International financial integration, trade and welfare gains: evidence from emerging and developing economies.

  • Asif Saeed

Student thesis: Doctoral Thesis


International financial integration and trade provides welfare benefits to individuals of developing economies through expansion in consumption and production opportunities. In the first part, this thesis computes welfare gains under assumed autarky conditions relative to actual levels of international financial integration. In the second part, we investigate a long-run relationship between trade variables and welfare gains. We use data from the Penn World Table 8.0 for 51 countries classified into more financially integrated economies (MFIs) and less financially integrated economies (LFIs) for the years 1961 to 2010.
This thesis examines issues related to the measurement of welfare gains from international financial integration and then investigates short-term and long-term impact of trade on welfare gains. Previous studies suggest that capital flows occur from countries with more capital to countries with relatively less capital. This leads to efficient allocation of resources in the global economy and improve the standards of living of the people across countries.
We acknowledge the lack of consensus on calculating welfare gains and inconclusive relationship between welfare gains and growth in literature. This thesis contributes in the existing literature in two distinct ways. First, we compute welfare gains by utilizing four alternative methods. These methods mainly vary in terms of incorporating the time preference rate and capital varieties which have significance in calculating welfare gains within countries over time. It is important to note that we do not assume prior values of the parameters in calculations of welfare gains. We construct country-specific time series of welfare gains under integration relative to autarky. This requires us to calculate two consumption series i.e. consumption under integration and autarky conditions. We assume actual consumption as consumption under integration and compute autarky consumption by accounting for respective macroeconomic measures (e.g. capital share, depreciation rate and total factor productivity). Second, this thesis provides important insights regarding the role of trade in explaining country level variations in welfare gains. We achieve this objective by investigating short-run and long-run relationship between trade variables and welfare gains. We examine causal effects from exports and imports to welfare gains in a multivariate vector autoregressive (VAR) framework.We find that welfare gains measured in terms of the ratio of consumption under integration relative to autarky range from 0.76 to 3.26 for MFIs and 0.43 to around 7.00 for LFIs. It implies that consumption with international financial integration in certain MFI countries is more than three times higher relative to autarky in different years between 1961-2010. Similarly, this welfare level indicates seven times higher consumption with international financial integration relative to autarky in LFI economies. These results show a wider range of welfare gains which is unique in various ways compared to gains given in the literature. Implied welfare gains from international capital flows depend on how rapidly the domestic rate of return to capital converges to the world rate. We notice that differential in the rates of return may persist across countries for a longer period than is assumed in the optimal savings model. This continues to encourage international capital flows to most developing and emerging economies. We attempt to provide evidence based on the availability of time-varying relevant macroeconomic measures which allow us to construct a historical series of welfare gains for a large set of MFI and LFI countries.
Regarding the long-term co-movement of trade variables and welfare gains, the results suggest that latter is primarily driven by imports in both MFI and LFI economies. Overall results indicate self-fulfilling prophecies between welfare gains and trade variables for 5 out of 9 MFI economies. We find that welfare gains are import led in 4 out of 5 MFI economies which experience positive impact of imports on welfare gains. These four economies include Indonesia, Israel, South Korea and Thailand. In general, empirical evidence suggests that domestic consumers benefit more relative to producers because trade allows imports and causes domestic prices to fall in the importing country. It also supports the conventional argument that consumer gains are generally higher relative to the losses of producers in the economy. India is the only MFI case of export led welfare gains in co-integrated systems. Similar to MFI economies, the empirical evidence suggests presence of import led and export led welfare gains in LFI economies. In this group, we find export led welfare gains for Botswana considered as an African success story. In a nutshell, the results indicate that welfare gains increase due to trade (imports and export channels).
Date of Award16 Feb 2019
Original languageEnglish
SupervisorGulasekaran Rajaguru (Supervisor) & Ahmed Khalid (Supervisor)

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