Faculty of Economics, Thammasat University
THAMMASAT REVIEW OF ECONOMIC AND SOCIAL POLICY
Democracy and Growth: Global Causal Evidence for Heterogeneous Political Regimes and Economic and Social Policy Tran Van Hoa
On Income Inequality and Population Size Thitithep Sitthiyot and Kanyarat Holasut
South-South Trade Growth Prospects and Policy Implications Panit Buranawijarn
Volume 2, Number 2, July - December 2016 ISSN 2465-390X (Print) ISSN 2465-4167 (Online)
THAMMASAT REVIEW OF
ECONOMIC AND SOCIAL POLICY Volume 2, Number 2, July – December 2016
ISSN 2465-390X (Print)
ISSN 2465-4167 (Online)
Thammasat Review of Economic and Social Policy
Thammasat Review of Economic and Social Policy (TRESP) is a double-
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Arayah Preechametta, Thammasat University, Thailand
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Editor-in-Chief
Euamporn Phijaisanit, Thammasat University, Thailand
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Kirida Bhaophichitr, Thailand Development Research Institute, Thailand
Brahma Chellaney, Center for Policy Research, New Delhi, India
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Ian Coxhead, University of Wisconsin-Madison, United States
Tran Van Hoa, Centre for Strategic Economic Studies, Victoria University, Australia
Emma Jackson, Bank of England, UK
Prajak Kongkirati, Faculty of Political Science, Thammasat University, Thailand
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Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July – December 2016
Editorial Introduction 1
ARTICLES
Democracy and Growth: Global Causal Evidence for
Heterogeneous Political Regimes and Economic and Social
Policy 6
Tran Van Hoa
On Income Inequality and Population Size 24
Thitithep Sitthiyot and Kanyarat Holasut
South-South Trade Growth Prospects and Policy
Implications 50
Panit Buranawijarn
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
1
Editorial Introduction
Following the success of our first issue in December
2015, this issue consists of the topics on democracy and
growth, inequality and population size, and south-south trade
considerations.
The nexus between democracy and growth is an
important issue in economics and political economy,
generating an extensive body of literature discussing
definitions of democracy and the nature of its causality.
Empirical studies, however, have so far proven inconclusive.
The first article of this issue, “Democracy and Growth:
Global Causal Evidence for Heterogeneous Political Regimes
and Economic and Social Policy”, by Tran Van Hoa
contributes to the literature through a simultaneous equation
model to introduce circular causality between democracy,
growth, and income based on conventional democracy-
growth causality hypotheses. The paper uses a data set from
2008 for 162 countries. The model employed is a three-
simultaneous-equation model of democracy, growth and per
capita real income based on conventional hypotheses for
open economies to introduce circular causality. The article
provides empirical evidence to support the hypotheses
linking democracy and growth. The findings confirm bi-
directional causality for overall data, and for full and flawed
democracies, but is mixed for countries with less democratic
institutions. Policy implications suggest the relevance of
democratic institutions for promoting growth. However, care
should be taken in data selection and drawing conclusions of
causality. Regarding the issues on income inequality, economists
have long used Gini Coefficient as a measurement of income
inequality. The degree of income inequality and size of
population can be expected to have some kind of a
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
2
relationship. However, there is yet a study that examines an
appropriate degree of income inequality as measured by Gini
Coefficient for a country given the population size. High
degree of income inequality can cause economic, social and
political disruptions (i.e. adverse impacts on growth and
poverty, concentration of economic and political power, etc.)
which in turns favour the rich and prohibit social mobility.
