Does global financial crisis impact on east asian export

By studying the impacts of GDP, financial sector quality measured by domestic credit, import demand on exports and by observing the change of these impacts before and after the global fi

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DOES GLOBAL FINANCIAL CRISIS IMPACT ON

EAST ASIAN EXPORT?

BY

TRAN PHAM HOAI TRINH

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, May 2014

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DOES GLOBAL FINANCIAL CRISIS IMPACT ONEAST ASIAN EXPORT?

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

TRAN PHAM HOAI TRINH

Academic Supervisor:

Dr DINH CONG KHAI

HO CHI MINH CITY, May 2014

ACKNOWLEDGEMENT

I would like to take this opportunities to send my special thanks to Dr Nguyen Trong Hoai who has inspired initiatives and passion of global financial crisis to me to carry out this interesting study; my sincere gratitude to Dr Dinh Cong Khai for his scientific guidance and invaluable advices, which he has provided throughout the time of preparation and accomplishment of this paper; my thanks to my classmates Anh Thu, Thu Huong, Thuy Thanh and my loved daughters Moon and May who always give me their restless assistance and encouragement when I was in trouble

ABSTRACT

The global financial crisis in 2008 was initially a single crisis in the US subprime market After very short time, the crisis has quickly escalated and spread its impact to all over the world As stated by UNDP, very quickly through international trade, the crisis has been transmitted from the West to the East This paper aims to find out how this financial crisis impacts the trade of East Asian countries More particularly, this paper tries to find out how, and to what extent, does the global financial crisis impact exports of East Asia By studying the impacts of GDP, financial sector quality (measured by domestic credit), import demand on exports and by observing the change of these impacts before and after the global financial crisis, the effect of the global financial crisis on export will be identified Data of exports, domestic credits and import demands are collected from

2001 to 2010 for 8 countries in East Asia The data is balanced from country to country, then balanced panel data will be used for model testing Moreover, the Hausman test used to test the panel data is significant with fixed effect model The results finally show that the global financial crisis started in 2008 has not changed impact’s magnitudes of GDP, financial sector quality and imports demand on exports of East Asia during crisis

Key words: global financial crisis, international production fragmentation, triangular trade network, financial integration

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION 9

1.1 BACKGROUND OF THE STUDY 9

1.2 PROBLEM STATEMENT 10

1.3 RESEARCH OBJECTIVES 10

1.4 RESEARCH QUESTIONS 11

1.5 RESEARCH METHODOLOGY 11

1.6 OUTLINE OF STRUCTURE 11

CHAPTER 2: LITERATURE REVIEW 13

2.1 LITERATURE REVIEW & EMPIRICAL STUDIES 13

*Impact of economic growth on exports 15

*Impact of financial sector quality on exports 16

*Impact of import demand on exports 17

2.2CONCEPTUAL FRAMEWORK 21

CHAPTER 3: OVERVIEW of EAST ASIAN EXPORTS and FINANCIAL SYSTEM 22

3.1 EAST ASIAN EXPORTS 22

3.2 EAST ASIAN FINANCIAL SYSTEM 26

CHAPTER 4: ECONOMETRIC MODEL and ESTIMATION STRATEGY 29

4.1 ECONOMETRIC MODEL 29

4.2 ESTIMATION STRATEGY 31

4.3 DATA 32

CHAPTER 5: ECONOMETRIC RESULTS and FINDINGS DISCUSSION 36

5.1 DESCRIPTIVE STATISTIC 36

5.2 VARIABLES and CORRELATION MATRIX 43

5.3 EMPIRICAL RESULTS and FINDINGS DISCUSSION 44

CHAPTER 6: POLICY IMPLICATIONS and CONCLUSION 50

6.1 POLICY IMPLICATIONS 50

6.2 CONCLUSION 52

6.3 LIMITATION 53

REFERENCES 55

APPENDIX 59

LIST OF TABLE, CHART & FIGURE

Chart 1 China Manufactured export structure 25

Chart 3 Cross-border loans during Q4 2007 – Q4 2010 42 Chart 4 Regional consumption goods export performance during crisis 47 Figure 1 International production fragmentation –vertical specialization

