The Empirical Investigation on The Relationship of Foreign Trade, Institutions and Economic Performance of The ASEAN Nations – Literature Review

The Empirical Investigation on The Relationship of Foreign Trade, Institutions and Economic Performance of The ASEAN Nations - Literature ReviewIn this section, several stylized facts, including the facts from the roles of institutions as well as the impacts of financial development and those of foreign trade in economic development from the previous studies are shown.
A Review on Institutions and Economic Development
More recently, the issues and the contexts of institutional quality and economic performance has been debated and argued gradually. At the same time, there are several organizations are working on improving the quality of institutions in term of the quality of governance in giving public goods both in developed and developing countries, in particular the developing and least developed countries. Likewise, the issue of institutional development or the so called ‘governance reform’ has become more prominent according to the ADB Institute. This article titled ‘Institutions and Economic Development’ of this organization argues that “If developing countries are poor because their current institutions provide a weak basis in terms of incentives that promote growth, this raised the question not only of what type of institutions they should acquire, but more importantly of how they could develop such institutions (p. 2).” According to this article, it clearly reveals the relationship between the roles of institutions and economic performance in a country. Institutions play extremely important roles in economic development such as in reducing uncertainty in the word, structuring human interaction, and allowing human to get on with everyday business and effectively problem solving (North, 2003). What I interest from North is the roles of institutions in structuring economic, political and social activities. Such idea does convey the roles of institutions as the net in connecting economy, politics and society to achieve a better social welfare. In resource usage, countries with better institutions not only invest more in physical and human capital, but they also use this factors more efficiently (Cavalcanti et al. 2008).
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The Empirical Investigation on The Relationship of Foreign Trade, Institutions and Economic Performance of The ASEAN Nations – Introduction

Backgrounds in Economic Cooperation in ASEAN
Nowadays all countries all over the world seem to integrate together in order to facilitate their trade and improve their productivity or GDP. Recently there have been multiple free trade agreements and regional integration agreements. Additionally, word trade grew as fast as word output over the last two decades, thus deepening economic integration according to Celderon and Poggio. Likewise, in the senses of globalization process and structural adjustment, regional economic integration seems to play important role to push national economic development and to reform the national economic policy. Consequently, as I stated earlier, the movement towards regional economic integration, the world economy has decided to form the regional free trade agreements which intend to push the trade volume and to promote the economic growth.
According to the process of ASEAN, it was historically formed on 08 August 1967 in Bangkok, Thailand by the first five founding countries, namely Indonesia, Thailand, Singapore, Philippine and Malaysia. These five countries agreed upon to sign the declaration, so-called the ASEAN Declaration or the Bangkok Declaration. Subsequently, a new member, Brunei, joined in 1984. Then we saw a big surprise when Vietnam, a communist country, decided to transform its economy to a market economy and joined ASEAN in 1995. The remaining countries in Southeast Asia, namely, Cambodia, Laos, and Myanmar (CLM) decided to join in 1999 and 1997. Moreover, based on the Bangkok Declaration or ASEAN Declaration, the purposes in ASEAN’s formation are to strengthen the foundation and prosperous and peacefully community by facilitating economic growth, social progress and cultural development through the spirit of equality and partnership. Not only to promote the economic growth, but also to promote peace and social stability in the region in the sense of paying respect to the rule of law in the relationship among countries in the region as well as the United Nation Charter (UNC). In addition to these collaborations, another purpose is to help each other in the sense of research facilities and training in the fields of administration, education, profession as well as technology. Another one of its important purpose I interest the most in this paper is to expand their trade with the study of the problems of commodity trade, the improvement of the transportation and communication facility and the raising of the living standard of the peoples in the region.
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Are There Laws of Production? Conclusions