On the other hand, low income inequality is detrimental in its
own way- equality of income generates no incentive to take
lucrative actions, which further lead to poor initiatives and
slow technological progress. Other social problems like riots
and protests may ensue. The authors, Thitithep Sitthiyot and
Kanyarat Holasut, hypothesized that there ought to be an
optimal level of income inequality to avoid these adverse
effects. They postulate that the degree of social, economic
and political diversities for any country is reflected by
population heterogeneity in that country. This study uses
income inequality and population data of 69 countries in
2012 from the World Bank. The relationship between the
level of income inequality (Gini Coefficient) and natural
logarithm of population size is found to be non-linear, which
can be best described by a second-degree polynomial
function. About one-fifth to one-third of countries in the
sample have Gini Coefficients close to appropriate values
while those of the other two-third to four-fifth are either too
high or too low. The finding of this article recommends
policy makers to take into account targeted Gini Coefficient
prior to any attempt to reduce or raise income inequality. The
paper posits that for a given level of population, countries
that achieve targeted level of income inequality are more
likely to attain higher economic growth, compared with those
which are far from their appropriate level of income
inequality.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
3
On trade growth amongst developing nations, the share
of the trade in goods exported by these nations has grown
rapidly over the past two decades, fueled in large part by
China’s rapid growth. Though many developing countries
still face various issues in conducting trade, the share of
South-South trade is increasing in times of instability and
uncertainty in developed economies. The South-South
cooperation represents the collaboration between developing
countries across various dimensions including politics,
economics, trade, investment and technology. The third
article, “South-South Trade Growth Prospects and Policy
Implications” by Panit Buranawijarn, focuses mainly on one
aspect, trade, and through a review of the data and literature,
explores the characteristics, motivations, and effectiveness of
South-South trade. The article focuses on the involvement of
China and India in South-South Trade due to the large roles
that they play in both Asia and the Global South. Though
there are theoretical justifications for reducing trade barriers
between developing countries, factors such as the wide range
of developing countries and the unbundled structure of
production and the trade in intermediate goods makes it
difficult to determine whether South-South trade is more
beneficial compared with trade orientations. On the other
hand, there are many reasons why more advanced developing
countries such as China may encourage the South-South
Cooperation agenda through investment and developmental
aid for political and security reasons. Policy-wise, in the face
of economic and political uncertainties in the West, and given
the long-standing difficulties of the WTO Doha Development
Round, developing countries may see advancing South-South
trade as providing greater stability. However, making the best
use of South-South Cooperation and Trade for development
will depend on the circumstances of each individual country.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
4
Thammasat Review of Economic and Social Policy
(TRESP) is our newly constructed biannual double-blind peer
reviewed international journal published in June and
December. The Faculty of Economics, Thammasat
University and the Editorial Team of TRESP seek to provide
an effective platform for reflecting policy-oriented
perspectives that links the academic and policymaking
community. Having devoted to our ‘knowledge-for-all’
philosophy so as to drive our society forward, the Faculty
decided that TRESP published in an open access model. For
further information and updates on this journal, or to submit
an article, please visit our website at www.tresp.econ.tu.ac.th.
Euamporn Phijaisanit
Editor-in-Chief
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
6
Democracy and Growth: Global Causal Evidence
for Heterogeneous Political Regimes and
Economic and Social Policy
Tran Van Hoa
Research Professor and Director
Vietnam and East Asia Summit Research Program
College of Business
Victoria University
Australia
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
7
ABSTRACT
The relationship between democracy and growth is of great
importance to development of economic and social well-
being policy but its directional causality is still generating
lively debate conceptually and empirically. The paper
introduces a simple simultaneous-equation model of
democracy and growth for open economies and uses global
data and system estimation to provide new evidence on
democracy-growth causality and importantly the effects of
different democratic institutions on it for strategic economic
and social policy analysis. The findings confirm democracy
causes growth globally but this causality is mixed for
countries with heterogeneous political regimes. Regime-
specific policy is therefore recommended for appropriate
decision-making.
Keywords: Democracy and growth, Lipset/Aristotle and
virtuous cycle, heterogeneous political regimes,
simultaneous-equation modelling.
JEL Classification: O10, O40, P16
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
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1. Introduction
The nexus between democracy (political freedom and
equality for all) and growth (real income per head or living
standard and its rate of change) is an important issue in
economics and political economy and with relevance to
economic and social well-being policy. It has generated a
large theoretical and empirical literature and ongoing lively
academic and policy-making debates. The debates range from
the definition of democracy arising from the immensely
influential polyarchy concept of Dahl (1970) and the
causality of democracy and growth (Rigobon & Rodrik,
2005; EIU, 2015). Equally important is the fact in the current
empirical literature that the findings to verify this nexus have
also been mixed and sometimes controversial (Barro, 1996;
Persson & Tabellini 2007; Acemoglu et al., 2008; Narayan et
al., 2011; Acemoglu et al., 2014).
