tiểu luận kinh tế lượng THE IMPACT OF MACROECONOMIC FACTORS ON ECONOMIC GROWTH IN SOME ASEAN COUNTRIES FROM 1993 TO 2018

FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS*****___***** ECONOMETRICS REPORT THE IMPACT OF MACROECONOMIC FACTORS ON ECONOMIC GROWTH IN SOME ASEAN COUNTRIES FROM 1993 TO 2

FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS

***** _*****

ECONOMETRICS REPORT

THE IMPACT OF MACROECONOMIC

FACTORS ON ECONOMIC GROWTH IN SOME ASEAN COUNTRIES FROM 1993 TO 2018

Ms Vu Thi Phuong Mai

Hanoi, September 2019

TABLE OF CONTENTS

ABSTRACT 1

INTRODUCTION 2

SECTION 1: OVERVIEW THE TOPIC 4

1.1 Introduction to Economic Growth theory 4

1.2 The theory of Economic Growth 4

1.2.1 Definition 4

1.2.2 The importance of GDP growth rate 5

1.2.3 The Cobb-Douglas Function 5

1.3 Literature review 6

1.3.1 The factors have effect on GDP growth rate 6

1.3.2 Research hypotheses 10

SECTION 2: MODEL SPECIFICATION 15

2.1 Methodology 15

2.1.1 Method used to gather the data 15

2.1.2 Method used to analyze the data 15

2.1.3 Method applied to derive the model 15

2.2 Theoretical model specification 16

2.3 Description of data 17

2.3.1 Data source 17

2.3.2 Statistical description 20

2.3.3 Correlation matrix between variables 20

SECTION 3: ESTABLISHMENT AND STATISTICAL DIMENSION 22

3.1 Estimated model 22

3.1.1 Estimation result 22

3.1.2 The sample regression model 23

3.1.3 The coefficient of determination 24

3.2 Hypothesis testing 24

3.2.1 Coefficients 24

3.2.2 Testing the overall significance of the sample regression 28

3.3 Discussion and recommendation 29

CONCLUSION 32

REFERENCES 32

APPENDIX 34

INDIVIDUAL ASSESSMENT 37

Economic growth is regarded as the key indicator to a country’s development.According to the economists it allow the living standard of people to rise and morepeople to find jobs Researches in the last decades have shown several factors thathave huge impacts on a country’s economic growth We found out that FDI, ODA,international trade, inflation rate and population all possess significant influence

Know about the importance of economic growth, we decide to have a thoroughresearch about few factors we have mentioned above and came up with this topic: “Theimpact of macroeconomic factors on economic growth in some Asean countries from

1993 - 2018” This report aims at evaluating the impact of the five factors above oneconomic growth in 3 developing countries (Vietnam, Indonesia and the Philippines)

Last but not least, due to the limited amount of time as well as some certaindifficulties in understanding and data collecting, this report may hardly avoidmistakes Our group is always willing to receive feedback from readers to completeour report to the fullest

Many thanks!

Econometrics is the quantitative application of statistical and mathematicalmodels using data to develop theories or test existing hypothesis in economics and toforecast future trends from historical data It subjects real - world data to statisticaltrials and then compares and contrasts the results against the theory or theories beingtested Depending on whether you are interested in testing an existing theory or inusing existing data to develop a new hypothesis based on those observations,econometrics can be subdivided into two major categories: theoretical and applied.Those who routinely engage in this practice are commonly known as econometricians

For every country around the world, economic growth is one of the mostimportant issues that governments have to deal with In history, many people havetried to figure out how to boost up the economic growth, what are the factors thataffect GDP and its growth rate, etc… According to the classical theory of EconomicGrowth, there are four primary inputs of the economy which are: Natural resource,Investment, Labour and Technology

Foreign direct investment (FDI), International trade (TRADE), OfficialDevelopment Assistance (ODA), Inflation and Population are some factors we like todiscuss that play important roles in economic growth in all economic, cultural, socialfields The relationship between these five factors and the economic growth have beenstudied for several decades and these results show there are correlation among them

In this report, our team conduct a research about the impact of FDI, ODA, Trade,Population and Inflation on economic growth To be more specific, we investigatethese factors in 3 different country (Vietnam, Indonesia and the Philippines) in theperiod of time between 1993 and 2018

This study will be essential to policy maker know more about the performance ofthese 5 factors and economic growth It will also assist in providing the frame work ofwhere work has been done by earlier researchers It will also provide a framework onwhich further research in economic growth could be carried out This study will also

be an invaluable tool for students, researchers, research institutions and general publicthat specialize in economics who wants to study more about factors that impact theeconomic growth.

