoming more, not less, dependent on direct foreign investment. While disbursements of official development assistance by the OECD countries rose 43% from 1961 through 1970, direct investment flows rose almost 90% over the same period. In the later year, the flow of direct investment was more than two-fifths of all official assistance, $3.2 billion compared to $7.8 billion.1 Furthermore, the United States and other major capital exporting countries would prefer, for economic as well as ideological reasons, to channel more of their capital outflows to developing countries through private investment. It is highly probable, therefore, that developing countries will continue to rely on direct foreign investment in the foreseeable future to carry out their development programs. It is against this background that the present study seeks to identify the empirical determinants of direct foreign-investment flows in the manufacturing sectors of developing countries. Our purpose is to select from the many economic, social, and political features of a developing country those features that are critical to making that country attractive or unattractive to private foreign investors. Available empirical studies are limited

The following sections are included:IntroductionThe ModelThe Equations of ChangeThe Magnification EffectThe Extended Model: Demand EndogenousThe Aggregate Elasticity of SubstitutionConvergence to Balanced GrowthSavings BehaviorThe Analysis of Technological ChangeReferences

Since Jan 4th 2016, the State Bank of Vietnam (SBV) has applied the central exchange rate regime pegging VND to a basket of 8 currencies, which reflects the adaptation of macro policies in general, exchange rate policy in particular when integration context has changed. In order to propose suitable solutions to administrate exchange rate policy effectively, this article employs the VAR model, in which the relationship between exchange rate and three objectives of exchange rate policy (including prices, output and trade balance) are tested. The data used in this model is quarterly, in the period 2001q1-2017q3. Based on the results of the VAR model, a number of policy implications has been proposed, including: (i) continuing to apply currency basket pegged exchange rate regime; (ii) in stead of choosing to devaluate VND, the SBV should use other exchange rate management tools; (iii) speeding up the development of derivative exchange rate market is necessary to reduce the level of ERPT to the import price index so that helps to control inflation in Vietnam and (iv) the SBV should prioritize the exchange rate policy administration towards price stability through adopting the inflation-targeting monetary policy.
 Keywords
 Exchange rate policy, exchange rate, inflation, economic growth, trade balance
 References
 [1] Campa, J. M. and Goldberg, L. S., “Exchange rate pass-through into import prices”, The Review of Economics and Statistics, 87(4) (2005), pp. 679-690. [2] Ghosh, A. and Rajan, R. S., “Exchange rate pass-through in Korea and Thailand: Trends and determinants”, Japan and the World Economy, No. 21 (2009), pp. 55–70.[3] McCarthy, J., “Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies”, Eastern Economic Journal, No. 33(4) (2000), pp. 511-537.[4] Hahn, E., Pass-Through of External Shocks to Euro Area Inflation, European Central Bank, Working Paper No.243, 2003.[5] Ito, T. and Sato, K., “Exchange rate changes and inflation in post-crisis Asian economies: VAR analysis of the exchange rate pass-through”, Journal of Money, Credit and Banking, No 40 (2008), pp. 1407-1438.[6] Kim, K. H., “US Inflation and the Dollar Exchange Rate: A Vector Error Correction Model”, Applied Economics, 30(5), 1998, pp.613-619.[7] Beirne, J. and Bijsterbosch, M., Exchange rate pass-through in central and eastern European member states, European Central Bank, Working Paper Series, No.1120, 2009.