Explanations for the variation of findings and
suggestions for improvement in empirical study are
numerous. They include the neglect of relevant variables and
their nonlinear relationships (Barro, 1996), omission of key
control variables that simultaneously affect both growth and
democracy (Acemoglu et al., 2008), heterogeneous political-
economic development paths of the countries in the sample
(Persson & Tabellini 2007), and importantly, possibly a lack
of circular causality hypothesis between democracy and
growth (Barro 1996; Acemoglu et al., 2008). These are the
current gaps on an important global issue that require further
study and verification for meaningful economic and social
policy study.
To address these major gaps in the empirical literature,
the paper develops a simple multi-equation model with
conventional testable causal postulates that are
comprehensively based on the current democracy-growth
Thammasat Review of Economic and Social Policy
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causality hypotheses for open economies. Significantly, the
model also assumes circular causality in the form of a
simultaneous-equation model to address the possible multi-
directional impact or virtuous cycle hypothesis between
democracy, growth and income (see also Rigobon & Rodrik,
2005).
For empirical study with cross-sectional data reflecting
thus implicitly long-run or equilibrium-state outcomes, the
paper uses the 2008 international data for 162 countries and
system estimation to provide evidence on the democracy and
growth relationship, and importantly, on this relationship for
four non-overlapping component regimes of these countries
on the hypothesis that different democratic regimes may be
characterised by different causality and therefore require
different policy (see detail below). The 2008 data are used on
the observation that 2008 was the start of the slowing down
of the decades-long democratisation process globally (EIU,
2008) and also known as democratic recession (Diamond,
2008), and the emergence of the global financial crisis
resulting in a sharp and protracted recession that could
threaten democracy in some parts of the world.
The paper’s findings confirm that bi-directional causality
exists between democracy and growth for the 162 countries
combined, and that this causality is mixed for different
groups of countries with heterogeneous political regimes and
thus requires regime-specific policy. Some analysis with
economic and social policy implications is then briefly
discussed.
2. The Model and Its Features
A simple three-simultaneous-equation model of
democracy, growth and per capita real income, based
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importantly on the key conventional and testable postulates
for open economies in the current literature and specifically
addressing the major specification and circular causality
issues above, can be written arbitrarily in implicit form as (𝑌, 𝐷, 𝑌𝐻, 𝐸𝐹, 𝑋𝑌) = 0. After normalising for three key variables (𝑌, 𝐷 𝑎𝑛𝑑 𝑌𝐻) and using the usual stochastic linear
form1, it can be written as
𝑌 = 𝛼1 + 𝛼2𝐷 + 𝛼3𝑌𝐻 + 𝛼4𝐸𝐹 + 𝛼5𝑋𝑌 + 𝑢1 (1)
𝐷 = 𝛽1 + 𝛽2𝑌 + 𝛽3𝑌𝐻 + 𝛽4𝐸𝐹 + 𝛽5𝑋𝑌 + 𝑢2 (2)
𝑌𝐻 = 𝛿1 + 𝛿2𝐷 + 𝛿3𝑌 + 𝛿4𝐸𝐹 + 𝛿5𝑋𝑌 + 𝑢3 (3)
Where
𝑌 is growth (rate of change in real GDP per capita),
𝐷 is democracy composite index,
𝑌𝐻 is real GDP per head or, approximately, initial income,
𝐸𝐹 is economic freedom composite index, and
𝑋𝑌 is exports/GDP or trade intensity.
𝑢1, 𝑢2 𝑎𝑛𝑑 𝑢3 are the error terms or omitted variables with conventional cross-country and cross-equation correlation.