model

18

Figure 3 Share of East Asian economies in the value of world exports 22 Figure 4 Triangular trade network structure 23 Figure 5 The rest of East Asia export to China (% of total export) 24 Table 1 East Asia regional exports share in total exports 24 Table 2 Share of intermediate goods in total export

from the rest of East Asian countries to China

25

Table 3 List of variables and expected sign of effect 31 Table 4 Growth of total merchandise export (2008Q3-2019Q3: % change) 37 Table 5 East Asian export growth during crisis 38

Table 7 Growth rate of China’s intermediate goods import from East Asian

Vs China’s export to EU & US

Table 11 Empirical result 44 Table 12 Variance inflation factor (VIF) 45 Table 13 East Asia regional export composition 46

Appendix 2 Hausman test for the sample with China 60 Appendix 3 Hausman test for the sample without China 61 Appendix 4 Full regression result for the sample with China 62 Appendix 5 Full regression result for the sample without China 63 Appendix 6 East Asia regional total exports 64 Appendix 7 East Asia regional intermediate goods exports 66

CHAPTER 1 INTRODUCTION

The first chapter consists of six parts to introduce the general issues of the study The first part provides the background of the study The second part raises the problem to be addressed The third part presents the research objectives The fourth part sets out the research questions to be answered in this study The fifth part is research methodology and the last part is outline of the study

1.1 Background of the study

East Asian countries1 are export-led growth countries Export so far have been the key engine for growth and received many supports from the government for better performance During the recent decades, in this region, China has rapidly increased exports of manufactured products to the US, EU and became a major trade partner with the US, EU The growth of China’s manufacturing export is also supported by the supply of intermediate inputs of other East Asian countries In this way, a trade network was formed between US, EU, China and other East Asian countries This network is called the triangular trade network and soon became a primary growth engine for East Asia (Ando, 2006) It is believed that East Asian countries can maintain regional growth independently based on this network and would not rely heavily on the out-of-region economies’ demand and supply This belief was built up based on the decoupling thesis2 which was raised by many researchers before the US financial crisis However, in fact, when the US financial crisis spreads to East Asia, exports of this region in some ways was affected and

decline significantly (Chul, 2011) So is it true that the US financial crisis impacts exports of East Asian countries and is the decoupling thesis unreal are the questions that I am concerned with

1.2 Problem statement

East Asia is the region where export-led growth strategy has boosted the economy since 1960s Exports hold the crucial role and are the key engine for economic development of this region Along with its export-based development, according to the decoupling theses, the increasingly intra-regional trade in East Asia has lightened the impacts of external demand and supply shock on growth and made this region become self-contained development Therefore export downfall in East Asia after 2008 received much attention of researchers in finding how the global financial crisis impacted this region

So far, many researches has focused on the impact of the global financial crisis

to international trade through trade finance constraint (Chauffour & Malouche, 2011), contraction of global supply chains (Escaith, 2010), and protectionism This research is going to find out the key determining factors of East Asian exports performance and identify if the global financial crisis is able to change the impact’s magnitude of these factors on exports of East Asia Through these findings we can answer the question of whether the global financial crisis had impacted on exports

of East Asian countries

1.4 Research questions

The research tries to address the following question:

i) What are the impacts of GDP, financial sector quality and import

demand on East Asian exports?

ii) What happened to export performance of East Asian when GDP,

financial sector quality and import demand being impacted by the global financial crisis?

