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2010 http://www.eurojournals.com/MEFE.htm

**Foreign Trade and Economic Growth the Case of Turkey
**

Mehmet Adak Economics Department, Yalova University, Safran Campus, Yalova 77100, Turkey E-mail: madak@yalova.edu.tr Tel: +90 (226) 814 60 90; Fax: +90 (226) 814 60 89 Abstract Foreign trade and Economic Growth interrelation in Turkey will be examined in this paper. The analysis is covering the years between 1981 and 2007. The econometric analysis shows that there is a significant causality between foreign trade and economic growth. Furthermore, statistics show that the influence of foreign trade on economic growth is positive and consistent.

Keywords: Causality, Economic Growth, Foreign Trade JEL Classification Codes: F10, F43, O19

1. Introduction

The causality between Turkish economic growth and foreign trade is analyzed in this paper. The Turkish economy was integrated into the global economy in the 1980s. As a result, the GDP per capita and foreign trade statistics have developed dramatically in the last 30 years. The GDP per capita has doubled and foreign trade has increased by 20 fold. This development in foreign trade is a new feature in Turkey. New production lines and units were established for the export market and foreign exchange reserves started to increase. In addition, new highly developed production industries were also a boost for the Turkish economy. Accordingly, all these expansive economic activities had an optimistic development on GDP and per capita income. At the same time economic development was supported by legal regulations such as tax return and tax discounts for foreign traders. Major economic indicators over the last 30 years are shown in figure 1. All economic series show a positive upward increase in the analyzed period. The Foreign Trade values are calculated by the sum of the export and import values of each year. As can be seen, the export series is more regular than the other series. Nevertheless, one does notice that all series, especially GDP per capita, foreign trade and import series fluctuated very sharply during the economic crisis of 1994, 1999 and 2001.

Middle Eastern Finance and Economics . David Ricardo’s contribution on international economics is the accepted source for today’s global economy. Recent Literature on Foreign Trade Positive influences of foreign trade on economic growth were first defined by Adam Smith in economic literature.00E+10 4. It was found that in a country.50E+11 2. The economies which have free trade regimes growth rate were found higher than the closed economies by Sachs and Warner (1995).40E+11 2. Foreign Trade impact on growth and productivity is discussed in several researches by Coe and Helpman (1995). Edwards (1998) claims that there has been a positive impact on open foreign trade and Total Factor Productivity. foreign trade influences on economic growth have been accepted as a major factor for economic growth in economic literature by Grossmann and Helpman (1991). 2. .50E+11 3. Foreign Trade and Economic Growth Theory is analyzed in section 2. In addition.00E+10 4.00E+11 1. The affects of foreign trade tariffs were found to be determinant on economic growth by Romer (1990).40E+11 1. However. Econometric analysis is given in section 4. Strong foreign trade unions were found to have a positive contribution on economic growth by Young (1991). Rodrik and Rodrigez (2000). The data set and its statistical analysis is defined in section 3.00E+00 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 8.00E+10 0.00E+00 2.00E+11 2.00E+10 2. Alcala and Ciccone (2004).20E+11 6.20E+11 1. Frankel and Romer (1999). Ben-David (1993) showed the convergences in per capita income with open trade regimes in the global economy. Wacziarg and Welch (2003).60E+11 IMPORT 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 This paper is organized as follows.Issue 8 (2010) Figure 1: Major Economic Indicators of Turkey (in US Dollars) GDP per CAP 12000 11000 10000 9000 8000 7000 6000 5000 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 3. where exports grow by 12 percent per year. In the 1980s economists began to analyze the International economics as an endogenous variable in production functions.00E+11 8.00E+10 0.00E+11 5. Positive Trade Openness’s impact on price deviation and economic growth was focused upon by Dolar (1992).00E+11 1.50E+11 1.00E+10 0.00E+00 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 138 FOREIGNTRADE EXPORT 1. Foreign trade growth rates and rate of economic growth interrelation was analyzed by Lewer and Van den Berg (2004).00E+10 1. In addition.

