The Relationship Between Exports, Imports and Economic Development: Evidence from Mongolia

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Research and Applications in Economics Volume 2, 2014

The Relationship Between Exports, Imports and Economic Development: Evidence from Mongolia Wan-Tran Huang*1, Saruultuya Tsendsuren2 Department of Business Administration, College of Management, Asia University, 500, Lioufeng Rd., Wufeng, Taichung 41354, Taiwan *wthuangwantran7589@gmail.com; 2saka_can@yahoo.com Received 21th Dec. 2013; Accepted 25th Feb. 2014; Published 15th April 2014 Š 2014 Science and Engineering Publishing Company

Abstract This study examines the interactions among economic development, exports and imports for Mongolia in the period during 1982-2010. For that to test for the existence of a trend relationships among GDP, export and import, the theory of cointegration proposed by Engle and Granger (1987), Johansen (1988) among others has to be applied, using the multivariate cointegration approach proposed by Johansen. We found that no findings could be reached as to support the hypothesis of import-oriented hypothesis; however, we could conclude that the empirical findings suggesting that GDP and import have an indirect effect on the economic development of Mongolia.

Keywords Mongolia; Economic Development; Export; Import; Causality Test

Introduction For developing countries, foreign trade may play major role in economic development, because the focus of economic development should be on supporting innovation, increasing prosperity and technology in the country. Therefore, efficiency of import and export appears to be a key issue and could be one of the leading factors to economic development.

Export expansion and openness to foreign markets is viewed as a crucial determinant of economic development, because of the positive externalities that it brings. For example, firms in a thriving export sector can enjoy the following benefits: efficient resource allocation, greater capacity utilization, exploitation of economies of scale, and increased technological innovation stimulated by foreign market competition (Helpman and Krugman, 1985). Some analysts argue that causality flows from export to economic

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development, and denotes this as the export-led growth (ELG) hypothesis (Balassa, 1978; Bhagwati, 1978; Edwards, 1998). Several studies have also shown that it is possible to have growth-led export (GLE), which has the reverse causal flow of economic development to export growth. The export expansion could be stimulated by productivity gains caused by increasing in domestic levels of skilled-labor and technology advance (Bhagwati, 1988).

Theoretically, the relations among positive contributions of the export to economic development should be more obvious in a market economy. But now it is drawn by the Mongolian economy with a lower level of technological and productive efficiency.

And the alternative is that of the import-led growth (ILG) which suggests that economic development could be driven primarily by growth from import.

Endogenous growth models show that import can be a channel for long-run economic development because it provides domestic firms with access to the needed intermediate factors and foreign technologies (Coe and Helpman, 1995).

Growth in import can play a transforming role in bringing of growth-enhancing foreign R&D knowledge from developed countries to developing countries (Lawrence and Weinstein 1999; Mazumdar, 2000). However, the criticial issue for the developing countries is to be ready further positive changes in economic development. Export activities of a country lead to accumulation of foreign exchange reserves which allow the country to import intermediate and final products, such as capital goods. Importing of high quality capital goods expands the country’s

Research and Applications in Economics Volume 2, 2014

production capabilities. This suggests that the import promotes the export sector by giving a chance to use more advanced technologies, which subsequently lead to higher export activities. The export also has a direct effect on expansion of income of a country. First, the export improves efficiency of economy by increasing competition and by allowing the export sector to adopt more advanced technologies. Second, penetration of international markets to the domestic market allows firms in the export sector have higher capacity utilization and enjoy greater economies of scale. Higher income may encourage domestic firms to invest in the areas, where increase of the export is more likely to happen, and to explore foreign markets.

In general, export, import and income of a country tend to reinforce each other. Therefore, the inclusion of import in the study of export-led growth hypothesis is crucial. Therefore, this paper examines the causal relationships among import, export and economic development of Mongolia. In order to test existence of a trend relationships between GDP, export and import, the multivariate cointegration approach proposed by Engle and Granger (1987), and Johansen (1988) is applied regarding impacts of import on economic development and export activities, first, this study uses the cointegration test to investigate the presence of a long-run relationships. To investigate for a cointegrating relationships between export and economic development, studies used commonly Engle and Granger (1987), Johansen (1988) and Johansen and Juselius (1990) approaches. Second, present study focuses on Mongolia, one of the Asian countries, which researchers have previously paid little attention.