1.5 Research Methodology

We are going to use some descriptive statistics to analyze export development of East Asian countries during 2001 and 2010 and identify if the development has been changed when the financial crisis happens in 2008 Moreover, this research is going to build an export model in which exports is the dependent variable, GDP, domestic credit, intra-regional intermediate goods demand, and the world import demand are the independent variables Data of exports, domestic credits and import demands are collected from 2001 to 2010 for 8 countries in East Asia The data source is statistical data of the World Bank and the United Nations conference on trade and development (UNCTAD) To study the dynamics of change, panel data is used by combining time series of cross-section observations Data is balanced from country to country, then balanced panel data will be used for model testing Using the dummy variable approach, we are going

to test if the structure of this model has been changed during the global financial crisis and then propose some policy implications base on the findings

1.6 Outline of structure:

The first chapter introduces the general issues in the study The literature and some previous related researches are reviewed in the second chapter After that,

the conceptual framework is created The third chapter focuses on overview of East Asia exports and its financial system Chapter Four deals with the research methodology and econometric model Chapter Five will show the econometric results & findings discussion The last chapter reveals conclusion and policy implications It will then go on to references and appendices.

Chapter 2 LITERATURE REVIEW

This chapter is for the review of relevant theories and previous studies related to determinants of East Asia exports; it selects and analyzes impacts on export of GDP, financial sector quality and import demand The first part presents the theoretical literature which the study is based on and the previous studies which relate to this research The second part is the conclusion on the conceptual framework

2.1Literature review and empirical studies

So far, there have been numerous studies on the determinants of East Asian export performance

Redding and Venables (2003) have delivered a research on the determinants of export performance across regions, particularly on South East Asia The research studied exports in two decades from 1970 to 1990 They focused on two factors which contributed most to export growth of this region which are external demand (foreign market access) and internal supply capacity determined by a country's characteristics including country size, country endowments, and geography What they found was that the level of foreign market access could determine the divergent export performance However, country size, measured by GDP and population, was unrelated to and insignificantly affected export performance Geography was found to be positive and statistically significantly affects exports

In 2004, the UNCTAD secretariat performed an empirical investigation on the determinants of export performance of 20 developed and 64 developing countries The result showed that trade barriers was an important factor while the demand and supply factors' level of significance varied across countries International market access and infrastructure were also other major determinants of export

performance The investigation found that the improvement of export performance correlated with improvement of foreign market access and indicated that East Asia was one of the main beneficiaries of the foreign market access expansion Intra-regional market access also played an important role in enhancing export performance of East Asian countries The investigation also found that internal transport infrastructures were important at the early stage of export development because of its facilitation to the size and growth of the supply capacity of a country Besides that, the investigation indicated that FDI positively affects export performance because FDI enabled the increasing of the technological content of export products thus enhanced export supply capacity

According to Jongwanich (2007) from ADB, long-term real exchange rate affect manufactured final products, especially labor-intensive products exports rather than intermediate goods exports The expansion of intermediate goods (parts and components) exports that come with the development of production fragmentation in East Asia reduced the influence of the real exchange rate on export performance The weak impact of real exchange rate on export of East and Southeast Asia implied that other supply-side factors, such as infrastructure, logistic, and business climate were important in determining export performance A better business investment climate, improvements in infrastructure and logistical services would help increase production capacity and enhance a country’s competitiveness in exports World import demand also significantly affects exports, especially when China became the assembly point and exported to developed countries after processing China was thus relied more on demand outside the region

To analyze the meaning of the international production fragmentation in determining trade flows, Athukorala and Menon (2010) from ANU used the data set of manufactured exports and components of 158 countries from 1992 to 2006 for a hypothesis testing Dependent variables were relative price (world price

relative to domestic price), world income, real GDP of capita, index of logistic performance and distance to major export markets They concluded that relative price and world income better explain exports of components and final goods from developed countries than from developing countries

Base on findings of these researches, this paper chose to study some factors which have critical impacts on export of East Asia such as import demand, including intra-regional intermediate goods import demand and world import demand GDP is also selected to investigate the role of country size and quality of the endowment factors such as capital accumulation, population growth, productivity and technology, which are sources of economic growth Financial sector quality is also selected to study to further explore the role financial endowment factor The exchange rate factor is omitted as it has weak impact in the context of increasing international production fragmentation in this region