As for its structural specification, the model conceptually
encompasses and addresses the main testable hypotheses of
growth, democracy and income and their circular causality in
the literature. These hypotheses include more specifically, (a)
the Barro’s (1996) hypothesis of democracy affecting growth
𝐷𝑌 (D causes Y) and also income 𝐷𝑌𝐻; (b) the Lipset/Aristotle hypothesis (Acemoglu et al., 2008) of growth
1 A log form (Acemoglu et al., 2014) may be inappropriate as Y can be
negative as a result of a financial crisis or recession
Thammasat Review of Economic and Social Policy
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and income affecting democracy 𝑌𝐷 and 𝑌𝐻𝐷; (c) the
virtuous cycle hypothesis of D-Y circular causality (𝐷 <=>𝑌) (Jaunky, 2013), and (d) depending on their empirical findings, the sceptic, compatibility and conflict hypotheses
(Narayan et al., 2011). In addition, as the model is for open
economies, it allows for the testable hypotheses of (i) the
effect of trade (exports) intensity representing a country’s
level of openness or globalisation on growth and income;
𝑋𝑌𝑌 and 𝑋𝑌𝑌𝐻 (Acemoglu et al., 2008), and on
democracy, 𝑋𝑌 𝐷, and as political and economic freedoms may be jointly correlated, of (ii) economic freedom on
growth and income, 𝐸𝐹 𝑌 and 𝐸𝐹𝑌𝐻 (Azman-Saini et al., 2010).
As the model of three structural and jointly dependent
equations for 𝑌, 𝐷 and 𝑌𝐻, it should be estimated
appropriately by a system method such as the three-stage
least-squares (3SLS) or the generalised method of moments
(GMM) incorporating factors or instruments that are, for econometric parametric estimation consistency, both
exogenous and simultaneously affect growth, income and
democratic processes (Barro, 1996; Acemoglu et al., 2008,
2014). Nonlinearity can be introduced into the model by
simply using the polynomials of 𝑌, 𝐷 and 𝑌𝐻 as additional
determinant variables (see Barro, 1996 for this suggestion).
An important focus of the paper is that it is assumed that
variation in democracy-growth causality may exist due to the
heterogeneous characteristics from a political economy
perspective of the in-sample countries as measured by their
various levels of democratic institutions or dictatorship
(Persson & Tabellini, 2007; EIU, 2008; Acemoglu et al.,
2014). This proxy aspect of deepening democratic institutions
as a major contribution to economic success is the paper’s
major focus for empirical testing in a structural system
framework and for evidence-based policy analysis.
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In addition, as a generalisation of Acemoglu et al. (2008,
2014)’s modelling-by-IVs strategy, the IVs in our model may
include influencing IV indicators such as population, the
country’s world GDP share (to allow for country size
weight), and export share (to allow for the effect of trade
intensity or level of openness). These IVs must satisfy the
relevance and exogeneity criteria as required for
econometrically asymptotically consistent system estimates
of identified equations. For pragmatic reasons that also
satisfy the econometric requirements, the IVs in our model’s
three-stage least-squares estimation are simply polynomials
of the jointly dependent variables (see Johnston & DiNarno,
1997).
3. The Data and Estimation Issues
The whole data are cross-sectional for 2008 and for a
sample of 162 countries. The data for Y and YH are from the
US-Department of Agriculture-Economic Research Service
database. The data for exports and GDP are retrieved from
the United Nations Explorer datasets. The countries’ export
shares (X/GDP) are calculated from these data. Democracy
index (D) is obtained from the Economist Intelligence Unit
(EIU) online, and economic freedom index (EF) from the
Heritage Foundation. Acemoglu et al. (2014) have provided
further discussions on the reliability of these indexes and
their alternatives.
As we use the concept of heterogeneous political
institutions for testing the potential variation of democracy-
growth causality, we adopt the EIU (2008) classification of
these institutions and data availability in empirical study. The
four non-overlapping subsamples of the 162 countries with
differential democratic institutions as defined by the EIU
(2008) are based, for each country, on the average score (0-
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10) of 60 indicators in five categories reflecting democracy:
electoral process and pluralism, civil liberties, the functioning
of government, political participation, and political culture.
The index values for the four regimes are: full democracies
(8-10), flawed democracies (6-7.9), hybrid regimes (4-5.9),
and authoritarian regimes (below 4). As described earlier, the
main motivation of this division is to shed more light on the
hypothesis that democracy-growth causality is potentially
affected by the countries’ stages of democratic processes
(Acemoglu et al., 2014) and also to provide potential and
appropriate regime-specific prescriptions. More specifically,
these four regimes and their number of included countries
are: full democracies (30 countries), flawed democracies
(50), hybrid regimes (36), and authoritarian regimes (51).
These regimes represent almost all of the world’s population.