Alici and Ucal (2003) found significant economic growth in the Turkish economy after the foreign direct investment and export led growth policies were decided after 1980. The growth rate of foreign trade is then calculated yearly.036000 0. The dependent variable which is the economic growth rate has been represented by GDP per Capita Growth rate.026778 0. Table 1: Statistical Characteristics of the Series Foreign Trade Growth Rate 0. Dev. Not many researches were found dealing with the Foreign Trade and Economic Growth relation for the case of Turkey.043695 1.6%. The trade liberalization effects on productivity were researched by Bayar (2002). Afterwards. This can be seen in Table 1 with the standard deviation of each series.2% in the 27 year period. Bayar found that there are productivity increases in industrial sectors after trade liberalization activities. Import of manufacturing materials from EU has had positive effects on productivity and output.529353 27 GDP per Capita Growth Rate 0. Observations Both series are sourced from the World Bank Development Indicator data base. Dev.597357 3.6% annually in the last 27 years.041208 -0. Data Set There are two variable time series in this analysis. Export and import values are calculated in US Dollars.115859 0. 3.5 percentage points faster than a country whose foreign trade grows by 2 percent per year.166000 0. Skewness Kurtosis Jarque-Bera Probability Sum Sum Sq.142687 -0. positive influences of economic integrations were found by Mihci and Akkoyunlu (2009).044151 27 Mean Median Maximum Minimum Std. Furthermore.5 percent difference in annual growth rates will give the faster growing country a GDP that is 12 bigger than the slower growing country after just one century. The series of Foreign Trade has a high cycle length than the GDP per capita growth rate.310755 0.723000 0.229095 4.972021 3.139 Middle Eastern Finance and Economics .136444 0. imports were found to have positive influences on output per labor. Utkulu and Ozdemir (2004) showed that these new trade policies have had direct influences on economic growth in the short and long run. GDP per Capita values were calculated with constant US Dollars prices of the year 2005.Issue 8 (2010) the economic growth will be 2.072000 0. It has been normalized with the international purchase power of parity as well. The maximum Foreign Trade Growth rate reached 16% and the maximum Growth Rate for GDP per Capita reached 3. The foreign trade series is calculated by the addition of export and import values of Turkey on a yearly basis.019134 2.116000 0. The main characteristics of the series are given in Table 1 and the graphs of the series are shown in Figure 2. its growth rate is calculated yearly. This 2. Yucel (2009) found that the new foreign trade regime and trade liberalization activities increased the foreign trade volume and economic growth in the Turkish economy after the 1980s. One micro econometric study about Turkey was done by Pamukcu (2003) on firms’ innovation production relation with foreign trade and trade liberalization.087000 -0. .030482 0. In addition. Effects of trade liberalization on innovation were found positive in this study. The average growth rate for Foreign Trade in Turkey was 13% annually and the average growth rate for GDP per Capita was 2. Whereas the minimum growth rates for foreign trade and GDP per Capita were recorded as -11% and -7.386000 -0.684000 0.

In Table 2. two null hypotheses are tested according to the direction of causality. Table 3: Correlation Matrix Foreign Trade Growth Rate 1 0.1 -.08 .0 -.79834 GDP per Capita Growth Rate 0.3 .08 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 -. The second null hypothesis tests the reverse direction of causality from foreign trade growth rate to GDP per Capita Growth Rate.04 .79834 1 Foreign Trade Growth Rate GDP per Capita Growth Rate Table 4: Covariance Matrix Foreign Trade Growth Rate 0.12 .10823 1.00452 GDP per Capita Growth Rate 0.2 .1 .00 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 The Granger Causality Test result for the years between 1980 and 2008 is given in Table 2.04 -.00163 Foreign Trade Growth Rate GDP per Capita Growth Rate .28 for the first and second hypotheses respectively.4 .Middle Eastern Finance and Economics .28034 Table 3 and Table 4 are the correlation and covariance matrixes of the times series of the analysis. Both tables show that there is a positive relation between the two series.00452 0.01960 0.Issue 8 (2010) Figure 2: GDP per Capita and Foreign Trade Growth Rate 140 GDP per Capita Growth Rate .35 and 0. The test results show probabilities of 0.5 . because we cannot reject the null in both cases.35615 Probability 0. We can therefore conclude that there is no Granger causality in either direction. The first null is “GDP per capita Growth Rate does not Granger Cause Foreign Trade Growth Rate”.34959 0.2 Foreign Trade Growth Rate . Table 2: Granger Causality Test Pairwise Granger Causality Tests Sample Range : 1980 2008 Lags: 2 Observations: 25 Null Hypothesis: GDP per capita Growth Rate does not Granger Cause Foreign Trade Growth Rate Foreign Trade Growth Rate does not Granger Cause GDP per capita Growth Rate F-Statistic 1.