 Impacts of economic growth on exports

The impacts of economic growth on exports have been widely studied by many researchers since the 1960s The results are different depending on the economic theories that they based their researches on but it is widely recognized that on one hand, increasing economic growth can directly provide the additional offer for exports while on the other hand, economic growth can indirectly create comparative advantage in certain areas leading to specialization and facilitating export For example, the investment in infrastructure, improving resource allocations and government supporting to targeted export industries can increase exports (Laszlol, 2004)

The international trade theory is a dynamic theory and allows theorists to make different conclusions with different assumptions In some approaches, the theorist recognized that economic development influenced international trade In the late

1970s, the new theory of foreign trade and economic growth was developed by researchers Helpman (1982), Krugman (1979) and Lancaster (1980) From the supply viewpoint of this theory, many studies were published by contemporary theorists Most of the results showed that the size, structure and quality of the endowment factors such as capital accumulation, population growth, productivity and technology, which are sources of economic growth, decide the comparative advantages of a country, thus decide the export capacity of the country The new trade and economic growth theory was analyzed deeply by the “growth-led export” model Gagnon (2008) delivered empirical test data based on Helpman's and Krugman's theory for a sample of 58 countries over the period from 1960 to 2004 The result showed that there was a long-term effect of economic growth on exports

In this model, economic growth allowed country to produce more varieties, hence increased exports capacity

Recently, Firouzjaee (2011), by testing the causality of economic growth to exports for 73 developing countries during the period 1970-2007 concluded that the improvement of human capital, labor force skills and technology development based on GDP growth provided institutional backgrounds for more exports

 Impacts of financial sector quality on exports

According to the Heck-Ohlin-Vanek (HOV) model of endowment factors, a country with relatively high quality institutions better specializes their production

in the goods which are intense in the use of financial services Extended from the HOV model of endowment factors, financial sector quality can be considered as an input endowment of a country and can create comparative advantage for that country In addition, following the supply-leading hypothesis of Patrick (1966), the development of financial sector can increase the supply of financial services, thus allow more access to international trade of industries which rely heavily on external finances In this way, financial sector quality determines international trade patterns Some researches on the impact of financial development on international

trade were delivered by Beck (2002, 2003) The main conclusion was that the differences in technology and endowment factors could be created by differences in financial development level The differences in comparative advantage of international trade, hence was determined by quality of financial sector

Consistent with the HOV model, Kletzer and Bardhan (1987), by analyzing data for 65 countries in 30 years base on HOV model, provided evidence that countries with a relatively high developed financial sector have a comparative advantage in industries that rely on external finance Financial sector could be viewed as a source of comparative advantage in this case

Beck (2003) provided empirical evidence support for Kletzer's and Bardhan's hypothesis By analyzing data for 56 developed and developing countries, his study found that “countries’ level of international trade is exogenously affected by the health of their financial sector” Before that time, in 2002, Beck used private credit ratio to GDP as an indicator of financial development to analyze 30-year panel data for 65 countries He showed that countries with a higher level of financial development obtained higher shares of manufactured exports in GDP

Recommended by Kiendrebeogo (2012) in his study about relationship between financial development and trade for 21 countries in 40 years from 1961, the development of financial institutions could increase the supply of financial services, thus allowed more access to international trade of industries which rely heavily on external finance In this way, financial sector development determined international trade patterns

 Impact of import demands on exports

Impact of import demand on export can be observed through impact of intermediate goods import demand and world import demand The recent studies on export performance focused more on import of intermediate goods, which was used

as inputs for further processing and export after processing They found that

countries that use this type of products will have a chance to reduce commodity prices, thereby increase export The interconnectivity of production process is increasing and allows many countries participate into a vertical trading chain in which each country specialize in some production and trade stages Ishii and Yi (1999) developed a concept that is called “vertical specialization”, in which a country imports intermediate goods to produce export goods