The report of our group has 3 main sections:

- Section 1: Overview of the topic: In this section, we give a very brief look through the three theories and models about economic growth

previous reports having the same object as ours

and explanation of the variables are mentioned in this section Data description

is included This part also includes the estimated model using the OLS methodand Hypothesis testing

SECTION 1: OVERVIEW OF THE TOPIC

1.1 Introduction to Economic Growth theory

From time to time, various theories, perspectives and models were provided toaccount for the sources of economic growth and the determinants of economicdevelopment For most people, a theory is an impractical contention and it has nosupport in fact For the economist, however, a theory is a systematic explanation ofinterrelationships among economic variables and its purpose is to explain causalrelationship among these variables A theory is usually used not only for a betterunderstanding of the world, but for the basis of politics

Economics, just like people, has moods Sometimes it’s in wonderful it’s expand, at the other times, it’s depressed The moods of the economy areassociated with different problems Generally, when an economy is growing orexpanding, economic activity- the production of goods and services (output) isincreasing When people produce and sell their goods, they earn income So when aneconomy is growing, bot total output and total income are increasing Since most of usprefer more to less, growth is easy to take Growth economics is about how to increasethe economic full-employment GDP productive capacities

shape-1.2 The theory of Economic Growth

first definition is more relevant But per capita output is clearly superior whencomparing living standard among nations or regions, we should focus on the second.Economic growth by either definition is usually calculated in term of annualpercentage rates of growth.

1.2.2 The importance of GDP growth rate

The growth of total output relative to population means a higher standard ofliving An increasing in real output results in more satisfactory answer to theeconomizing small different perspective Growth is the key to meet new needs andresolve socio-economic problems both domestically and internationally In the sameway, the economic development can, for example, under take the environment withoutimpairing existing bulls of consumption, investment and public goods production.Moreover, by easing the burden of scarcity, reducing society’s production constraints

- economic growth allow nation to realize existing goals more fully and to undertakenew output Over period of years, a slightly difference in the rate of growth canbecomes significant change because of the “miracle” of compound interest Theimportance of the growth rate is undeniable

1.2.3 The Cobb-Douglas Function

particular functional form of the production function, widely used to represent thetechnological relationship between the amounts of two or more inputs (particularlyphysical capital and labor) and the amount of output that can be produced by thoseinputs The Cobb–Douglas form was developed and tested against statistical evidence

The Cobb-Douglas production function, in its stochastic form, may beexpressed as:

Yi= 1X2i 2X3i 3eui

Where: Y = output

X2 = labour input

X3 = capital input

u = stochastic disturbance term

e = base of natural logarithmFrom equation, it is clear that the relationship between output and the two inputs is nonlinear However, if we log-transform this model, we obtain:

1.3.1 The factors have effect on GDP growth rate

There is also a number of FDI researches in general Although there aresensible theoretical bases to assume that FDI will have a beneficial effect on financialdevelopment, current empirical proof on this nexus is not conclusive Many studiessupport the beneficial financial development impact of FDI Authors found that theirempirical findings show the beneficial effects on financial development of FDI inflow,national investment, trade openness, and secondary education Bahname (2012) studiesthe impact of FDI on economic growth in Southern Asia for the period 1977-2009 Theresults reveal that FDI, along with other variables such as human capital, economicinfrastructure and capital formation have positive and significant effects on economicgrowth Nguyen Thi Phuong Hoa (2004) studies the effects of FDI on productivitygrowth in the whole economy, under the analytical framework of relationship betweenFDI and poverty She then draws a conclusion of FDI’s positive effect on provincialeconomic growth, via formation and accumulation of capital assets In another research,Nguyen Mai (2003), which considers the effect of FDI on economic growth, bothvertically and horizontally, based on Vietnam's FDI statistics from 1988 to 2003, withadditional forecasts to 2005 According to him, FDI has positive effect on economicgrowth at the national level, and therefore, Vietnam needs to expand the market and

seek new partners in order to attract more FDI inflows Most research has found thepositive impact of FDI on economic growth.