Are There Laws of Production? ConclusionsUnder the conditions of a steady state economy there are no profits, economic growth, savings or investments. There are valid reasons for this. In both developing and steady state economies at any moment in time the total cost of all consumer products manufactured must equal the wages of all workers involved in production. For this reason in a steady state environment the total earnings and costs of manufacturers are constant and equal to one another. If manufacturers attempt to save in a steady state economy they will inevitably begin to suffer losses. Their costs which include the salaries of workers producing consumer and capital goods will exceed earnings by the value of savings. A reduction in earnings will immediately lead to a reduction in salaries, therefore it is extremely difficult to save under these conditions. And it does not make sense to do so under such conditions: enterprises do not have the option of taking credit, there are no profits and there is nothing to pay interest rates with. Even if all the money of the hired workers is used to purchase goods the enterprises will only be able to cover their expenses. A steady state economy is an economy in a state of economic crisis. There are no profits, investment, savings, interest rates or economic growth. This situation occurs when the economy reaches the limits of its production capacities, when all or almost all of the enterprises use their existing resources to the maximum effect. The only possibility of overcoming this situation is to implement innovations which will help to significantly increase the productivity of labour. Having paid the established market price for labour at the beginning of the production process, in the end the manufacturer receives a certain increase that occurs due to the implementation of innovation. Manufacture of goods increases and earnings become more expenses. In a developing economy there is profit which goes towards acquiring additional capital. Additional capital is needed for the efficient functioning of an enterprise.
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Are There Laws of Production? The Laws of Production

Causes may be an inadequate investment climate or a lack of profitable projects during a period of economic downturn, when real profits of manufacturers are significantly reduced. Profits go towards increasing salaries or they become the income of the owner of the enterprise. In this case profit goes towards purchasing consumer goods and services. The lack of investment does not allow production to be expanded actively because taking into consideration equation, the situation leads to an increase in prices for goods and services. It is possible that this may be the explanation for high inflation in countries where market freedom is restricted by high administrative barriers. An increase in prices is also observed during a period of economic downturn when the opportunities for profitable investment disappear.
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Are There Laws of Production? Labour and Capital

Are There Laws of Production? Labour and CapitalAs follows from equation, the increase in production of a single enterprise will be: d(pq) = d(wl) + d(rk)
The entrepreneur finds a way of increasing the productivity of labour by introducing new technologies into production for instance. Let us stipulate in advance that a unit of cost will be the cost of one unit of the end product. A unit of cost must be chosen because in an economy it is relative prices that are important not absolute prices. Naturally, at the beginning of a production cycle the entrepreneur pays the same wages as before the new technology was introduced. There should not be any objections to this, the workers still receive everything in full, they buy up all the products and equation is satisfied. After the completion of the production cycle and the sale of the manufactured goods, the entrepreneur receives a profit, since the workers produced more than in the previous cycle. The profit d(pq) will equal the growth in the productivity of labour d(wl): d(pq) = d(wl)
With their profit in their hands the entrepreneur makes a decision on where to put it. There are three options: to use the profit to acquire capital, to increase workers’ salary, or to spend all additional funds on personal consumption. Acquiring additional capital the entrepreneur puts profit towards paying for the salaries of workers producing capital goods. Equation is satisfied. And since all the profit is invested in additional capital the increase in production of consumer goods for the whole period will be d(wl) = d(rk), then the increase in the production of consumer goods for the whole period will be d(pq) = d(wl) + d(rk) = 2d(wl)
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Are There Laws of Production? Where does Capital Come from?

Let us return to our small country where there is one owner of a firm and 10 workers. After unsuccessful attempts to earn profit by reducing wages, the owner very quickly finds another and the only acceptable opportunity of increasing their wealth. In order to do so the owner needs to turn from being an unsuccessful exploiter to an innovator. By introducing new technological solutions into the production process and improving management the owner will be able to increase the productivity of labour. Now 9 people will be able to produce as many products as used to be produced by 10. The entrepreneur will continue to pay the workers 100 currency units so that earnings do not decrease. However, the owner sends one worker to manufacture a new and improved oven to bake bread for instance. As the cost of one worker is 100 units a month, over this period of time the owner will receive capital of 100 units. This capital will be the owner’s materialized profit. Whilst the cost of labour of a worker producing capital goods will be nothing more than savings and investments. The company rejected an immediate increase in consumption in favour of a greater increase in consumption in the future. The production of consumer goods could be immediately increased if the worker worked at their usual place because the productivity of labour is greater. However, the production of additional capital is a more favourable alternative. After putting the new oven into operation, the owner of the enterprise and the company receive double the benefits: production increases due to the fact that the worker has returned to their usual place of work and also because a new oven has been put into operation.