The vertical trading chain grew rapidly and accounted for significant parts of export Using input-output tables to measure vertical specialization level in exports, the empirical study of Ishii and Yi (1999) for many countries indicates that as of

1990, in OECD countries, vertical specialization accounted for 20 percent of merchandise exports In smaller countries outside OECD (Ireland, Korea, Taiwan, and Mexico) vertical specialization accounted about 40 percent of exports

Figure 1: International production fragmentation –vertical specialization model

Domestic goods

Capital and Labor

Finished goods export

Finished goods import

Intermediate goods import

In the vertical specialization concept, the goods crosses multiple borders, thus tariff and transportation cost incurred repeatedly When these countries reduce trade barriers, the cost of production then reduced accordingly The countries would gain comparative advantages for exports as a result By this manner, import intermediate goods as inputs for production therefore positively influence on exports growth

Since the 1990s, trade of intermediate goods including parts and components has grown greatly in which China accounted for a significant part of growth As findings from research of Gaulier (2007), China became a new location for firms in advanced East Asian economies which want to save production cost by relocating labor-intensive stages of production After importing parts and components from other East Asian countries, China assembled them then exported the final consumer products to the US, EU and other developed countries

According to an investigation of Amighini (2005) about the role of international fragmentation of production in China trade performance, evidence from the ICT industry showed that China’s foreign trade expansion in the 1990s relied mainly on assembly and processing imported parts then exports to another countries During the 1990s, China exports on office machines accounted for 18 percent of world exports, 18 percent on IT products, 11 percent on telecom products and became the largest world exporter of these products This evidence was proved by the reveal comparative advantage (RCA3) index which commonly used to measure international specialization and comparative advantage The results were positive for China with high RCA for office machines, telecom products, semiconductor, and IT products

Besides that, by increasing the intensive margin4 i.e expansion of the same product to the same market, level of import demand can have essential influence on the exporting country (Felbermayr&Kohler, 2004) Besedes & Prusa (2008) investigated and compared countries’ export growth based on their performance at the extensive and intensive export margin In their investigation, a country export growth was based on three components “establishing new partners and markets”,

“having relationships survive or persist”, and “deepening existing relationship” They showed that although both developing and developed countries have a large number of new exporting relationships, different numbers of new partners have very little impact on long-run export growth In contrast, developing countries’ export growth was very significant where they were able to improve their performance on the two key components of the intensive margin: having relationships survive and deepening existing relationships Thus demand from existing bilateral trading partners could have essential influence on exporting of developing countries Extend this relation for East Asia economies; import demands from traditional partners of triangular trade networks were important for export performance of this region

4International trade evolves at two margins that are intensive margin where deepening the existing bilateral trading relationship over time and extensive margin where trading bilateral relationship is newly established Intensive margin can also occur when the country expand in the quantity of each export and extensive margin occur when expansion the number of products exported, or say in another words, variation of products exported

2.2 Conceptual framework

Figure 2: The conceptual framework

The conceptual framework has been laid out to advise that impacts of GDP, financial sector quality, import demand on export might be changed by financial crisis and we can find out how the global financial crisis effect to exports by observing the changes of these three factors’ impacts on exports before and after crisis For the hypothesis testing, a regression will be performed for a sample of 8 East Asian countries that join in the triangular trade networks for ten years from

2001 to 2010 Using a dummy variable approach, I am going to test if the structure

of the trade model has been changed before and during the financial crisis happen

in 2008,then propose some policy implications base on the findings Before doing this test, I am going to glance through East Asian exports and financial system development

GDP

Export

Financial sector quality

Import Demand

Financial crisis

CHAPTER 3 OVERVIEW of EAST ASIAN EXPORTS and FINANCIAL SYSTEM 3.1 East Asian exports

Over the years, trade openness has contributed considerably to enhancing East Asian countries’ participation in the global economy From 1990 to 2012, the volume of exports from East Asian countries grew consistently The below figure describes the share of East Asian’ exports above total world exports