Certain other studies do not support that FDI affect positively on economicgrowth They assume that the FDI has an unclear effect on development The hypotheses

of FDI development in Jordan by Louzi and Abadi (2011), based on time series data from

1990 to 2009, the econometric framework of cointegration and error correctionmechanism is employed to capture two way linkages between interested variables Theempirical results show that FDI inflows do not affect an independent influence oneconomic growth, while domestic investment and trade liberalization have positiveimpacts on GDP growth Geijer (2008) also used a multiple regression analysis with GDPper capita as dependent variable in Mexico He found that FDI and openness in both inthe short and long run, are not significantly causing the GDP per capital

Some individuals believe that FDI's impact on economic growth is conditionalpositive effect Jyun-Yi and Chih-Chiang (2008) investigate whether the impact of FDI

on economic growth is dependent upon different absorptive capacities by using thresholdregression methods, created by Caner and Hansen (2004) The empirical results show thatFDI alone plays an ambiguous role in contributing to economic growth based on a dataset

of 62 countries covering the period from 1975 to 2000 Moreover, under the thresholdregression, FDI is found to have a positive and significant impact on growth when hostcountries have better levels of initial GDP and human capital

In both theoretical and empirical literature during the last three decades, a lothas been paid to the relation between trade openness and economic growth There is,however, no agreement on whether greater openness to trade stimulates economicgrowth

There are a number of studies that deal with the effect of FDI and trade onglobal and (these SEA countries) financial development in general However, fewhave a fundamental view of the impact on economic growth of FDI, TRADE, ODA,POP, INF, especially between 1993 and 2008 We are determined to carry out thisstudy by adding results from Vietnam, Indonesia, Philippines analysis using classical

econometrics panel data to contribute to the existing literature on the impact of FDI,TRADE, ODA, POP, INF on economic growth.

Developing countries seem to benefit from international capital flows,especially FDI and ODA, in the 1980s and 1990s From a theoretical perspective, FDIinflows seem to provide more benefits than other capital flows because, in addition toincreasing a country's total capital, FDI has a positive peripheral effect of increasingthe productivity of the economy through technology transfer as well as experience andtechnology management skills (De Mello, 1997) However, empirical evidence doesnot support this view such as Gorg and Greenaway (2004), Mencinger (2003), Koseand ctg (2006), Prasad and ctg (2006) and many other papers

In addition, ODA is also an important factor in determining factors foreconomic growth of developing countries Neoclassical economists argue thatdeveloping countries are short of capital because of weak capital accumulation, soexternal funding is needed to enable them to develop (Sachs, 2005) However, someargue that ODA actually only plays its positive role in economic growth fordeveloping countries in an environment of good institutional quality (corruption)

At the same time, the relationship between trade and economic growth iscurrently controversial with two conflicting views on the relationship between thesetwo factors The commercial view that has a positive impact on economic growth issupported by famous economists such as Adam Smith (1776), David Ricardo (1817),Edwards and Sebastian (1992) and many research papers Besides, there is someopinion that the positive impact of trade openness on economic growth is not reallystrong according to empirical evidence found by Rodriguez and Rodrik (1999) ,Rodrik et al (2002), Alcala and Ciccone (2002) and Dollar and Kraay (2003)

In "An Essay on the Principle of Population", Thomas Robert Malthus arguesthat the population increases exponentially: 1; 2; 4; 8; 16; 32; , the time needed todouble the population by about 25 to 30 years Meanwhile, food increased only byexponentially: 1; 2; 3; 4; 5; 6 Thus, the gap between supply and demand for foodwidens This correction is the cause of poverty Today, people still develop this

perspective to the point of attributing all economic, social and environmentalnegativity to the rapid population growth in developing countries like Vietnam,Indonesia, Philippines.