D. β 1 is coefficient of foreign trade growth rate and e is the residual of the model. The foreign trade growth rate has positive influences on GDP per Capita Growth Rate.000001 . Tests have been done in level while the series was found stationary at level I(0). XM depicts Foreign Trade Growth Rate. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) t-Statistic -0. y = f ( XM ) (+) y represents the GDP per Capita Growth Rate.230562 R-squared 0.016011 Log likelihood 61.026778 0.711457 Probability 0.93859 0. The Intercept has been included in the test equations.762271 -3. Model This model is performed linearly. The Augmented Dickey Fuller test is applied with Schwarz info Criterion.689194 Probability 0.0001 Table 6: Unit Root Test Result for Foreign Trade Growth Rate Null Hypothesis: Foreign Trade Growth Rate has a unit root Exogenous: Constant Lag Length: 0 (Automatic based on SIC.99804 Durbin-Watson stat 1. Least Square Method GDP per capita growth rate is the dependent variable of the model and the foreign trade growth rate is the independent variable of the model.628619 Probability 0.0001 4.006800 0. Table 5: Unit Root Test Result for GDP per Capita Growth Rate Null Hypothesis: GDP per Capita Growth Rate has a unit root Exogenous: Constant Lag Length: 0 (Automatic based on SIC.0000 0.688376 6.444299 -4.034783 Mean dependent var S.348311 43.771193 Std.2.041208 -4. Table 7: Regression Analysis Output Dependent Variable: GDP per Capita Growth Rate Method: Least Squares Sample: 1981 2007 Included observations: 27 after adjustments Variable Coefficient C -0. Analysis 4.637358 Adjusted R-squared 0.E. Least Square Method has been used in the analysis so the model can perform as.1.4976 0. of regression 0. MAXLAG=6) Augmented Dickey-Fuller test statistic Test critical value for 1% level t-Statistic -5. 4.Issue 8 (2010) The Unit root test has been applied for each economic series.141 Middle Eastern Finance and Economics .622853 S.025307 Sum squared resid 0.004681 Foreign Trade Growth Rate 0. Error 0. MAXLAG=6) Augmented Dickey-Fuller test statistic Test critical values for 1% level t-Statistic -5.729561 -3. y = β 0 + β1 XM + e β 0 is the intercept (constant).

Heteroskedasticity Test White’s statistic test is calculated as R square times the number of observations from the regression table below. Intercept of the analysis’s t-statistics value could not exceed the confidence interval but t-statistics value of foreign trade growth rate has exceeded the critical value of the confidence interval. Figure 4 gives information about the residual of regression analysis. Figure 4: Residual Graphic . in the test regression.Issue 8 (2010) 142 All the parameters signs have been found as expected.00 . R square and adjusted R square values were found at about 62-63 percent.04 .4 Foreign Trade Growth Rate . Since the . The leaner relation between the two variables is given in figure 3.06 82 84 86 88 90 92 94 96 98 00 02 04 06 4.02 .04 -. F-statistic value of regression analysis exceeded critical level as well.04 . The White’s statistic test is asymptomatically distributed as a χ 2 with degrees of freedom equal to the number of slope coefficients.6 percent.02 -. excluding the constant.1 .0 -. Figure 3: Scatter Regression Line .00 -. the residual fluctuates into a very narrow tunnel.2 .5 .1 -. As can be seen.2 -.08 .12 GDP per Capita Growth Rate Durbin-Watson statistics gives information about autocorrelation which was found at 1.5 percent and the sum squared residual can be seen at about 1.3 .08 -.Middle Eastern Finance and Economics .08 .06 .77 being quite close to 2.3.04 . Standard error of regression is too low at 2.