Figure 3: Share of East Asian economies in total value of world exports

Source: Author’s calculation based on data from UNComtrade 2013

Along with the growth of exports, intra-region export in East Asia grew rapidly It can be explained by cross-border production and trade networks since international production networks account for a significant share of trade flows of most countries of the region The triangular trade structure has been formed and developed in East Asia countries since 1990s and accelerated since China joined the WTO in 2001 In the triangular trade networks, firms from Japan, Korea, and Singapore export parts and components to China for assembly This process would help these countries to relocate labor-intensive stages of production, thus create

comparative advantages in low cost for the region The triangular trade was formed

in that manner and China has played a central role in the formation of a triangular trade The goods after being assembled in China were exported to developed economies, particularly the US and EU China became the major manufactured exporter of the region Exports of intermediate goods including parts and components to China from other East Asia countries have grown greatly support to that development of manufactured exports

Figure 4: Triangular trade network structure

Several factors have contributed to the expansion of East Asian production and trade network that are geographic proximity, the different comparative advantages of each East Asian economies and the rapid development in technology Particularly, the low-wages advantage in some countries allowed firms to

“unbundle” the stages of production so that labor incentive stages can be performed

in those low-wages countries

China

South East Asian countries

North East Asian countries

EU & US

In addition, most East Asian economies promote exports through tariff exemptions on imported inputs for export production This policy has facilitated the increasing participation of East Asian countries into international product fragmentation and the triangular trade network Intra-regional exports, thus, account for a significant share of exports of East Asian countries

Table 1: East Asia regional exports share in total exports

Source: Author calculation based on UNcomtrade 2013

Within regional trade networks, China has become one of the major export destinations for the rest of East Asian countries Exports share from Japan, Korea, Malaysia, Philippines, Singapore, and Thailand to China increased over the time

Figure 5: The rest of East Asian exports to China (% of total export)

Source: Author calculation based on data from UNCom trade 2013

Along with the increasing of intra-regional trade and the participation of East Asian countries into international product fragmentation, we can see a high concentration of this region in intermediate goods (parts and components) trade

Table 2: Share of intermediate goods in total exports from the rest of East Asian countries to China

Source: Author calculation based on data from UNCtadstat 2013

While China is the major destination for the rest of East Asian countries intermediate goods exports, the US and EU are the two key partners of China for final goods after assembly Import demands from these two partners thus are very important to China and to the region as well

More than 80% of export products from China to EU and the US are manufactured goods, in which nearly 50% are machines and transport equipments, about 7% is chemical products

Chart 1: China manufactured export structure

Source: Author calculation based on data from UNCtadstat 2013

The surge in exports of manufactured goods in this region has been accompanied by a shift in commodity composition from labor-intensive goods to more technology-intensive and high skill goods During the years 1995 – 2012, export of high skill and technology

intensive goods accounted for about

45% of total manufactured exports

while labor incentive goods

accounted for only 14% on average

This implies that when demand

from the US and EU unexpectedly

fell, it might be very tough for

China and other East Asian

countries to switch from foreign market to domestic market where demand for high-skill and technological intensive goods is not high

3.2 East Asian financial system

Before the Asian financial crisis in 1997, the financial system and related legal infrastructure were mostly at a low standard Domestic capital market slowly developed The financial system was weak and relied mainly on short-term lending because of the lack of long-term debt market

After the Asian financial crisis, aware of the weakness of its financial system, East Asian countries started to reform local financial sector, particularly the banking sector Korea raised the ceiling of foreign ownership in domestic banks, Thailand deregulated their financial market, and Singapore eased the regulations in their financial market and reformed their financial infrastructure Although every country had different financial system infrastructure and financial policies, all of them consolidated their banking system after 1997 Korea government delivered a reform plan which aimed to improve the financial sector, enhance the efficiency of

intensive and resource- intensive 14%

Labour-Low-skill and technology- intensive 11% Medium- skill and technology- intensive 30%