Julian Lincoln Simon (1932-1998) is a professor of business administration atthe University of Maryland (USA) Contrary to Malthus, he said that: Population has apositive impact on the economy by the following reasons: Increasing population sizeleads to increased consumer demand, expanding markets to promote productiondevelopment Large-scale production will bring about higher economic efficiency Onthe other hand, there are many who will increase their knowledge through additionallearning and competition Moreover, the pressure of demand will wake up science andtechnology development All of these factors will increase per capita output That is,production increases faster than the population, not slower than Malthus's model TheGreen Revolution is an example

The neutral view of population and economic relations was evident in theInternational Conference on Population and Development in Bucharest (Rumania),

1984, with the following main contents:

 Population growth is not some of the main or even important causes leading to low living standards

 The problem of population is not simply a question of quantity but the quality

of human life and their convenience

 The rapid increase in population actually exacerbates the problems ofunderdevelopment

Inflation is a phenomenon macroeconomic common, influential sweeping tothe economic, major social and political values of the nations in stages of economicdevelopment Because “Inflation is a chronic disease counted, the only time when thesymptoms stopped incubation period and onset of attack like a blazing fire” (MauriceFlamant, 1992) so it was stable and inflation control is always the same in theseimportant goals leading business executive macroeconomics of each country Over thepast decades, the world economy has many fluctuations, especially crises the globaleconomy has slowed down economic growth and inflation inflated in many countries

In that cycle appears in Vietnam vortex "low growth - inflation high" Due to policyexpectations too level of high growth but inflation the use of monetary factors hascaused inflation emission at a high level, causing impacts the opposite is true forgrowth economy In the context of inflation Constant volatility and influencesignificantly to the main direction macroeconomic books like that, from year on In

2011, the Vietnamese government paid attention to a new monetary policy - inflationtargeting policy thereby maintaining a reasonable inflation and stabilization becomesthe target of goods beginning of monetary policy Chien Inflation targetimplementation strategy is a complicated process Firstly, The Central Bank has tobuild build yourself a point or one about inflation target Above that The world hashad many case studies justify the existence of a threshold inflation for countries'samples different as Sarel (1996), Khan and Senhadji (2001), Drukker and et al(2005), Particularly in Vietnam Not many authors have implemented these yetQuantitative research to determine inflation threshold, therefore, The research teamused the equation quantitative method to find out Effective threshold for inflation,from It sets out control policies inflation and promote reciprocity in this relationship,not to inflation becomes a disadvantage for the economy

1.3.2 Research hypotheses

After studying related theories and referring to domestic and foreign studies,the research team searched and synthesized hypotheses to study the factors affectingthe average life expectancy of countries in the world gender

a) The impact of FDI on growth through investment

FDI can affect the economy in all economic sectors, cultural and social sectors.However, for developing countries, especially poor ones, the greatest expectation of FDIattraction is primarily for economic growth This expectation seems to be expressed in theminds of economists and policymakers for three main reasons: First, FDI contributes toincreasing the surplus of capital accounts, contributing to improving the balance payment

in general and macroeconomic stability Second, developing countries often have lowrates of capital accumulation, therefore, FDI is considered an important source of capital

to supplement domestic investment capital for economic growth Thirdly, FDI createsopportunities for poor countries to access more advanced

technology, facilitate technology transfer, accelerate the process of knowledgedissemination, improve management skills and labor skills, etc This effect isconsidered to be the spillover effects on FDI productivity, contributing to increasingproductivity of domestic enterprises and ultimately contributing to economic growth

in general In fact, not all countries achieve these goals at the same time Somecountries have attracted a large FDI inflow, but spillover effects are unlikely to occur

In a different situation, FDI inflows into a country may increase investment capital forthe economy but its contribution to growth is low Both cases are consideredunsuccessful with policies to attract FDI or have not fully utilized and wasted thisresource from the perspective of economic growth This situation makes economistsmore and more interested in assessing the impact of FDI on economic growth,especially of developing countries, through the two impact channels mentioned above

b) The impact of TRADE rate on economic growth.