The reason of choosing Mongolian economy case and the relationship between how import and export are hypothesized with economic development are discussed in the first and second parts. While three coming sections present data and methodology, empirical results and conclusion of the study.

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the competitive advantage to the economy, and appears to be a driving power for growth. Especially in less developed countries, liberalizing their foreign trade helps to access to information stock of the world via technology transfer as well affect to the development of world trade. Foreign trade has principally two major roles in the growth and development process of company, in order to tie the increasing import with, economic development we should enhance paying power without leading to delays. The second, a more important problem is in accordance with radical change in economic structure, to reshape the foreign trade, or in other words, to influence the distribution of resources. Increase in income level is generally called economic growth in developing countries. Economic development, as it is now generally understood, includes the development of agriculture, industry, trade, transport. A developing economy, compared with a developed economy, is unequipped with capital in relation to its population and natural resources.

Why the Case of Mongolia

Developing countries are poor in technology than developed countries. In fact, the level of technology employed in production is a reliable indication of the level of economic development. The present study gives more focus on the case of Mongolia because that country is one of the developing countries. It is interesting to reveal that relations between economic development and foreign trade in a developing country and its close relationship with foreign trade are under consideration. However, the key factor for promoting economic development addressed on importing of technology. It will be increased by output of countries where will produce more than will provide to the inside market and then could encourage the export to outside countries. Therefore, it is an important reality that in providing the economic development, foreign trade plays an important role.

But Mongolia has a lower level of technology development, because the export does consist of less technology and technology related products.

Liberalization of international trade will cause the expansion of goods and service in the markets. And this will also lead to the productivity level of countries.

Thus, the economic growth will accelerate. The liberalization of international trade will make important effects on the growth, not only in developed countries but also in less developed countries. The studies of Grossman and Helpman (1989 and 1990) relating to the growth and foreign trade keep an important place. They stated that R&D sector brings

The foreign trade of Mongolia is very limited in size.

Most of exported products are mining products, and animal origin products, not final products such as cashmere, meat. Definitely, that is low level of technology in Mongolia. Therefore, the paper proposes that Mongolia is an import based country.

While export level is very low due to the low level of technology. Hence, we predict that relations between economic development and foreign trade are negatively associated with less developed technology 33

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and lower level economic development, attempt to provide evidence of the export and the economic growth hypothesis by choosing the case of Mongolia.

For the other countries in the world, most of the countries have already done this type of research, such as South Korea, Russia, Japan, and China. Lee and Huang (2002) find the relationship between export growth and output growth is explored using a multivariate threshold model with regimes defined by the export-import ratio. In the cases of five countries that are recognized as being outward-oriented, they find that, except for Hong Kong, the relationship whereby exports lead output prevails in at least one regime for each of the four of the countries being studied.

Brief Introduction to Mongolia Mongolia (with area of 1,564,116 square kilometers) is bordered with Russia and China. Mongolia is the second largest landlocked country with a total population of 2.79 million by 2012. It has one of the world’s lowest population density 1.6 persons per square kilometer. The predominant religion is Buddhism. The capital and largest city is Ulaanbaatar with population of 1.24 million). The official language is Mongolian language, and has democratic political system parliamentary. The official currency unit is the Tugrik (MNT), the exchange rate of which is 1,751 MNT against US Dollar as of March 2014.

Soviet assistance, at its height one-third of gross domestic product, disappeared almost overnight in 1990 and 1991 at the time of the dismantlement of the Union of Soviet. By following decades, it shows that Mongolia has been endured some deep recessions, because of political inactions and economic reforms shifting from central planned economy into market economy.

Economic activities in Mongolia are traditionally still based on livestock and agriculture, However, Mongolia has large mineral deposits, which attract foreign investors. The country holds natural deposits, such as copper, gold, coal, molybdenum, fluorspar, uranium, tin, and tungsten, which account for a large part of foreign direct investment and government budget revenues. However, Mongolia's foreign trade had risen consistently since 1940, it has registered chronic deficits. In 1940, foreign trade amounted to 144.2 million tugrik, of which 54.9 million for exports and 89.3 million from imports. In 1960, foreign trade jumped to 676.7 million Tugrik (289.6 million in exports and 387.1 million in imports), but it increased more slowly in the next decade.

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Research and Applications in Economics Volume 2, 2014

In the 1980s Mongolia used to export primarily minerals, metals, and raw materials (including foodstuffs) and imported machinery and equipment, fuels, and consumer goods. Agricultural products initially made up most of the exports, but decreased in importance as exports of minerals expanded after 1970.