We note that the selected sub-sampling may not be optimal
but it simply represents one useful definition of democratic
states with available data that provides, as an advantage over
its alternatives, considerable differentiation of scores even
among developed countries (EIU 2008). This definition has
been usefully adopted in the paper to empirically study the
diversity of democracy and growth causality for economic
and social policy analysis.
4. Empirical Findings and Political Economy Policy
Implications
The model (1) - (3) for testing bi-directional causality
between democracy, growth and income has been estimated
by the 3SLS method based on the whole sample of 162
countries and separately for the four sub-samples as
described above. While ‘pure or clean’ IVs with economic-
theoretic relevance and statistical exogeneity features for
system estimation are theoretically desirable for obtaining
Thammasat Review of Economic and Social Policy
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asymptotically consistent parameter estimates, they are
elusive (Bazzi & Clemens, 2013) in empirical studies due to
the inherent Marshallian or Haavelmo interdependence
characteristics of economic activities. Extensive discussions
of major issues with IVs and remedial recommendations in
practice for acceptable estimation and analysis have been
provided in the literature (see for example Murray (2006),
Acemoglu (2010), Bazzi and Clemens (2013), and Acemoglu
et al. (2014), among others). In the paper, a number of
combinations of economically relevant IVs and their
polynomials had been experimented with and tested for
exogeneity. The final accepted IV proxies satisfying the
relevance and exogeneity econometric criteria are, for
pragmatic and illustrative-system-estimation reasons, simply
the polynomials of the variables in the model. The simple use
of endogenous variable polynomials (or lags with time series
data) as appropriate IVs have been suggested as satisfying the
relevance and exogeneity requirements for asymptotically
consistent system estimation in the econometric literature
(see Johnston & DiNardo, 1997; Wooldridge, 2009). The
final findings, conditional on these IVs, are reported in Table
1.
When the whole sample of 162 countries was used for
estimation ignoring thus the political-economic heterogeneity
among these countries, the findings confirm the validity of
the hypotheses of Barro (𝐷𝑌 and 𝐷𝑌𝐻), Lipset/Aristotle
(𝑌𝐷 and 𝑌𝐻𝐷) and virtuous cycle (𝑌 <=> 𝐷) (Jaunky,
2013). In other words, democracy itself contributes
significantly to improving growth and living standard, and
higher economic growth and income in these countries also
promote deepening democratic institutions. Interestingly, the
countries’ export intensity or openness has no statistically
significant effect on growth, democracy or income, and free-
market environment is found to enhance democracy
Thammasat Review of Economic and Social Policy
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(confirming the link between economic freedom and political
freedom) and not growth or income. The findings from the four separate classes of regimes
show, however, the diversity of democracy-growth causality
for heterogeneous democratic institutions. First, for full-
democracy economies which consist of mainly developed
economies, the findings almost mirror the causality found in
the overall sample for growth, democracy and income and the
positive impact of economic freedom, and the insignificance
of openness. Second, for flawed democracies (where some
major South East Asian countries such as Indonesia,
Malaysia, the Philippines, Thailand and some South Asian
countries such as India and Sri Lanka belong), bi-directional
causality between growth, democracy and income is also
found, but, significantly and unlike full democracy regimes,
economic freedom does not promote democracy but it
enhances income for this group. Third, for hybrid regimes,
the diversion from the overall findings for causality appears
prominent. For example, democracy appears to hinder growth
and weakly impacts on income. Growth and especially
income also have only weak effects on democracy. While
economic freedom has no significant effect on democracy
and income, the level of openness however strongly increases
income for this group. Finally, for authoritarian regimes, an
interesting observation is that, unlike the overall and other
regimes, all included key variables are statistically significant
but with sometimes opposite causality. More specifically,
democracy affects growth but reduces income, and growth
promotes democracy but higher income hinders it. For the
countries in this regime, openness assists growth but not
income, and more economic freedom enhances democracy
and income but not growth.
