Relationship between Openness and Growth: - Research Questions and Methodology

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Relationship between Openness and Growth-
Research Questions and Methodology

• Sugata Marjit
• And
• Saibal Kar
• Centre for Studies in Social Sciences, Calcutta

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Introduction

• Trade affects regional income of a
  geographically large developing country
• Egger, Huber and Pfaffermayr (2005) deals with
  trade openness of EUs and regional disparity
  (based on available regional trade data)
• Absence of regional trade data
• Lack of proper indicator of regional trade
  openness, and relation between openness and
  poverty, regional income differences, etc.

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Methodological Questions

• How could one deal with the issue of trade
  openness and poverty?
• Two ways to approach the issue Macro and Micro
• What we have done in this paper is a Macro
  exercise to devise a holistic measure of openness
  across regions - although same method might be
  applied to more disaggregated framework . One may
  make a journey from Macro to Micro.

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Previous Studies

• Maiti (2004) and Marjit and Maiti (2006) observe
  trade exposure, specialisation and fragmentation
  in the labour market - expansion of informal
  sector through tying up with formal sector
• Purfield (2006) NSS data on 15 largest states
  between 1973/742002/03 suggests - differences in
  policies adopted by states affect their
  individual patterns of growth.
• Topalova (2005)- using NSS data - trade
  liberalization had different impacts on poverty
  and inequality across states.
• In rural districts where industries were more
  exposed to liberalization, trade liberalization
  has had a negative effect on poverty reduction.
• Trade liberalization led to an increase in
  poverty and poverty gap in these rural districts,
  mainly owing to limited factor mobility across
  regions and sectors.

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• Openness Index - Methodology
• Unavailability of trade data by regions
• We try to devise a proxy for trade by using
  production data at the state level.
• DGCIS is the source of trade data according to HS
  classification
• ASI is the source of State industrial data
  according to NIC classification
• Since ASI and DGCIS use different definitions, we
  reclassify and merge comparable data at the
  2-digit level
• For a specific state, the level of output (i.e.
  sum of industrial and agricultural output) has
  been linked to all-India trade figures to get an
  approximate indicator of how much open a
  particular state is.
• We exclude service sector due to lack of
  production or trade data

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Openness Index Methodology (Contd.)
Firstly, State industrial data is reclassified as
follows
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Table B DGCIS trade classifications tallied
with ASI data
Openness Index Methodology (Contd.)
Second, trade is reclassified as follows Table
DGCIS trade classifications tallied with ASI
data
Note All data in this analysis has been
converted to Rs lakh before further analysis.
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Opennes Index Methodology (contd.) Third, for a
particular state the share of value added by an
industrial group is
where, production share of ith industry in kth
state at time period t GVAkit Gross Value
Added of ith industry in kth state at time period
t NVAkit Net Value Added of industry
producing in kth state at time period t DPkit
Depreciation of industry producing in kth state
at time period t Total of all gross value
added of industries 15-16 to 34-35
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Openness Index Methodology (Contd.)
Fourth, export and import shares are respectively
the export and import of particular industry to
respective total
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Openness Index Methodology (Contd.)
Fifth, we derive the correlation between share
of industrial production of a state and the
share of industrial export for each state
separately for each year and then rank the
correlation coefficient. We assign the rank of 1
to the state with highest correlation and the
rank of 15 to the state with lowest correlation.
Sixth, similar to export performance rank we
derive correlation between share of industrial
production of a state and the share of
industrial import for each state separately for
each year and then rank the correlation
coefficient. We assign the rank of 1 to the state
with highest correlation and the rank of 15 to
the state with lowest correlation.
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Openness Index Methodology (contd.)

• Lastly, equal weights are assigned to the average
  of export ranks and inverse of import ranks
  which gives the openness index of a state

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Relationship Between Openness and Interregional
Income Disparity
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Table 1 Correlation of openness of states with
HDI ranks
1981 1991 2000 2001
HDI ranks -0.27 0.17 0.22 0.33
Rural HDI ranks -0.35 0.01 NA NA
Urban HDI rank -0.36 0.08 NA NA
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Table2 Correlation of openness of states with
unemployment rate and poverty ration
Year Unemployment rate Poverty ratio
1983-84 NA 0.18
1987 -0.04 0.13
1993-94 0.53 0.28
1999-200 0.39 0.21
Source NSS report