Error 0.0017 0.031070 Std.000204 0. Figure 5: Correlogram of Residuals Breusch-Godfrey Serial Correlation Lagrange Multiplier (LM) test works in the linear model which is defined below. 12 lags are included in the correlogram. If the correlations between the equations’ errors are significantly different from zero we can assume that there is no autocorrelation in the model.504391 -0.003553 t-Statistic 3.610460 Dependent Variable: RESID^2 Method: Least Squares Sample: 1981 2007 Included Observations: 27 Variable Coefficient Constant 0. F-statistic gives information about the significance of β 2 . Chi-Square(1) 0.838886 Scaled explained SS 0.Issue 8 (2010) observation times R squared value of 0. The residual correlogram has been given in Figure 5.003181 R-squared 0. so there is no heteroskedasticity found in the model.3597 can be incorrect if we reject the null hypothesis of no heteroskedasticity. This signifies that autocorrelations are not significantly different from zero at 5 percent significance level. 0.838886 is smaller than the 5% critical χ 2 value of 3. Each lag represents the correlation of et with et-1. t-2 and so on. The two main LM test outputs are given in the top two lines of the Table 10 with corresponding p- values. et-2. Autocorrelation numerical values are given in the table under the first column of AC. Chi-Square(1) Prob.trade + β 2 e t −1 ∧ ∧ ∧ ∧ e t and e t −1 are the least square residuals in lag of t and lag of t-1. e t = β 0 + β 1 foreign .3597 0. F-statistics value calculated as.143 Middle Eastern Finance and Economics . .895351 Prob.4. LM test has run for 1 lag in the test.4346 0. Autocorrelation Test Autocorrelation can be found in the models when the least square residual lag t has a correlation with past values of least residual lag t-1.3791 0.000715 XM^2 -0. The probability values of 0.25) Prob.3791 4. … and et-12. The bars were not enough to obscure the dotted lines. Table 8: White Heteroskedasticity Test Prob.841454. These are indicated in the first raw graph with their own signs. F(1.801654 F-statistic Obs*R-squared 0.

399)2 = 0. 39.036023 0.171 and F-statistic value did not exceed the critical value.. G. Bayar.399685 Probability 0. Alesina Alberto. we can thereby accept the hypothesis of no serial correlation up to lag order 1 at the 95% confidence level. Handbook of Economic Growth. 613–646. (2004). In further studies.108412 0.083906 0. foreign trade can be segmented into major sectors and each sector’s deviations can be regressed by the income development of the lands studied. “Equalizing exchange: Trade liberalization and income convergence” Quarterly Journal of Economics 108 (3). (2003). pp 1499-1539.6988 0. A. (1995) “International R&D spillovers”. Ucal. D. 5. Error 0.24) Prob..Middle Eastern Finance and Economics . “Effects of Foreign Trade Liberalization on the Productivity. Therefore. The econometric model and ordinary least square test done in the research show that the foreign trade growth positively affects the GDP per capita growth rate. Emerging Markets Finance and Trade 38 (5). References [1] [2] [3] Alcala. (1993).171 Table 10: Breusch-Godfrey Serial Correlation LM Test F-statistic Obs*R-squared Dependent Variable: et Method: Least Squares Sample: 1981 – 2007 Included observations: 27 Variable Constant foreign trade growth rate et-1 R-squared 0.6929 The calculated Breusch-Godfrey LM test statistic of 0.006933 0.9146 0. “Trade and productivity” Quarterly Journal of Economics 119 (2). Elsevier Alici A.083465 0.003905 0. As a result of changing foreign trade policies.208826 t-Statistic -0. This study has also shown that foreign trade is one of the economic growth determinants of Turkey. Growth and the Size of Countries”. Spolaore Enrico. Conclusion The foreign trade growth rate has pushed up the GDP per capita growth rate in the past three decades after the integration of Turkey into the global economy.. Trade Liberalization”. LM = number of observations × R-squared value LM= 27 × 0. North-Holland.. F(1. 653–679.006349 Std. Chi-Square(1) 0. F.153 Lagrange Multiplier value calculated as. Coe T. A.000582 0. Waczıarg Romain (2005). European Trade Study Group Fifth Annual Conference. 859-87 [4] [5] [6] . 11-13 September 2003 Madrid. (2002). 46-71 Ben-David. a rapid increase in foreign trade and national production followed.6788 144 Coefficient -0. the null hypothesis of H0: β 2 =0 cannot be rejected at 5 percent significance level.153358 0.0063=0.9338 0.. “Trade.171432 Prob. M. and Helpman E. S. Ciccone.. Export and Outpu Growth of Turkey: Causality Analysis”. “Foreign Direct Investment.Issue 8 (2010) F-statistic = (t-statistics of β 2 )2 F-statistic = (0. European Economic Review.