Exports of processed foodstuffs and consumer goods, such as woollen blankets and leather clothing, increased after 1970s, while exports of unprocessed foodstuffs and animal products declined. Principal export commodities included cement, lumber and sawn timber, wool, large and small hides, grain and meat.

Data and Methodology Mongolia is a developing country and can be expected to remain in a similar situation to that of other developing countries. In particular, many developing countries depend on the export for economic development, which gives rise to the export-led growth hypothesis.

Hypothesis 1: There is statistically significant positive relationship between export and economic development. The export-led growth hypothesis entails by pursuing policies to promote exports and to acquire foreign currency reserves. The need to countries achieves economic growth by importing high-technology goods. The import-led growth hypothesis proposed by Hanson (1982) suggests that the import is an important source of economic development. According to the model that forms the basis of this hypothesis, developing economy first import capital goods and to develop industrial auto techniques, is to which in turn promotes economic development.

Hypothesis 2: There is statistically significant positive relationship between import and economic growth.

Moreover, this paper assumes that negative relation between import and export. If more based on importled growth country will be easier to have the dependence on outside countries.

Hypothesis 3: There is statistically significant negative relationship between import and export.

Economic Development

H1

H2

+

+

Export-led growth

H3 -

Import-led growth Export

FIG. 1 EMPIRICAL TESTING THE HYPOTHESIS

By a multivariate vector-auto regressive (VAR) framework, the concept of Granger causality is employed to determine the direction of causation between export and import, due to take into account the stationary properties of the time series data.

The Granger causality test is a statistical hypothesis

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test for determining whether one time series is useful in forecasting another. A time series “X” is said to Granger-cause “Y” if it can be shown, usually through a series of t-tests and F-tests on lagged values of “X” (and with lagged values of “Y” also included), and then those “X" values provide statistically significant information about future values of “Y”.

Whether the export cause GDP gains or losses, or whether a two-way causal relationship exists between export and GDP can, in the end, it will be decided only empirically. This paper proceeds by studying the integration properties of the data, undertaking a system cointegration analysis, and examining Granger causality tests.

The VAR model is a general framework used to describe the dynamic interrelationships among stationary variables. So, the first step in time-series analysis should be determined whether the levels of the data are stationary. If not, taking the first differences of the series and try again. Usually, if the levels of the time series are not stationary, the first differences will be taken. If the time series are not stationary, then the VAR framework needs to be modified to allow consistent estimation of the relationships among the series.

Analysis and Results Granger causality test will be conducted with a three step approach. Firstly, the non-stationary properties of these variables are checked. If all these variables are stationary, the standard Granger causality test will be applied on the levels of these variables. Secondly, If all these variables are non-stationary, we will proceed to testing cointegration. Finely, if these variables are not cointegrated, the standard Granger causality test will be applied on the first differences of these variables. If these variables are cointegrated, the Granger causality test will be conducted based on a VAR by the suggestion of Granger (1988).

To check for non-stationary property, the data are subjected to the augmented Dickey and Fuller (ADF test). The present study uses Eviews statistical package, due to professional tools in the applied economics. The results of ADF test are shown in Tables 1-3 for each of the variables.

In Table 1, the DF critical vales are -3.699 (1% level), 2.976 (5% level), and -2.627 (10% level). The computed t value is -5.095. In absolute term, 5.095 values are higher than any of ADF critical t values in absolute

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term. Hence, we could conclude that the GDP is stationary.

TABLE 1: RESULTS OF AUGMENTED DICKEY-FULLER TESTS FOR GDP GROWTH

Augmented Dickey-Fuller test statistic 1% level Test critical values: 5% level 10% level

t-Statistic -5.095 -3.6999 -2.9763 -2.6274

Prob.* 0.0003

In export growth, we found that the ADF critical values are -3.689 (1% level), -2.976 (5% level), and 2.627 (10% level). The computed t value is -10.179.

TABLE 2: RESULTS AUGMENTED DICKEY-FULLER TESTS FOR EXPORT GROWTH

Augmented Dickey-Fuller test statistic Test critical values:

1% level 5% level 10% level

t-Statistic

Prob.*

-10.1795 -3.699871 -2.976263 -2.62742

0

In absolute term, 10.179 values are higher than any of DF critical t values in absolute term. Hence, we conclude that the export is also stationary.