High-skill and technology- intensive 45%

Chart 2: Manufactured export composition

the banking system by allowing more foreign ownership in domestic banks Many regulations were eased or changed to increase local banks' competitiveness Malaysian government implemented a long term master plan from 2001 expecting

to increase the stability and competences of financial system They encouraged the development of local banks, deregulations for foreign banks that operate in Malaysia in order to create competitive environment among local and foreign banks In the years after, Malaysia government facilitated for local banks to extend

to overseas operations and eased the regulation for new entry foreign banks In

1998, Singapore reformed their financial infrastructure, enhanced competences between local and foreign banks, liberalized banking sector, and reformed capital market with aim to be the financial center of Asia Thailand consolidated banking sector, closed some non-efficient local banks, re-classified and switched some financial institutions into commercial banks, eased the regulation for foreign banks invest into domestic banks Banking sector of Thailand was gradually liberalized

In addition, East Asian countries started to liberalize their capital account, facilitated cross-border lending activities This operation helped to fulfill the increasing capital demand of domestic corporations in the context inter-bank loans supply could not meet that strong demand Korea is one of the countries highly contributed in enhancing cross-border lending activities or lending from locally based foreign owned banks Cross-border lending was also significantly used in Thailand and Indonesia

The financial crisis in 1997 encouraged East Asian countries to build up an efficient regional financial mechanism to limit the effects of the financial crisis and forecast future crisis China did not support this initiative at first; however, after joining WTO, China’s role became more important for the development of the whole region China notably cooperates with other countries to contribute to a sustainable financial system in East Asia From 2000, a network of bilateral currency swaps was agreed in Chiang Mai, Thailand This network would help

member countries rebound from crises by borrowing funds from within the region without political conditions This initiative was fully in place by end of 2003 and extended in two years later

However, there was a lack of long term stable debt market in this region and countries normally used short term borrowing for long term investment Domestic saving deposits flew out to overseas financial centers and then moved back into the regions as short-term foreign currency loans The Chiang Mai initiative actually could not eliminate this structural weakness The Asian Bonds Markets Initiative was raised as a solution for this problem and it was supported strongly by countries across the region This bond market was supported by most of the countries in the region, especially China The participation of China in regional bond market encouraged the financial liberalization process, stabilized financial market and created healthier financial system in the region in the context the interdependence between China and other economies in the region through triangular trade became more significant

CHAPTER 4 ECONOMETRIC MODEL & ESTIMATION STRATEGY

This chapter mentions about research methodology and econometric model and consists of three parts The first part is the econometric model The second part defines the estimation strategy and the last part advised the data for the model

4.1 Econometrics model

Econometrics is a very good instrument to examine the hypothesis To test the impact on exports of GDP, domestic credit and import demands before and after the global financial crisis, a regression with time dummy explanatory variable is used Data from 8 East Asian countries from 2001 to 2010 is collected for a balanced panel data regression

Our model will be presented as follow:

lnExport it = β1+ β2Dt+ β3X1it+ β4X2it+ β5lnX3it +β6lnX4it+ β7lnX5it+ β8(X1it.Dt) +

β9(X2it.Dt)+ β10(lnX3it.Dt) + β11(lnX4it.Dt) + β12(lnX5it.Dt) + є

Where i is for the country, t is for the year, β1 is the intercept and β2 is the differential intercept β3, β4, β5, β6, β7 are the slope coefficients,β8, β9, β10, β11, β12 are differential slope coefficients and є is the error term

• Growth of Gross Domestic Product (GDP) :X1t Annually growth of Gross Domestic Product of selected 8 developing countries in Asia

• Domestic credit (NDC): X2t - Domestic credit provided by banks as percentage of GDP

• Demand: including regional intermediate goods import demand, regional final goods demand and world import demand

 Regional intermediate goods demand (IGD) – X3t We take natural log of this variable to measure rate of growth

 Regional final goods demand (FGD) – X4t We take natural log of this variable to measure rate of growth