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As democracy and growth are crucial components of
economic and social well-being, the findings appear to have
important related policy implications. First, for total (162
countries) and as mirrored by full-democracy (30 countries)
findings, the world’s population seems to enjoy the mutual
benefits of positive growth, income and democracy
relationships while in fact only 14.4 per cent of its population
enjoys this beneficial causality environment and its
affordability. Economic and social policy that is based on the
total or aggregate data findings as reported by the majority of
studies in this area and used by policy-makers is therefore at
least misleading. Second, while half of the world’s
population lives in a democracy of some sort, our evidence
shows that for flawed democracy countries (50 countries or
35.5 per cent of the population and concentrating in Latin
America, Eastern Europe, and to a lesser extent in Asia), a
disturbing result is that a policy of more economic freedom
has no impact on deepening democracy which, according to
the EIU survey, was still generally characterised by low
political participation and weak democratic culture (EIU,
2008). Interestingly, the same result is also found for hybrid
regimes.
Third, significantly for hybrid regimes (36 countries or
15.2 per cent which together with authoritarian regimes
dominate in the countries of the former Soviet Union), the
relationships between democracy, growth and income are
weak, and the only economic and social policy that is
compatible with our significant findings and enhances
income is related to more openness. This policy may have
obstacles however due to the geo-political situation of these
countries and the conflicting influence of Russia and the
West. The weak relationships could also be attributed to the
‘colour revolution’ during the period being petering out.
Fourth, paradoxically for authoritarian regimes (51 countries
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
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or 34.9 per cent), the empirical findings are, unlike for other
regimes, statistically and uniformly more robust, due to
perhaps the wide differentiation of the democracy index
scores among the regime members. For these members, any
policy is, according to our findings, complex and needs
careful balancing as it always involves minuses and pluses.
For example, a policy of more democracy and more openness
will promote growth but will reduce income, and a policy of
more economic freedom will promote democracy and higher
income but will reduce growth.
5. Conclusion
To address the gaps in the empirical literature on
democracy and growth causality, a simple structural
simultaneous-equation model of democracy, growth and
income with major relevant determinants for open economies
in the world is developed to provide empirical evidence to
their causality and with a special focus on the effects of
heterogeneous democratic institutions. This evidence is
useful to develop appropriate economic and social policy
analysis as democracy and growth are crucial components of
economic and social well-being. The findings confirm the bi-
directional causality for overall data and full and flawed
democracies, but are mixed for countries with less
democratic institutions. The study shows the relevance of
these institutions on promoting growth and also that caution
is required in interpreting causality from overall global panel
data and in developing appropriate economic and social
policy. As an example, an average global democracy index of
5.55 in the scale from 0 to 10 was recorded for both 2008 and
2015 even though the latter is more in the age of anxiety with
more diverse country-specific scores (EIU, 2015).
Endogenous switching regime modelling in the time-series
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
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domain may be a further related interesting research with
available data but it is in another perspective (Jochmann &
Koop, 2014).
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
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References
Acemoglu, D. (2010). Theory, General Equilibrium, and
Political Economy in Development Economics. Journal
of Economic Perspectives, Vol. 24, No. 3, pp. 17-32.
Acemoglu, D., Johnson, S., Robinson, J. A. and Yared, P.
(2008). Income and Democracy. American Economic
Review, Vol. 98, No. 3, pp. 808-42.
Acemoglu, D., Naidu. S., Restrepo, P., and Ronbinson. J. A.
(2014). Democracy Does Cause growth, NBER
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Avoiding Common Pitfalls In Identifying the Causes of
Economic Growth. American Economic Journal:
Macroeconomics, Vol. 5, No. 2, pp. 152-186.
Dahl, R. A. (1970). Polyarchy. New Haven: Yale University
Press.
Diamond, L. (2008, March-April). “The Democratic
Rollback”. Foreign Affairs. Retrieved from
https://www.foreignaffairs.com/articles/2008-03-
02/democratic-rollback
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Economist Intelligence Unit (2008). “Index of Democracy”.
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http://graphics.eiu.com/PDF/Democracy%20Index%20
2008.pdf
Economist Intelligence Unit (2015). “Democracy Index”.
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Index-2015.pdf
Jaunky, V. C. (2013). Democracy and Economic Growth in
Sub-Saharan Africa: A Panel Data Approach,
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Cointegration. Studies in Nonlinear Dynamics and
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4th Ed, New York: McGraw-Hill.