[8] Huong, T.T.X., V.X.Vinh and N.P. Canh, “Transmission of monetary policy: A number of appropriate regression models”, Journal of Development and Integration, No. 16 (26), 2014, tr.41-46.[9] Vinh, N.T.T, “The role of different channels on trasmitting monetary policy into output and price in Vietnam”, Journal of Economics and Development, No. 214 (2015), tr.20-30.[10] Giang, L.T., Applied structural vector autoregression model to analyze monetary transmission mechanism in Vietnam, Dotoral Thesis, National Economics University, 2017.[11] Trinh, P.T.T., “Impact of foreign exchange reserves to inflation: Approaching by VAR model”, Economic Development Review, No. 26 (2015), tr.46-68.[12] Minh, V.V., Exchange rate pass-through and its implications for inflation in Vietnam, Vietnam development forum, Working paper 0902, 2009.[13] Anh, N.D.M, T.M. Anh and V.T. Thanh, “Exchange rate pass-through into inflation in Vietnam: An assessment using Vector Autogression approach”, Vietnam Economic Management Review, 2010.[14] Anh, P.T., “Applying SVAR model to analyzing exchange rate pass-through effects (ERPT) in Vietnam”, Journal of Economics and Development, No. 220 (2015), tr.48-58. [15] Anh, P.V., Choosing the exchange rate regime in order to implement the inflation targeting policy in Vietnam, Doctoral Thesis, Foreign Trade University, 2017.[16] Minh, H.D., The relationship between inflation and exchange rate in Vietnamese economy, Doctoral Thesis, Hanoi University of Science and Technology, 2014. [17] Hausmann, R., Pritchett, L. and Rodrik, D., Growth accelerations, NBER Working paper series 10566, 2004.[18] Rodrik D., “The Real Exchange Rate and Economic Growth”, Brookings Papers on Economic Activity, Vol. 2008, pp. 365-412. [19] Gluzmann, P. A., Levy – Yeyati, E. and Sturzenegger, F., “Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited”, Economics Letters, No 117 (2012), pp. 666–672.[20] Kappler, M., Reisen, H., Schularick, M. and Turkisch, E., “The Macroeconomic Effects of Large Exchange Rate Appreciations”, Open Econ Rev, No.24 (2012), pp.471–494.[21] Habib, M. M, Mileva, E. and Stracca, L., “The real exchange rate and economic growth: Revisiting the case using external instruments”, Journal of International Money and Finance, Accepted Manuscript, 2017. [22] Rose, A. K., “Exchange rates and the trade balance: Some evidence from developing countries”, Economics Letters, No. 34 (1990), pp.271-275, North-Holland.[23] Vural, B. M. T., “Effect of Real Exchange Rate on Trade Balance: Commodity Level Evidence from Turkish Bilateral Trade Data”, Procedia Economics and Finance, No.38(2016), pp.499 – 507.[24] Trang, L.M, Exchange rate policy to promote export of Vietnam, Doctoral Thesis, Thuong mai University, 2017. [25] Bahmani – Oskooee, M., “Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs?”, Economics Letters, No. 36 (1991), pp.403-407, North-Holland.[26] Anh, D.T.H., Impact of the real exchange rate on trade balace in the context of international economic integration, Doctoral Thesis, Banking Academy, 2012. [27] Arize, A. C., Malindretos, J. and Igwe, E. U., “A Convenient Method for the Estimation of ARDL Parameters and Test statistics: U.S.A Trade Balance and Real Effective Exchange Rate Relation”, International Review of Economics and Finance, 2017, http://dx.doi.org/10.1016/j.iref.2017.03.024.[28] Wang, C. H., Lin, C. H. and Yang. C. H. et al, “Short-run and long-run effects of exchange rate change on trade balance: Evidence from China and its trading partners”, Japan and the World Economy, No. 24 (2012), 266-273.[29] Koray, F. and McMillin, W. D., “Monetary shocks, the exchange rate, and the trade balance”, Journal of International Money and Finance, No.18 (1999), pp.925–940[30] Hang, N.T.T., D.T.Minh, T.T.Thanh, L.H.Giang and P.V.Ha, Exchange rate policy choice in the context of economic recovery, VEPR, Working Paper No, 2010.[31] Nhung, N.C. and T.T.T. Huyen, “Exchange rate pass-through into Vietnamese import prices by industries and by countries”, International Business Management, 11 (11), 2017, pp.1834-1843.