International trade is simply known as the exchange of goods and servicesbetween nations of the world At least two countries should be involved in theactivities, that is, the aggregate of activities relating to trading between merchantsacross borders Traders engage in economic activities for the purpose of the profitmaximization engendered from differentials among international economicenvironment of nations (Adedeji, 2006)

The most important fact about the relationship between trade openness andeconomic growth is that trade openness drives growth In Vietnam, the impacts arevery significant in the economy

The followers of Ricardo ignored the question of the foundations of comparativeadvantages and didn’t identify factors, resulting from IT, that could raise in a lasting formthe rate of EG and its tendency in the long-term In general, the changes introduced in theRicardo’s theory demonstrated the increase of welfare caused by IT, but ignored eventualgains in the rate of EG It was in the context of neoclassical general equilibrium that themodel of Hecksher (1919) appeared, whose contributions, Samuelson (1948 and 1949)completed in the late 40’s In a rigid analysis of the model, we observe that it permits toadvocate the opening of the countries to IT, showing that

it is efficient, mutually beneficial and positive for the entire world However, it limits the analysis to the static gains of welfare.

c) How Net ODA received per capita contributes to economic growth.

Since Erixon stated his opinion, whether ODA contributes to economicgrowth or not is a matter of concern in the current economic debate There are threedifferent schools of thought in the current economic debate, including "more aid", "notso", and "conditional aid" (Tierney et al., 2011) The most influential statements in thedebate argue that ODA is an important source for economic growth with the view thatthere is a negative relationship between ODA and economic growth (Easterly andEasterly, 2006) ; Moyo, 2009; Doucouliagos and Paldam, 2009; Lacerda, 2010)

Jeffery Sachs, the most prominent economist in the field of developmentassistance, asserts that most developing countries have fallen into the trap of poverty

as well as negative economic growth, will not be able to escape poverty hunger,unless the country has the development assistance capital to meet their goals (Sachs,2005) Moreover, the author adds that development assistance organizations need to

be urgently needed the amount of ODA, so the author calls this event a "push" tobring these countries back on the path of growth

However, some researchers oppose the view that ODA has failed to promotegrowth, moreover, it has detrimental to the development of many countries (Easterly andEasterly, 2006; Moyo, 2009) Easterly rejected the claims of Jeffrey Sachs and concludedthat the growth of the countries in recent years is not due to the flow of ODA, but also toother factors contributing to the GDP growth of the countries Similarly, other studiesshow that ODA is unlikely to support economic growth in all countries (Easterly andEasterly, 2006; Murphy and Tresp, 2006) Easterly and Moyo emphasize that, in fact,ODA is not conducive to economic development but stagnates economic growth Theauthors mention a variety of reasons: (1) ODA causes an increase in consumption,reduces savings and causes investment losses, (2) ODA causes inflation, (3) ODAreducing exports and (4) ODA limiting the absorption of cash flow When the countryreceives ODA, saving decreases leading to a decrease in investment High inflation is due

to the fact that ODA is not saved to create investments but simply consumed As a result,the increase in demand curve leads to an increase in the price of

food and imported goods Moreover, Easterly argues that ODA reduces the volume ofexports Foreign currency inflows increase the value of the local currency, as thedemand for converting foreign currencies into local currencies increases The increase

in demand for the local currency, the value of the local currency, will appreciate As aresult, the country will lose its competitiveness and export goods will be relativelyexpensive in the global market, which will lead to a drop in exports, eventuallyleading to economic growth stagnation Arellano et al (2009) increase the robustness

to Easterly's conclusions that ODA does not really affect economic growth becauseODA does not lead to investment but merely consumption

d) The relationship between population and economic growth rate

Population size and human resources are closely related: large population size

will be an abundant labor supply, one of the important forces for economic developmentespecially in developing countries including Vietnam, Indonesia and the Philippines.With a large population (more than 95 millions in Vietnam, 106 millions in Philippinesand 267 millions in Indonesia), these countries have plentiful labor resources

The population is not only a productive force but also a commodityconsuming force - one of the great drivers for economic development Developingcountries with large populations will be a strong consumer market Vietnam,Indonesia, and the Philippines are also not outside that group of countries Since theprocess of strong consumption of goods, it has made invisible competition betweenmanufacturers, making them constantly innovate science and technology, improveservice quality to meet the needs of customers

e) The impact of Inflation on economic growth.

