Causal Linkages among the Product Diversification of Exports, Economic Globalization and Economic Growth

• Date: 01 August 2017
• Author: Giray Gözgör,Muhlis Can
• Published date: 01 August 2017
• DOI: http://doi.org/10.1111/rode.12301

Causal Linkages among the Product Diversification

of Exports, Economic Globalization and Economic

Growth

Giray G€

ozg€

or and Muhlis Can*

Abstract

This paper examines causal relationships between economic globalization, the three indices for product

diversification of exports (Theil index, intensive margin and extensive margin) and economic growth in

the unbalanced panel data framework in 139 countries over the period 1970–2010. We also consider the

subgroup of the countries related to the income levels and run the panel Granger non-causality tests for

heterogeneous panels. The empirical results indicate that there is a bidirectional causal relationship

between economic globalization and economic growth. There is also a significant causal relationship that

runs from all three indices for the diversification of exports to economic growth. After implementing

various robustness checks, we observe that diversification of exports and economic globalization are

positively related with economic growth merely in the upper middle economies.

1. Introduction

Various parameters of the economy in low-, middle- and high-income countries

have been deeply affected by the globalization process, particularly after the late-

1980s. Possibly as a result of the improvement in communication and information

technologies as well as the expansion of financial linkages all over the world since

early 1990s. low- and the middle-income countries have become attracted by

globalization. Furthermore, in this rapid globalization process, trade liberalization is

accepted as one of the important development strategies of leading institutions,

such as the International Monetary Fund (IMF), the World Bank and the United

Nations (UN). Globalization has diverse outcomes on economic and financial

parameters that can significantly affect the economic growth and the export basket,

particularly in the low- and the middle-income economies. Therefore, this paper

aims to examine the Granger causality relationships between the economic growth,

the economic globalization and the diversification of exports in the unbalanced

panel data framework in 139 countries.

The important aspect of economic globalization is the capital flows (foreign direct

investments (FDI) and portfolio flows). In fact, developing countries, including low-

income countries, seek to catch up with the developed countries in the context of

productivity and gross domestic product (GDP) levels. The achievement of this

process is related to obtaining and application of production technology for which

capital inflows are one of the most important ways of acquiring technological

transfer (Hansen and Rand, 2006). For instance, Sekkat and Veganzones-

*G€

ozg€

or (Corresponding author): Faculty of Political Sciences, Department of International Relations,

Istanbul Medeniyet University, Dumlupınar, D-100 Karayolu No:98, 34000, Kadık€

oy/

_

Istanbul, Turkey.

E-mail: giray.gozgor@medeniyet.edu.tr. Can: Hakkari University, 30000, Hakk^

ari, Turkey.

Review of Development Economics, 21(3), 888–908, 2017

DOI:10.1111/rode.12301

©2016 John Wiley & Sons Ltd

Varoudakis (2007) observe that capital inflows are especially important in the

manufacturing industry of developing countries, but attracting capital inflows is not

easy. In addition, capital inflows matter for high-income countries. For instance,

Lane and Milesi-Ferretti (2001) show that richer countries attract even greater

capital inflows. Therefore, we need to examine the effects of economic globalization

on the economic growth by considering the countries at different income levels,

which this paper aims to do.

In contrast, export diversification had no great importance for countries,

particularly the low- and the middle-income countries, until the 1950s. Until that

time, the classical trade theories emphasize that every country should specialize in

specific export product groups, in which they have comparative advantages.

However, this notion was changed, because of the Prebisch–Singer hypothesis:

concentration of primary commodities can cause instability in the export earnings

and this affects economic growth, negatively. Starting from the 1980s, the upper

middle-income countries, especially, have changed their export structures from

primary commodities to manufacturing goods. However, not only most of the upper

middle-income countries, but also the low- and lower middle-income countries have

still narrow export varieties consisting of a few basic primary products. Therefore,

their export revenues can be affected directly by an adverse event in the global

markets and this can cause an increase in unemployment rates and a reduction in

investments (UN, 2004). Indeed, the magnitude of exports is important, but the

diversity of the export basket is more important to sustain economic growth in

countries at the low income level (G€

ozg€

or and Can, 2016).

The common problem of the low- and lower middle-income countries is to have

lower physical capital and human capital stocks as well as a low level of domestic

savings and a high population growth rate. The spillover effects of technology are

also notably slow in these countries. In general, inadequate domestic savings and

the lack of qualified human capital stocks are also important problems in the upper

middle-income countries. Therefore, aspects of economic globalization (i.e.

openness to trade, FDI and portfolio inflows) as well as diversification of exports

can positively affect economic growth. In other words, economic globalization an d

diversification of exports may become important tools to overcome such problems

in low- and middle-income countries (Kellman and Shachmurove, 2011).

This paper examines causal linkages between economic growth, economic

globalization and product diversification of exports in 139 countries over the period

1970–2010. Indeed, the previous literature shows that diversification of exports

certainly correlates with economic growth, but there is still no satisfying evidence in

the direction of causal relationships (Cadot et al., 2013). Most of the literature

show that diversification of exports enhances economic performance, but some

papers observe that diversification of exports can actually be driven by economic

growth (IMF, 2014). To this end, we also revisit the export diversification–economic

growth nexus using robust econometric methods for causality testing. This issue is

still an important empirical question in the literature, because a gap still remains in

the theories to construct well-established testable hypotheses regarding the impact

of diversification of exports on economic growth (IMF, 2014). In short,

economically speaking, the literature has not so far investigated the effects of

economic globalization and export diversification together on economic growth in a

wide range of country groups. This paper also attempts to enhance our knowledge

on the causal linkages among the related variables in low-, middle- and high-income

countries, separately.

DIVERSIFICATION, GLOBALIZATION AND GROWTH 889

©2016 John Wiley & Sons Ltd