2004–2020. The study was conducted in the context that Vietnam’s trade openness is increasing, causing significant challenges in macro management, including exchange rate management. The authors use vector autoregression model and Granger causality test to test this relationship. The study used a vector autoregression model and Granger causality test to investigate the causal relationship between trade openness and real effective exchange rate volatility in Vietnam over the period 2004–2020. The study was conducted in the context of Vietnam’s trade openness index rising, causing significant challenges in macro management, including exchange rate management. The study takes a new approach (i) using Vietnam’s real effective exchange rate relative to 143 trading partners; and (ii) examining the impact of economic growth on trade openness and exchange rate volatility. The research results indicate that trade openness has a two-way Granger causality with effective real exchange rate volatility in Vietnam at the 1% significance level. Specifically, the effect of trade openness on real exchange rate volatility is positive at a 1-period lag and 4-period lag. Meanwhile, real exchange rate fluctuations have a negative effect on trade openness with a 1-period lag. At the same time, the study also finds that increased economic growth reduces real effective exchange rate volatility and increases Vietnam’s trade openness. On that basis, the study proposes implications for the management of trade openness and exchange rate management in the current Vietnamese context.

Publisher Summary This chapter discusses the financial development and economic growth in underdeveloped countries. An observed characteristic of the process of economic development over time, in a market-oriented economy using the price mechanism to allocate resources, is an increase in the number and variety of financial institutions and a substantial rise in the proportion not only of money but also of the total of all financial assets relative to GNP and to tangible wealth. Typical statements indicate that the financial system somehow accommodates—or, to the extent that it malfunctions, it restricts—growth of real per capita output. Such an approach places emphasis on the demand side for financial services; as the economy grows it generates additional and new demands for these services, which bring about a supply response in the growth of the financial system. In this view, the lack of financial institutions in underdeveloped countries is simply an indication of the lack of demand for their services.

Quantitative Aspects of the Economic Growth of Nations: VIII. Distribution of Income by Size

The Interest Rate Parity Theorem: A Reinterpretation

Institutional Quality and Income Distribution

References and Further Reading

Complementarities between Exports and Human Capital in Economic Growth: Evidence from the Semi‐industrialized Countries

The purpose of this study was to assess the effect of trade openness and real exchange rate on economic growth in Tanzania. Secondary time series data collected annually for consecutive 47 years since 1970 to 2016 were analyzed. The study used the Autoregressive Distributed Lag (ARDL) to assess the long-run and short-run effects of trade openness, real exchange rate, and foreign direct investment on Real Gross Domestic Product. The results from analysis reveal the evidence on one hand that trade openness has a positive significant effect on economic growth in both the short and long-run, but real exchange rate and foreign direct investment have a positive significant effect in the long run on the other. As it was estimated that with trade openness more trade is developed in terms of exports and imports which in turn boosts the economy. The study recommends that, there is the need for country to support the domestic industrial development to produce more goods and services.

The Impact of Exchange Rate Movements on Trade Balance between Vietnam and Japan: J Curve Effect Test