 World consumption goods import demand (WDD) – X5t We take natural log

of this variable to measure growth rate

• Dummy variable (Dt): Equal 1 for the year during financial crisis 2008,

2009, 2010 and equal 0 for the year before crisis from 2001 to 2007

• Interaction between GDP and dummy variable - X1it.Dt

• Interaction between NDC and dummy variable - X2it.Dt

• Interaction between natural log of IGD and dummy variable - X3it.Dt

• Interaction between natural log of FGD and dummy variable–X4it.Dt

• Interaction between natural log of WDD and dummy variable –X5it.Dt

• Table 3: List of variables and expected sign of effect

sign

dum Dummy : 1 for the year 2008,2009, 2010 & 0 otherwise N/A

dumlnFGD Interaction between dummy and Natural log of final goods

To study the dynamics of change of exports in East Asian countries, panel data

is used by combining time series of cross-section observations Eight East Asian economies including China, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore & Thailand are selected to study during ten years from 2001 to 2010 According to Gujarati& Porter (2009), comparing to pure cross-section or pure time series data, panel data can better detect and measure effects of variables By combining time series of cross-section observations, panel data gives “more informative data, more variability, less collinearity among variables, more degrees

of freedom and more efficiency” Moreover, by studying the repeated cross section

of observations, panel data are better suited to study the dynamics of change

Fixed-effect technology is applied as we are going to analyze the impact of variables that vary over time with assumption that something within the countries may impact or bias the predictor and we need to account for this Fixed effect removes the effect of those time-invariant characteristics from the predictor variables so we can assess the predictors’ net effect The research is going to use STATA to perform a Hausman test, a test of whether the individual effects are random The null hypothesis is that both fixed and random effects are consistent

We must first estimate the fixed and random effects models and then conduct the Hausman test to check if our model is suitable with fixed effect model

Dummy variable approach will be use to determine whether the relationship between dependent variable and explanatory ones over period 2001 to 2010 had undergone a structural change from 2008 , the year crisis spreads into East Asian countries By this approach, the dummy variable alternative to the Chow test to examine the structural stability of a regression model and also indentify the source

of differences when the model structure change The interaction between dummy and explanatory variables enables us to differentiate between slope coefficients of the two periods before and during the crisis

4.3 Data

Export (EXP) : Exportit - Total export from selected 8 developing countries in East Asia The data is collected from UNcomtrade and measured in current dollars for the period from 2001 to 2010

Growth of Gross Domestic Product (GDP) :X1t Annually growth of Gross Domestic Product of selected 8 developing countries in Asia The data is found on the website of UNcomtrade in percentage from 2001 to 2010

Domestic credit (NDC): X2t - Domestic credit provided by banks as percentage

of GDP Data is collected from World databank from 2001 to 2010

Originally, when it is needed to measure financial development, researchers have often focused on the ratio of private credit to GDP It can be used to examine whether there is too much finance or still have too little finance in a country Much

of the empirical evidence on financial system’s role in economic development uses variations of this measure This research use domestic credit provided by the banking sector which includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net The banking sector includes monetary authorities and deposit money banks, as well as other banking institutions where data are available which essentially captures activity of Banks in credit market This ratio is used recently by Jung Hur and his partners in 2004 for the research about impact of financial development and asset tangibility on export

It is also used by Beck (2002) for his research of the link between financial development and international trade

Demand: including regional intermediate goods import demand, regional final goods demand and world import demand

Regional intermediate goods demand (IGD) – X3t: The number is collected from import data of 8 East Asian countries from the website of UNcomtrade and measured in dollars from 2001 to 2010 Intermediate goods are classified base on Broad Economic Categories (BEC) classification which is available in UNcomtrade website Intermediate goods includes below categories

 111* Food and beverages, primary, mainly for industry

 121* Food and beverages, processed, mainly for industry

 21* Industrial supplies not elsewhere specified, primary

 22* Industrial supplies not elsewhere specified, processed

 31* Fuels and lubricants, primary

 322* Fuels and lubricants, processed (other than motor spirit)