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).
Some other researchers have argued on the roles of institutions in economic development, for instance, the ADB Institute, Cavalcanti, North, Dollar and Kraay, Dollar and Kraay, Lin-hui et al. (n.d.), Jansen and Nordas (n.d.). These researchers have shown their results similarly and support to have better institutional quality in economic development. From the overview of North, institutions help us to deal with uncertainty in society and in human interactions. Moreover, institutions play important roles in everyday business transactions by dealing with the imperfect competition, imperfect information, and transaction cost in the sense to make a better choice. Institutions indicator such ‘rule of law’ can facilitate tariffs to increase the ratio of trade to GDP if it is strongly considered (Jansen and Nordas, “n.d.”). He also argues that the impact of trade liberalization on actual trade flows also depends on the quality of institutions. Lin-hui et al. (n.d.) argue that economic institutions play important roles on China’s economic growth, that is, they are the causes of economic growth and they are endogenous. However, economic institutions are efficient or not depend on the ones who have right to control economy. This is as what North shows that economy depends on politics. Dollar and Kraay shows the joint roles of institutions and trade on economic growth. The argumentation is that countries with better quality of institutions and those that trade more grew faster, and countries with better institutions tend to trade more.
A Review on Foreign Trade and Economic Growth
In acknowledging to some of the Chinese authors who have done the empirical studies on the relationship between foreign trade and the economic growth, most of them have adopted the casual relationship to be argued. Yuhong and Xiaoyin analyzes the panel causality of the relationship between foreign trade and GDP growth of Southwest Minority Region of China and suggested some results of existed long-time and short-time causality between those observed variables such as GDP and foreign trade as well as GDP and export. In other words, foreign trade is the long-time and short-time reason of GDP growth. Nevertheless, the study did not suggest the evidence that can approve the existed long-time stable causality between foreign trade and GDP in that region because of the lack of location advantage. In addition to this idea, Wang and Fengsheng et al. also support that the Chinese foreign trade has been playing a very important role to boost China’s economic growth. The role of the Non-governmental enterprises (NGEs) is agued to be important and significant to the contribution of the development of China’s foreign trade. So the essential implication is to provide a fair and equal system for the development of NGEs’ foreign trade, to improve the financing system of NGEs’ foreign trade and to establish sustainable concept of development and promote foreign trade by optimizing and integrating their internal resource. Therefore, developing foreign trade is good for promoting GDP growth, inversely; GDP growth is also good for promoting an opening up of economy through foreign or intentional trade. Also, while enhancing export, one should not ignore import since it is also the main factor to improve the economic growth. Such a concept is strongly supported by Yuhong and Zhanglin with their multivariate linear regression to test the causality. Some other variables of trade structures would be much more important to the related public polices such as financial environment, the quality of institution as well as export and import regulation and rule of law. This is also enhanced by Deng et al. and raised the ideology of Keynes of “export is for better import” (p. 4) to be argued with the meaning that export is to provide with better situation to support importing what we do not have or to get more efficient products. Similar to Wang and Fengsheng et al., we could not overlook the role of the intra-industry trade since it has positive relationship to economic growth both long-term and short-term (Faming et al. 2009). The intra-industry trade is perhaps strongly related to the manufacturing sector, which is also the main mile stone to push economic growth. Anyway, the economic growth reversely has positive effect on intra-industry trade. Therefore, there would exist the causality relationship, and the role of the economic development which could not be overlooked.