Trade liberalisation and economic performance : analytics and empirics from Bangladesh

Hossain, Mohammad A. (2003). Trade liberalisation and economic performance : analytics and empirics from Bangladesh PhD Thesis, School of Economics, The University of Queensland.

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Author Hossain, Mohammad A.
Thesis Title Trade liberalisation and economic performance : analytics and empirics from Bangladesh
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2003
Thesis type PhD Thesis
Total pages 289
Language eng
Subjects 14 Economics
Formatted abstract The thesis empirically investigates the policy regime shift in Bangladesh from import substitution to export promotion. The structural malaise gripping the economy during the 1970s and the early 1980s, and the policy reforms aimed at rectifying it are critically analysed. The methodology of the anti-export bias enunciated by Bhagwati and Krueger is applied to evaluate the success of the trade policy reforms implemented in Bangladesh.

The thesis reviews, using various time-series econometric techniques, the success of the export-led growth strategy in Bangladesh. Therefore, a focussed analysis of the de novo hypothesis is undertaken to determine whether the trade liberalisation policies succeeded in starting a new engine of growth in Bangladesh in the form of labour-intensive manufactured exports. This analysis is further extended to examining the Lucas critique of structural change in the context of the export-led growth hypothesis.

Having explored the export-led growth and de novo hypotheses in the context of the policy regime shift from import substitution to export promotion, the thesis identifies two key issues for the sustainability of the export oriented industrialisation strategy, namely, efficiency and equity or welfare. Thus, the thesis undertakes a deeper investigation of the performance of the manufacturing sector of Bangladesh by examining the technical efficiency of the various three-digit level manufacturing industries. Also undertaken, in this context, is an assessment of the performance of the export-oriented industries relative to the import competing industries. The thesis concludes by reviewing the welfare implications of trade liberalisation by focussing on personal income distribution, wage disparity in the manufacturing sector, and poverty.

The first part of the thesis (Chapters 1 -3) reviews the theoretical rationale that motivated the execution of a trade liberalisation strategy as epitomised by an export promotion strategy in contrast to the pursuit of an import substituting strategy. This section also provides a critical review of the structure of the Bangladesh economy, and highlights the bottlenecks that the policy makers need to tackle in implementing the regime shift. Finally, this section initiates the empirical investigation by presenting an appraisal of the extent of trade liberalisation in Bangladesh and a preliminary assessment of its impacts.

The initial evaluation suggests that Bangladesh has gradually moved towards a greater outward-oriented policy regime as judged by the trade-GDP ratio, the real exchange rates, anti-export bias reduction, and reductions in tariff rates and quantitative restrictions. Led by textiles and readymade garments, both total- and manufacturing exports have appreciably risen in thel980s and the 1990s. Similar implications hold for output growth.

The second part of the thesis (Chapters 4 to 8) econometrically examines the issues as set out in the previous paragraphs. The empirical results based on the vector error correction modelling and various non-nested tests support the general contention of the de novo hypothesis in that both total- and manufacturing exports of Bangladesh responded to export stimuli such as reduction of anti-export bias and increase in the import-GDP ratio. The results also suggest that manufacturing exports are a significant determinant of economic growth in Bangladesh. However, the results do not lend support to the claim that manufacturing exports have become the sole engine of export-led growth bypassing the total exports engine. The innovation accounting and the persistence profiles confirm the authenticity and stability of the long run relationship between exports and growth. Further, the weak exogeneity and structural invariance tests appear to indicate that exports are superexogenous with respect to economic growth.

The empirical results based on the application of the combined stochastic-inefficiency model under alternative panel specifications indicate that trade liberalisation has had significant impact on the improvement of technical efficiencies of most of the three-digit level manufacturing industries of Bangladesh. In general, the efficiency gains have been recorded across the board although the export-oriented industries appear to have benefited more than the import-substituting industries.

Empirical assessment based on alternative econometric techniques shows that export orientation has contributed to an increase in wage inequality while the demand for skilled workers relative to unskilled workers has had an opposite impact. On the other hand, the findings clearly suggest that personal income distribution has deteriorated during the post-liberalisation period.

Finally, trade liberalisation appears to have been associated with reductions in both hardcore and absolute poverty, particularly in the rural areas.
Keyword Free trade -- Bangladesh.

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