TRADE LIBERALIZATION, FOREIGN DIRECT INVESTMENT AND INFRASTRACTURE SPENDING: A COMPARATIVE OF DEVELOPED (G7 COUNTRIES) AND DEVELOPING COUNTRIES (BRICS COUNTRIES) -1996-2015
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The proposal examines the literature on how trade, foreign direct investments, and infrastructure development affect economic growth of selected developed and developing economies. A comparative analysis will be carried between developed economies (G7 countries) represented by Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States while the developing economies are represented by Brazil, Russia, India, China and South Africa. The comparative analysis will be carried between years 1996 to 2015. In addition, the proposal will establish the relationship between trade and economic growth in both developing and developed economies. Furthermore, the proposal will establish that trade variables in both developed and developing economies is captured in three indicators namely, the sum of exports and imports to the Gross Domestic Product (GDP), the ration of imports to the GDP and the sum of exports to GDP.
A quadratic expression is formed to capture the nonlinear threshold effect between economic growth and trade. Moreover, the relationship between Foreign Direct Investment (FDI) and economic growth will be analysed. The research will depict that trade and FDI are expressed as the ratio of GDP in both developed and developing economies. In addition, the co-relation between the FDIs and the GDP rate is inherent to the volume of investments brought into the host country. Moreover, the relationship between infrastructure and economic development in both developing and developed economies will be discussed by this proposal. The proposal will establish that infrastructure outputs such as power, transport, and water are used as production inputs in productive sectors such as manufacturing and agriculture, therefore forming a close relationship between GDP and infrastructure. The study will conclude by establishing the relationship of the three variables (trade liberation, FDI and infrastructure spending) in economic development in both developed (G7 economies) and developing economies (BRICS economies).
Developed and developing economies depend on trade, FDI, and infrastructure to spur their economic growth. The differences between the economic growth paths can be attributed to the volumes of investment in the three variables. The relationship between trade and development has dominated the debate in developmental economics and trade. Developed economies trade more thus high economic growth path. The study depicts that there exists a long relationship between trade and economic growth. In addition, the study depicts that trade and economic growth are co-related, but their relationship is fortified by the stability in macroeconomic policies. From, the analysis, negative macroeconomic variables such as inflation can constrain economic growth. Developed economies have embraced openness to trade which plays a crucial role in economic growth. In addition, the reduction and elimination of barriers to trade promote trade growth thus ultimately raise the GDP of the developed economies. Empirical evidence indicates that there is a trading threshold that exists between trade openness and economic growth. Developing countries must have more effective policies towards openness to trade in particular when controlling a level of imports thus boosting their economic growth through international trade.
Although there may be no considerable evidence link between the FDI and economic growth, FDI may be a recipe for economic growth in both the developed and developing economies. FDIs are expected to boost the host economic growth, it’s evident that the extent of FDI growth depends on a country-specific characteristics. In particular, the FDI tends to promote economic growth of host countries with liberal trade regimes such as developed economies. Moreover, developed economies have open and liberal trade regimes, improved education thus human capital conditions encourage export-oriented FDI hence maintaining macroeconomic stability. Developing economies policymakers should focus on strategies and policies that promote economic growth thus attracting FDI inflows into their regions. Empirically, the FDI boosts the host economy via accumulation of capital by an introduction of new goods and the subsequent introduction of foreign technology thus enhancing the stock of knowledge in the host country through the transfer of skills. Developed countries benefit from the FDI by the increasing capital and technical spill overs. In addition to that FDI represents the potential source for sustainable growth and development given its ability to assist in human capital development and formation, generate spill overs in technology, and assist the host countries to integrate to global economy trade. Furthermore, the developed economies ensure the existence of competitive business environment thus enhancing the development of FDI enterprise.
FDI inherent to developed economies complemented the domestic savings by conferring foreign savings. The developed economies balance of payment receipts is augmented since the FDI fills the funding gap between the investment requirements and the local savings. According to the United Nations Conference on Trade and Development (UNCTAD), FDI has proven to be a stable source of funding since it is based on the long-term view of the growth potential of the recipient nation, access to wider markets and accessibility of raw materials. Therefore, as a result, individual countries have been seeking policies that attract FDI. Developing economies should seek FDIs to spur economic growth thus reducing macro-economic detrimental effects such as poverty.
Infrastructure forms the base in which Economic growth is realized. Infrastructure encompasses the roads, water, mass transport, airports, and utilities. Infrastructure aids support services to help grow productive sectors such as agriculture and industrialization. The pro-founding relationship between infrastructure and economic growth is quite complex. Although infrastructural development is necessary and important form economic growth and industrial take-off, the desire for a country growth is not directly proportional to higher or an increased need for infrastructure. In developed economies, infrastructure exhibit high network effects. As the number of users increases, the marginal productivity of infrastructural investments increase. In addition, the spread of network surpasses the average productivity inherent to investment until the market is all saturated.
Developing economies still lag behind in economic development due to decades of economic stagnation, poor living standards s and sometimes environmental disasters which have left infrastructural development underutilized. Investment in infrastructure as a GDP proportion is about 10% in comparison to 16% in developing countries. In addition, less than 50% of the region roads are paved. In addition, about 1/3 of the population of the region are within two kilometres of the seasoned roads in comparison to 2/3 in developed economies regions of the developed economies. Telephone penetration in developing economies is about 14% in comparison to an average of 52% in developed economies. Developing Economies lack resources to undertake infrastructural development. In addition, the lack reliable data to determine manpower and finance for infrastructural development. Many developing economies lack the infrastructural development framework that may guide them to achieve economic development. Moreover, the developing economies exhibit inadequate planning which mismatches societal needs and requirements. On the other hand developed economies have well-functioning supporting institutions and stable political environments.
Developing economies need to save annually by eliminating all inefficiencies and also carry 100% capital budget execution. The relationship between infrastructure and Economic growth is two-way. First, infrastructure creates growth in the economy and on the other hand, economic growth brings infrastructural changes. Practically in both the developed and developing economies, infrastructure provides the keys to all modern technology in all sectors. Studies have also depicted that around 9% of the value added is contributed by infrastructure in developing countries, while 11% comes from the high-income economies. As income levels rise, so as the composition of infrastructural changes. In developing economies, basic infrastructure such a water, irrigation and transport grows fast and is of high demand. In high-income countries, power and telecommunications are of more importance. Empirical studies have shown that 20% increase in public investment in infrastructure accelerates real economic growth by 1.8% in the medium to long-term.
The empirical literature on trade and economic development became predominantly important in the 1980s. In 1982 many developed economies faced debt crises and economic meltdown, diluting the impact of protectionists. The empirical literature suggests the positive relationship between trade and economic growth of both developing and developed economies. Makki & Somwaru (2004) investigated whether trade spurs economic growth and found a positive relationship. A further analysis by Rodriguez & Rodrik (2000) revealed that the relationship between economic growth and exports in four developed and four developing economies using the error correction and co-integration model. His findings depict a stable long-run relationship and a bi-directional causality relationship between economic growth and growth of exports. In addition, the favourabl...