A Comparison of Domestic Demand and Export-led Growth Strategies for European Transition Economies

Abstract

The relationship between growth and trade has been argued many times in the literature. The topic is still current, dealing with different methodologies and countries by researchers. In this frame to understand the relationship theoretically and empirically better, the topic is examined again with a different approach which is explaining export-led growth (ELG) and domestic-demand-led growth (DLG) strategies comparatively for European transition economies. The annual data for the period between 1990 and 2015 were taken from Data Stream for 16 European (Central and Eastern Europe, Southeastern Europe and Balkans) transition economies and because data include both cross section and time dimension, it is necessary to apply dynamic panel data techniques. Second-generation unit root test (multifactor), Westerlund ECM panel co-integration test and heterogeneous panel causality test are applied, and long-term coefficients are estimated with common correlated effects (CCE) model. According to test results, not only ELG but also DLG strategy is accepted for European transition economies, and the direction of the relationship between growth and trade is bilateral. But the contribution of domestic demand on growth is seven times bigger than net export. The leading countries for ELG strategy are Romania, Bosnia and Herzegovina but for Poland and Czech Republic DLG strategy contributes more on economic growth. It is a better macroeconomic policy to have the balance between export-led and domestic-demand-led growth strategies for a sustainable economic growth. The key approach of high growth rate is to produce high technology with competitive price according to domestic demand and export it to the foreigner markets.

JEL Codes: F14, C01, C33

Keywords

Export-led growth domestic demand-led growth dynamic panel data analysis transition economies

Get full access to this article

View all access options for this article.

References

Ağayev

(2011). İhracat ve ekonomik büyüme ilişkisi: 12 geçiş ekonomisi örneğinde panel eş-bütünleşme ve panel nedensellik analizleri [The relationship between export and economic growth: Panel co-integration and panel causality analysis for 12 transition economies]. Ege Akademik Bakış Dergisi, 11(2), 241–254.

Awokuse

T. O.

(2003). Is the export-led growth hypothesis valid for Canada?

Canadian Journal of Economics, 36(4), 126–136. Retrieved 29 December 2014, from http://www.jstor.org/stable/3131917

Awokuse

T. O.

Christopoulos

D. K.

(2009). Nonlinear dynamics and the exports-ouput growth nexus. Economic Modelling, 26(1), 184–190.

Basevi

(1970). Domestic-demand and ability to export. Journal of Power Electronics, 78(2), 330–337.

Beckerman

W. H.

(1962). Projecting Europe’s growth. Economic Journal, 72(288), 912–925.

Bilas

Bosnjak

Franc

(2015). Examining the export-led growth hypothesis: The case of Croatia. Naše gospodarstvo, 61(3), 22–31.

Blanchard

O. J.

Plantes

M. K.

(1977). A note on gross substitutability of financial assets. Econometrica, 45(3), 769–772.

Blecker

Robert A.

(2009). Long-run growth in open economies: Export-led cumulative causation or a balance-of-payments constraint? Retrieved 21 November 2016, from https://www.american.edu/cas/economics/pdf/upload/2009-23.pdf

Chang

(2004). Bootstrap unit root tests in panels with cross-sectional dependency. Journal of Econometrics, 120(2), 263–293.

10.

Çetintaş

Barışık

(2009). Export, import and economic growth: The case of transition economies. Transition Studies Review, 15(4), 636–649.

11.

Dumitrescu

E. I.

Hurlin

(2012). Testing for granger non-causality in heterogeneous panels. Economic Modelling, 29(4), 1–11.

12.

Emirmahmutoğlu

Köse

(2011). Testing for granger causality in heterogeneous mixed panels. Economic Modelling, 28(2011), 870–876.

13.

Feder

(1983). On export and economic growth. Journal of Development Economics, 12(1–2), 59–73.

14.

Felipe

Lim

A. J.

(2005). Export or domestic-led growth in Asia? Asian Development Review, 22(2), 35–75.

15.

Gandolfo

(1998). International trade theory and policy. Heidelberg: Springer-Verlag.

16.

Giles

J. A.

Williams

C. L.

(2000). Export-led growth: A survey of the empirical literature and some noncasuality results part 2 (Econometrics Working Paper EWP0002) Department of Economics, University of Victoria, Canada.

17.

Gkagka

Zarotiadis

(2011). Growth and EU trade relations: A case study. South-Eastern Journal of Economics, 9(1), 1–11.

18.

Henriques

Sadorsky

(1996). Export-led growth or growth-driven exports? The Canadian case. Canadian Economics Association. Retrieved 29 December 2014, from http://www.jstor.org/stable/136249

19.

Hsu

R. C.

(1972). Changing domestic demand and ability to export. Journal of Political Economy, 80(1), 198–202.

20.

Hurlin

Dumitrescu

(2012). Testing for granger non-causality in heterogeneous panels. Economic Modelling. Retrieved 25 September 2015, from https://ideas.repec.org/p/hal/wpaper/halshs-00224434.html

21.

Iradian

(2009). What explains the rapid growth in transition economies? IMF Staff Paper, 56(4), 811–851.

22.