Firstly, inflation can work positive impact on economic growth via the savingschannel and the beginning from Sidrauski (1967) emphasized reasonable low inflationwill do investments become more attractive than grasp hold cash for holding money facereduces its value fast than investing When the economy inflation always has time lagtime between price increases of top products and increase in input costs now in latency onwage increases Tobin (1972) stated inflation moderate as the lubricant of

economy (grease effect), inflation transmitter helps manufacturers possible reduce realcosts to buy early into labor, thereby increasing periods save and invest, encouragethem expand the scale of production Second, inflation has a billion relationshipproportional to growth through stimulating effect Inflation created Psychologicalprice increases so people have more consumer trends or buy hoarded goods, thus doincrease in aggregate demand Besides that, inflation usually leads to the breaking theprice of local currency, improve strength competitive economy and yes tendency toincrease net exports Increasing export demand stimulated an increase demand forgoods and services in the country - Source for export In general theory of Keynes,one the economy is affected by both two factors: total supply and aggregate demand.However, aggregate demand often lower than total supply by trend direction of saving

in using receipts enter, which is the cause of the crisis economic crisis To ensureincrease the chief needs the intervention of the House countries through policies likeexpand fiscal and money policy currency to improve aggregate demand, in thenlowering interest rates will create inflation play, thereby stimulating people to useusing cash for consumption and investment business Third, the state cancommunicate by increasing the money supply to increase enhance education - trainingdevelopment, science and Technology Building infrastructure Constructioninvestment building more schools and educational institutions education, researchinstitutes, salary increase for construction personnel factories, factories, willcontribute improve the quality of human resources force, scientific - technologicallevel, meet infrastructure conditions cater to the development requirements economy

SECTOR 2: MODEL SPECIFICATION

2.1 Methodology

2.1.1 Method used to gather the data

The collected data is information of each country's macroeconomic factors overthe 26 - year period from 1993 to 2018 The data source is from verified sources of highaccuracy, collected through Worldbank, OECD National Accounts data sources

2.1.2 Method used to analyze the data

Using Stata software to process statistics and calculate the correlation matrixbetween the variables

2.1.3 Method applied to derive the model

In this project we use the traditional or classical methodology of Econometrics

Traditional econometric methodology proceeds along the following lines:

Step 1: Statement of theory or hypothesis

Step 2: Specification of the mathematical model of the theory

Step 3: Specification of the statistical, or econometric, model

Step 4: Obtaining the data

Step 5: Estimation of the parameters of the econometric model

Step 6: Hypothesis testing

Step 7: Forecasting or prediction

Step 8: Using the model for control or policy purposes

We running Stata software for most of these steps and building regressionmodel using the Ordinary least squares method (OLS) to estimate parameters ofmultivariate regression models With Stata software we easily consider VIFmagnification molecule identifies multi-collinearity Use the White test to checkvariance error variance Conduct Breusch-Godfrey tests to identify self-correlation.Use the F test to evaluate the fit of the model and the t test to estimate the confidenceinterval depend on the parameters in the model

2.2 Theoretical model specification

2.2.1 Variables

Applying the methodology of econometrics, when we know the value of threevariables over years, namely GDP growth rate, FDI value, Trade value, ODA value,Population and Inflation rate, we can absolutely assume that 5 variables have linearrelationship and establish the multiple regression model to perform relationshipbetween them as:

Y = 1 + 2 X 2 + 3 X 3 + 4 X 4 + 5 X 5 + 6 X 6

In this model, the variables are explained as:

investment

Assistance

However, GDP growth rate also depends on many other factors such as labor,unemployment rate, etc Therefore, to build the model more exact, we will set ui torepresent those disturbance This will fill the disturbance and make the model morereliable:

assistance per capita

GDP growth Annual percentage growth rate of World Bank national

are based on constant 2010 U.S files

dollars GDP is the sum of grossvalue added by all resident producers

in the economy plus any producttaxes and minus any subsidies notincluded in the value of the products

It is calculated without making

fabricated assets or for depletion anddegradation of natural resources

sum of equity capital, reinvestment of Statistics, and World Bank

short-term capital as shown in the estimates

balance of payments This seriesshows net inflows (new investmentinflows less disinvestment) in the

investors, and is divided by GDP