TABLE 3: RESULTS AUGMENTED DICKEY-FULLER TESTS FOR IMPORT GROWTH

Augmented Dickey-Fuller test statistic 1% level Test critical values: 5% level 10% level

t-Statistic -9.83585 -3.69987 -2.97626 -2.62742

Prob.* 0

Lastly, for import growth, the DF critical values are 3.699 (1% level), -2.976 (5% level), and -2.627 (10% level). The computed t value is -9.835. In absolute term, 9.835 values are higher than any of DF critical t values in absolute terms. It is possibly to conclude that the import is same as stationary as export.

Since these variables are stationary, we proceed with the VAR test. As the following results shown in the Table 4 there is not enough cointegration between GDP with export and import.

TABLE 4: VECTOR AUTOREGRESSION MODEL

GDP(-1) Standard errors t-statistics in EXPORT(-1) Standard errors t-statistics in IMPORT(-1) Standard errors t-statistics in

GDP

EXPORT

IMPORT

0.7183 -0.1956 [ 3.6713] 0.0375 -0.0613 [ 0.6126] -0.0478 -0.0494 [-0.9684]

1.9515 -1.1304 [ 1.7263] -0.0594 -0.3544 [-0.1677] -0.3446 -0.2853 [-1.2076]

2.5505 -1.2605 [ 2.0233] 0.2805 -0.3952 [ 0.7097] -0.6180 -0.3182 [-1.9420]

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Research and Applications in Economics Volume 2, 2014

From Table 4, a giving more GDP will cause more import because we have result 2.5505 of the relationship between GDP and import, however import exhibits not sufficient results according to the research outcomes of -0.0478. Conversely, more GDP will cause more export because we got 1.9515 but it does not provide a significant result. Consequently, we need to test for Granger Causality test between GDP with export and import variables (see Table 5).

By Granger Causality test shows that there is no causality between GDP with export and import.

However, it has already revealed some crucial evidences from VAR test. Once again, more GDP will cause more import, however it does not show level of significance. Also, we have a result of -1. 2605 (Table 4), it is associated with Mongolian imported products and the importing products, with capacity.

TABLE 5: GRANGER CAUSALITY TEST BETWEEN GDP, EXPORT AND IMPORT

Granger Causality Tests Sample: 1982 2010 Null Hypothesis: Obs F-Statistic EXPORT does not Granger 27 0.76087 Cause GDP GDP does not Granger 0.19426 Cause EXPORT IMPORT does not Granger 27 0.87346 Cause GDP GDP does not Granger 2.01335 Cause IMPORT IMPORT does not Granger 27 1.15242 Cause EXPORT EXPORT does not Granger 1.57969 Cause IMPORT

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Conclusion This research covers period from 1982-2010. No findings could be reached as to support the hypothesis of import-oriented hypothesis. On the other hand, it has no tests indicating that there exists a relationship between export and import. The results suggest that there is no causality from export to import. But we could conclude that the empirical findings suggesting that GDP and import have an indirect effect on the economic development of Mongolia. Mongolia is a developing country, and has smaller space with economic activity in the world. Therefore, Mongolia needs to extend their importing capacity and needs to have more economic development-oriented products, such as high technologies and equipments that could increase economic development in the long term. In fact, Mongolia is rich in natural recourses, which are could be easy to produce final products within a local and international level. These findings suggest that an

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economic development effect of external trade after transforming to market economy and increasing trade access to Mongolian market is a quite challenging emerging topic for further studies, which has deep potential for empirical research.

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Wan-Tran Huang received his doctoral degree from University of Georgia, Department of Agricultural and

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Applied Economics. He was Lecturer Professor and Vice President of Chung Chou University of Science and Technology, Chief of Research of Chung Chou University of Science and Technology, Dean of Department of Marketing Management, Chung Chou University of Science and Technology, Professor and Chief of Students Affairs of Asia University, Professor and Chief of Advance Study of Asia University, Professor and Dean of Institute of Business Administration, Committee member of Central MultiEmployment Plan of Bureau of Employment and Vocational Training, Council of Labor Affairs, Executive Yuan, Review member of Technology Plan of Council.

He has published several papers at international high ranked refereed Journals, such as International Journal of Intelligent Technology and Applied Statistics, Journal of Financial Review, International Journal of Intelligent Technologies and Applied Statistics, and so on.

Saruultuya Tsenduren is doctoral student of Department of Business Administration, College of Management, Asia University, Taichung, Taiwan.

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