Murray, M. P. (2006). Avoiding Invalid Instruments and
Coping with Weak Instruments. Journal of Economic
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Narayan, P. K., Narayan, S. and Smyth, R. (2011). Does
Democracy Facilitate Economic Growth or Does
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Rigobon, R. and Rodrik, D. (2005). Rule of Laws,
Democracy, Openness and Income: Estimating
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112–114.
Thammasat Review of Economic and Social Policy
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On Income Inequality and Population Size
Thitithep Sitthiyot
Director
Public Debt Policy Research Division
Policy and Planning Bureau
Public Debt Management Office
Ministry of Finance
Thailand
Kanyarat Holasut
Associate Professor
Department of Chemical Engineering
Faculty of Engineering
Khon Kaen University
Thailand
Corresponding author and submitted as an independent author. The
contents of this article do not reflect the authors’ affiliations. The authors
are grateful to Suradit Holasut for initiating the idea and for valuable
suggestions. The authors also thank two anonymous referees for their
useful comments and criticisms. All errors rest with the authors.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
25
ABSTRACT
The pursuit of having an appropriate level of income
inequality should be viewed as one of the biggest challenges
facing academic scholars as well as policy makers.
Unfortunately, research on this issue is currently lacking.
This study is the first to introduce the theoretical concept of
targeted level of income inequality for a given size of
population. By employing the World Bank’s data on
population size and Gini coefficient from sixty-nine countries
in 2012, this study finds that the relationship between Gini
coefficient and natural logarithm of population size is
nonlinear in the form of a second degree polynomial
function. The estimated results using regression analysis
show that the majority of countries in the sample have Gini
coefficients either too high or too low compared to their
appropriate values. These findings could be used as a
guideline for policy makers before designing and
implementing public policies in order to achieve the targeted
level of income inequality.
Keywords: Income Inequality, Gini Coefficient, Population
Size
JEL Classification: D31, D63, J19
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
26
1. Introduction
It is widely agreed among academic scholars and
practitioners that the most commonly used measurement of
income inequality is Gini coefficient. While the theoretical
value of Gini coefficient lies between zero and one, in
practice, the minimum and maximum values the Gini
coefficient could possibly attain are zero and (P-1)/P, where
P is the number of population. This could be illustrated by
using an example of a hypothetical country. If a country has
only one population, then there is obviously no income
inequality and the value of Gini coefficient would be zero.
That is the minimum value of Gini coefficient this country
could attain. However, as the number of population gets
larger, say, 2, 3, 5, 8, …, or P, and only one person has all the
income while others have none, a situation of perfect income
inequality, the maximum value of Gini coefficient for this
hypothetical country to attain would be 1/2, 2/3, 4/5, 7/8, …,
or (P-1)/P, respectively.1 In practice, the value of Gini
coefficient, therefore, should be greater than zero but less
than (P-1)/P.
The above example indicates that, theoretically, there
should be an association between the degree of income
inequality as measured by Gini coefficient and the size of
population. This is consistent with Deltas (2003) who argues
that the Gini coefficient of a small population would be
smaller than that of a larger one generated by the same
stochastic process. Equivalently, removing members of a
population at random would tend to lower the estimated Gini
coefficient of that population. Deltas also notes that, for any
1 This could simply be calculated geometrically by dividing the area
between the 45-degree line and the Lorenz curve by 1/2.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
27
given level of intrinsic inequality, as expressed by income
generating function, a reduction in the sample size would
lead to a reduction in inequality as measured by the Gini
coefficient. In addition, countries with small populations and
less diverse economies tend to report small Gini coefficients
whereas a much higher Gini coefficient are expected for
countries with economically diverse large populations (“Gini
Coefficient”, 2016).