Foreign Direct Investment (FDI) in recent years has created a positive impact for ASEAN countries. FDI give spillover effects that directly contribute capital improvements, technological developments, and global market access, also skills and managerial transfers. In order to attract FDI inflow into country, ASEAN member countries need to know what factors which attract investment related to the needs of infrastructure types and other factors. The purpose of this study is examine the determinant of FDI in ASEAN countries. This research method used is panel data regression period 2005-2015 from 10 countries in ASEAN. The results showed simultaneously and partially telecommunication infrastructure, market size, trade openness, and labor force variable have significant relationship with FDI inflows in ASEAN countries.Keywords: panel data regression, telecommunication infrastructure, market size, trade openness, labor force, FDI.ReferencesAppleyard, DR. Field, JF. and Cobb, SL. 2008. International Economics. New York: McGraw-Hill.Azam, Muhammad. 2010. “Economic Determinants of Foreign Direct Investment in Armenia, Kyrgyz Republic and Turkmenistan: Theory and Evidence”, Eurasian Journal of Business and Economics. 3 (6), 27-40.Botric, Valerija. 2006. “Main Determinants of Foreign Direct Investment in the Southeast European Countries”, Transition Studies Review. Vol. 13(2): 359–377.Calderon, C., and Serven, L., 2010. “Infrastructure and Economic Development in Sub-Saharan Africa”, Journal of African Economies. Vol.19(4): 13-87.Carbaugh, Robert J. 2008. International Economics. Edisi Kedelapan. South Western: Thomson Learning.Chakrabarti, A. 2001. “The Determinant of Foreign Direct Investment: Sensivity Analysses of Cross-Country Regression”, International Symposium on Sustainable Development. Vol 54 (1):89-114.Demirhan, E., & Masca, M. 2008. Determinants of Foreign Direct Investment Flows. Prague Economic Papers.Dutt, Pushan, et all. 2007. “International trade and unemployment: Theory and cross-national evidence”, Journal of International Economics. Volume 78(1): 32-44.Gharaibeh, A. M. 2015. “The Determinants of Foreign Direct Investment-Empirical Evidence from Bahrain”, International Journal of Business and Social Science. Vol. 6(8): 94-106.Grigg, N. 2000. Infrastructure System Management & Optimazation. Working Paper of Internasional Civil Engineering Departement Diponegoro University.Hirsch, Caitlin E. 1976. Macroeconomics, Politics and Policy: The Determinants of Capital Flows to Latin America. Texas Tech University.Hymer, Stephen Herbert. 1976. The International Operations of National Firms: A Study of Direct Foreign Investment (MIT Press, Cambridge, MA), MIT Department of Economics PhD thesis originally presented 1960.Kaliappan, Shivee Ranjanee et all. 2013. “Foreign Direct Investments (FDI) and Economic Growth: Empirical Evidence from Southern Africa Customs Union (SACU) Countries”, International Journal of Economics and Management. Vol 7(1): 136 – 149.Kurniati, Y., A. et al. 2007. Determinan FDI (Faktor-faktor yang Menentukan Investasi Asing Langsung). Jakarta: Bank Indonesia.Mughal, M.M., & Akram, M. 2011. “Does Market Size Affect FDI? The Case of Pakistan”, Interdisciplinary Journal of Contemporary Research in Business. Vol. 2(9): 237-247.Nasir, S. 2016. “FDI in India’s Retail Sector: Opportunities and Challenges”, Middle-East Journal of Scientific Research. Vol: 23(3): 155-125.Novianti, Tanti et all. 2014. “The Infrastructure’s Influence on the Asean Countries’ Economic Growth”, Journal of Economics and Development Studies. Vol. 2(4):243-254.Rehman, C. A., Ilyas, M., Alam, H. M., & Akram. M., (2011). “The impact of Infrastructure on Foreign Direct Investment: The case of Pakistan”, International Journal of Business and Management. Vol.6(5): 184-197.Salvatore, D. 2007. International Economics. United States: John Wiley & Sons, Inc.Sarna, Ritash. 2005. The impact of core labour standards on Foreign Direct Investment in East Asia. Working Paper of the Japan Institute No. 1789.Shah, Mumtaz Hussain. 2014. The Significance of Infrastructure for Fdi Inflow in Developing Countries. Journal of Life Economics. Vol. 3(5):1-16.Shah, Mumtaz Hussain., and Khan, Yahya. 2016. Trade Liberalisation and FDI Inflow in Emerging Economies. Business & Economic Review. Vol 2(1): 35-52.Todaro, Michael P. and Smith, Stephen C. 2011. Economic Development. Ninth Edition. United States: Addison Wesley.Umoru, D. & Yaqub, J.O. 2013. “Labour productivity and Human capital in Nigeria: The empirical evidence”, International Journal of Humanities and Social Sciences. Vol. 3(4). 199-221.Vernon, R. (1966). “The product cycle hypothesis in a new international environment”, Oxford bulletin of economics and statistics. Vol 41(4), 255-267.World Bank. 2015. World Development Indicator 2015.Zeb, Nayyra et all. 2015. “Telecommunication Infrastructure and Foreign Direct Investment in Pakistan: An Empirical Study”, Global Journal of Management and Business Research. Vol. 14(4): 117-128.