(1992).. Utkulu. J. D. 369-405 Yucel. (2008). Journal of Political Economy 98.. Edwards... U. (1999).Issue 8 (2010) Dollar. USA. Ozdemir. 1976–85”. D. (2003) “Trade Liberalization and Innovation Decisions of Firms: Lessons from Post-1980 Turkey”. S. Warner. McGraw Hill Mihci. J. C. Economics of Planning.Surveys in Economic Growth Theory and Empirics. E. (2000). MIT Press. Frankel. A..H..145 [7] Middle Eastern Finance and Economics .. 6th edition. G.A.. 261–325. USA Gujarati. 163-179 Lewer. Prentice Hall Griffiths. MA. Blackwell Publising. Cambridge. (1991) “Learning by Doing and The Dynamic Effects of International Trade” Quarterly Journal of Economics 106. Welch. “Trade liberalization and growth: New evidence”.. F. Hill. (2007). “Using EViews for Principles of Econometrics” 3th Edition. Greene. A.. D. Young. (2004) “How Large is International Trade’s Effect on Economic Growth”. “Does trade cause growth?”. (1998). Brookings Papers on Economic Activity 1.. 33-42 [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] . “Trade policy and economic growth: A skeptics guide to the cross-national evidence”. C.. NJ. “Outward-oriented developing economies really do grow more rapidly: Evidence from 95 LDCs. pp.. 1–118. USA.. D. Argumenta Oeconomıca. Inc. 137-170 Pamukcu. vol.. Akkouyunlu. 22-1. J. (2004) “Basic Econometrics”. W. 523– 544. F. “Causal Relationships between Financial Development . (2009). R. J. Romer. 71-102 Sachs. S. E. Malden. (1990) “Endogenous Technical Change”. December. W. P. Romer. H. (2004).. Arzu.. Trade Openness and Economic Growth: The Case of Turkey” Journal of Social Sciences 5(1). (1991) “Innovation and Growth in the Global Economy”. 37. MA. (2003). Grossman. NBER Working Paper 10152. “Economic Reform and The Process of Global Integration”. 245-266 Wacziarg. (2009) “The Impact of The Customs Union with The European Union on Turkey’s Economic Growth”. American Economic Review 89 (3).. MA. 15. “Openness. John Wiley & Sons. Rodriguez. World Development 31-8. MIT Press. 1443-1458 Rodrik. and Helpman. “Does Trade Liberalization Cause a Long run Economic Growth in Turkey”. G. Economic Development and Cultural Change 40 (3). 379–399. H. R. D. NBER Macroeconomics Annual.. K. 383–398. T. Van den Berg.. Cambridge. Lim. “Econometric Analysis”. (1995). productivity and growth: What do we really know?” Economic Journal 108 (447).

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