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Are There Laws of Production? Steady State Economy Technologies

Are There Laws of Production? Steady State Economy TechnologiesSecondly, in a steady state economy technologies do not change and are well-known to everyone. All manufacturers use the most advanced technologies that are available at a given time. Otherwise, there would be a real opportunity to increase the output of goods and services and there would be economic growth. An economy such as this is at the limit of its production capacities. All enterprises use their existing production resources with the same level of efficiency. The marginal product of resources is equal to their price, therefore there are no profits. The steady state economy markets are very much like perfect competition markets. The profit of one manufacturer will definitely cause a loss in another, competition is irreconcilable and a bitter struggle. And a struggle such as this does not depend on the number of participants. Even if the entire economy consists of one monopolist the revenue will remain the same. They will receive exactly as much as they pay workers, as they are the only buyers of their goods and services. In order to break free from the tenacious grip of perfect competition and receive a profit we need to introduce certain production and/or managerial innovations that are able to significantly increase the productivity of labour. An enterprise such as this receives profit because the cost of labour is determined by the average productivity of all workers, including those working at slower enterprises with a lower level of productivity. It is evident that enterprises working with old technology will begin to suffer losses.

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Are There Laws of Production? The Labour Theory of Value

For some reason, when discussing Karl Marx’s labour theory of value, a very important circumstance is overlooked. If we assume that the value of the end product, aside from the payment for labour, includes payment for the use of capital and a certain profit for the owner of a production facility, then how does it turn out that the end product is bought? It is evident that the total salary of the workers is certainly lower than the cost of end products and services. Who acquires all this and for how much money? Even if we take into consideration that capital is the waged labour of workers engaged in the production of capital goods, salaries are obviously insufficient to purchase all of the goods manufactured. The salary is lower than the cost of the goods by the size of the profit. There are profits, however, we can clearly see them in real economic life. Profits usually go towards acquiring additional capital resources and this means that they are used to pay for labour in the capital production sector. But capital sector enterprises also receive profits. This means that the value of all salaries is lower than the overall cost of the end products. Furthermore, how can we explain the existence of savings and investments? The salaries are not enough to even purchase consumer goods. How can there be savings?
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Are There Laws of Production? History

Are There Laws of Production? HistoryThe cost of labour, if we disregard periods of economic hardship, has a clear tendency for growth. Given the continuous quantitative increase in capital, confirming whether over time the relation between the cost of labour and the cost of capital in a certain country or industry changes or not becomes difficult. Will the fact of equalization of the rate of profit in various industries not serve as confirmation of the similar relationship between the share of labour and capital in the final value of a product in all sectors of the economy? This is all very interesting, but here we must stop and continue the discussion of Douglas’ results.
At the end of the 1920’s, using data from American manufacturing industry from 1899 to 1922, Paul H. Douglas attempted to determine the value of the labour exponent k using the method of least squares. It turned out to be 0.75. It was established that the discrepancy between the theoretical value of the product, which was determined using the production function and the real value was small. The most significant variations were observed in the years of the depression and maximum economic activity. This was explained simply by the incomplete nature of the indexes of labour and capital. The indexes measured the number of factors of production rather than the degree of their relative use. Evidently, during the years of depression the usage level of equipment was low and employment was part-time. During the years of prosperity, equipment was used extremely intensively and employees were hired to work overtime. Therefore these discrepancies were more likely an additional confirmation of the overall value of the formula for normal periods. Further confirmation was received from income analysis performed by the National Bureau of Economic Research. It was established that the share of labour in the net value of an industrial product from 1909-1918 was 74.1%, i.e. almost exactly corresponded to the value of the exponent for labour.
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Are There Laws of Production? Introduction

In 1948, an article was printed in the American Economic Review entitled Are There Laws of Production? The author of the article Paul H. Douglas, who was well-known for jointly proposing, together with C. W. Cobb, the use of a production function such as P = bLkC1~k, presented the results of his many years of research of the manufacturing industry in a number of countries. The main aim was to establish values for the coefficients k and 1-k. Functions such as the Cobb-Douglas function are interesting because the exponents reflect the share of the factor of production in the manufactured product and, therefore, the work was to determine the share of labour and capital in the manufacturing industries. After a number of critical observations it was decided upon to substitute the coefficient 1-k for the coefficient j, which would be determined independently of k. Indeed, if the sum of the coefficients equals one, this signifies a constant return of factors inputted into production and this still needed to be proven. If the sum of the exponents is greater or lower than one, this will demonstrate whether production is developing faster or slower than the speed of the involvement of additional production factors in the economy. Looking ahead, we would like to note that this approach did not change much: the sum of the exponents in all the studies was close to one.
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