Kaldor

(1968). Productivity and growth in manufacturing industry: A reply. Retrieved 15 October 2015, from http://www.jstor.org/stable/2552347?seq=1#page_scan_tab_contents

23.

Kaldor

(1970). The case for regional policies. Scottish Journal of Political Economy, 17(3), 337–348.

24.

Kao

(1999). Spurious regression and residual-based tests for co-integration in panel data. Journal of Econometrics, 90(1), 1–44.

25.

Konya

(2004). Export-led growth, growth-driven export, both or none? Granger causality analysis on OECD countries. Applied Econometrics and International Development, 4(1), 73–94.

26.

Konya

(2006). Exports and growth: Granger causality analysis on OECD countries with a panel data approach. Economic Modeling, 23, 978–992.

27.

Kurt

Terzi

(2007). İmalat sanayi ve dış ticareti verimlilik ve ekonomik büyüme ilişkisi. [The relationship between economic growth and the efficiency of manufacturing industry and trade]. Journal of Economics and Administrative Science, 21(1), 25–46.

28.

Lamfalussy

(1963). The United Kingdom and these six an essay on economic growth in Western Europe. London: Macmillan.

29.

Linder

S. B.

(1961). An essay on trade and transformation. New York, NY: Wiley.

30.

Marangos

(2001). International trade policies for transition economies: The post Keynesian alternative. Journal of Post Keynesian Economics, 23(4), 689–704.

31.

Marangos

(2002). The political economy of shock therapy. Journal of Economic Survey, 16(1), 41–76.

32.

Marin

(1992). Is the export-led growth hypothesis valid for industralized countries?

Review of Economics and Statistic, 74(4), 678–688. Retrieved 29 December 2014, from http://jstor.org/stable/2109382

33.

Nath

H. K.

(2005). Trade, foreign direct investment and growth: Evidence from transition economies (Working Paper Series, August, SHSU_ECO_WP05-04). Sam Houston State University, Huntsville, TX.

34.

Nazlıoğlu

. (2010). Makro iktisat politikalarının tarım sektörü üzerindeki etkisi: Gelişmiş ve gelişmekte olan ülkeler için bir karşılaştırma [The effects of macroeconomic policies on agriculture sector: A comparison for developed and developing countries] (Unpublished master thesis). Erciyes University, Social Sciences Institute, Kayseri, Turkey.

35.

Palley

T. I.

(2002). Domestic demand-led growth: A new paradigm for development (Jacobs, Weaver and Baker, Eds). Washington, DC: New Rules for Global Finance.

36.

Palley

T. I.

(2011). The contradictions of export-led growth (Public Policy Brief No. 119). Jerome Levy Economics Institute of Bard College.

37.

Pedroni

(1999). Critical values for co-integration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61(Special Issue), 653–670.

38.

Pedroni

(2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20(3), 597–625.

39.

Pesaran

H. M.

(2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74(4), 967–1012.

40.

Pesaran

H. M.

(2007). A simple panel unit root test in the presence of cross section dependence. Journal of Applied Econometrics, 22(2), 265–312.

41.

Pesaran

H. M.

Yamagata

(2008). Testing slope homogeneity in large panels. Journal of Econometrics, 142(1), 50–93.

42.

Pesaran

H. M.

Smith

V. L.

Yamagata

(2013). Panel unit root tests in the presence of multifactor error structure. Journal of Econometrics, 175(2), 94–115.

43.

Pesaran

M. H.

(2004). General diagnostic tests for cross-section dependence in panels. IZA Discussion Paper, 1240, 1–39.

44.

Ram

(1985). Exports and economic growth: Some additional evidence. Economic Development and Cultural Change, 33(2), 415–425.

45.

Ram

(1987). Exports and economic growth in developing countries: Evidence from time-series and cross-section data. Economic Development and Cultural Change, 36(1), 51–63.

46.

Siliverstovs

Herzer

(2005). Export-led growth hypothesis: Evidence for Chile. Applied Economics Letter, 13(5), 319–324.

47.

Thirlwall

A. P.

(1979). The balance of payments constraint as an explanation of international growth rate differences. Banca Nazionale del Lavoro Quarterly Review, 32(128), 45–53.

48.

Tsen

H. W.

(2007). Exports, domestic-demand and economic growth: Some empirical evidence of the Middle East countries. Journal of Economic Cooperation, 28(2), 57–82.

49.

Tyler

W. G.

(1981). Growth and export expansion in developing countries: Some empirical evidence. Journal of Development Economics, 9(2), 121–130.

50.

Ushad

S. A.

Vinesh

S. R.

Lamport

(2013). Export or domestic-led growth in SADC countries? Ushad Paper Shanghai Workshop, China.

51.

Venkatraja

(2015). Does export-led growth strategy sustain? An aggregate demand dimension: China’s experience; India’s lessons. International symposium on Emerging Trends in Social Science Research. Retrieved 22 February 2016, from http://globalbizresearch.org/files/c538_irrem_b-venkatraja-188519.pdf

52.

Vernon

(1966). International investment and international trade in the product cycle. Quarterly Journal of Economics, 80(2), 190–207.

53.

Westerlund

(2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748.