While there are empirical research examining the
relationship between income inequality and size of
population or size of state as well as other economic, social,
and political variables,2 the issue of what an appropriate
degree of income inequality as measured by the Gini
coefficient should be for a country given a population size
has yet to be explored by the existing literatures.3 According
to the income inequality and population data in 2012
compiled by the World Bank (2016a; 2016b), countries that
have similar values of Gini coefficient could have very
different population size. For example, Bhutan, with
population of only 743,711, has the Gini coefficient of 0.387
while Thailand, with population of 67,164,130, has a slightly
higher value of the Gini coefficient of 0.393. Does this imply
that income inequality in Bhutan is not much different from
that in Thailand? The same World Bank’s data also show that
countries that are similar in terms of population size could
2 For studies that focus on the issue of income inequality and size of
population or size of state, please see Streeten (1993), Commonwealth
Secretariat (2000), Bräutigam and Woolcock (2001), Alesina (2003), and
Campante and Do (2007). For those that investigate the relationship
between income inequality and other social, economic, and political
factors, please see Phongpaichit (2016) and references therein. 3 To the best of the authors’ knowledge, as of this writing, the authors
have found no study that investigates the appropriate level of income
inequality as measured by Gini coefficient for a given size of population.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
28
have very different level of income inequality. For example,
Guinea, with population of 11,628,767, has Gini coefficient
of 0.337 whereas Haiti, with a slightly lower population of
10,288,828, has almost twice the value of Gini coefficient at
0.608. Based on these observations, can we conclude that
people of Guinea has more income equality than those of
Haiti?
Given that there are various economic, social, and
political factors that could have effects on income inequality
as investigated by earlier research,4 it is interesting to
examine the linkage between the degree of income inequality
as measured by Gini coefficient and the population size, and
find out empirically an appropriate value of Gini coefficient
given the size of population since no study has been
conducted thus far. With an exception of two extreme cases
of perfect income equality and perfect income inequality
regardless of population size, this study hypothesizes that a
country with small populations should have relatively lower
Gini coefficient than a country with large populations due to
the degree of economic, social, and political diversities as
already reflected by the size of population. This study views
that knowing the appropriate level of income inequality as
measured by Gini coefficient could benefit policy makers as
a starting point that can be used as a guideline prior to design
and implement public policies to tackle the issue of income
inequality or income equality.
This study is organized into five sections. Following the
Introduction, Section 2 discusses the logic of the appropriate
degree of income inequality. Section 3 explains research
methodology and data employed in this study. Section 4
4 See Streeten (1993), Commonwealth Secretariat (2000), Bräutigam and
Woolcock (2001), Alesina (2003), Campante and Do (2007), and
Phongpaichit (2016).
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
29
presents empirical findings and discusses the issue of targeted
level of income inequality. Finally, Section 5 concludes and
provides policy implications as well as suggestions for future
research.
2. The Logic of Appropriate Degree of Income
Inequality
High or extreme income inequality, theoretically, could
cause economic, social, and political disruptions in many
ways. Fuentes-Nieva and Galasso (2014) criticizes that
extreme economic inequality is damaging to society for
several reasons. It could have negative impacts on growth
and poverty reduction. Extreme economic disparity is also
worrying because of the pernicious impact that wealth
concentrations could have on equal political representation.
When wealth dominates public policymaking, the laws and
regulations are bent to favor the rich and often to the
detriment of the rest in the society. Equally alarming, public
opinion could be shaped and election outcome could be
affected by large-scale propaganda efforts through media the
rich own or can control (Raza, 2016). According to Fuentes-
Nieva and Galasso (2014), these could lead to the erosion of
democratic governance, the pulling apart of social cohesion,
and the vanishing of equal opportunities for all. Left
unchecked, the adverse effects of high or extreme income
inequality are potentially immutable, and will lead to
opportunity capture where the lowest tax rates, the best
education, and the best healthcare are claimed by the children
of the rich. This creates dynamic and mutually reinforcing
cycles of advantage that are transmitted across generations,
making process of social mobility even harder.
Whereas high or extreme income inequality is generally
perceived to have adverse effects on a society as a whole, it
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
30
should be noted that low income inequality or income
equality, in principle, could cause economic, social, and
political problems as well. Regardless of political regime a
country chooses to adopt, if everyone’s income is equal or
slightly different, there should be no incentives for people to
be creative or try to do things differently because no matter
how hard they try or what they do and/or invent, there will be
no extra benefits. A hypothetical example would be to
imagine that a brain surgeon doctor has the same monthly
salary as a garbage collector. In such a society, it is likely that
there would be labour shirking and/or free-riding problems.
The social and economic consequences would be poor
discipline and low initiatives among workers, poor quality
and limited selection of goods and services, as well as slow
technological progress (Soubbotina & Sheram, 2000). These
eventually could put the whole country into an incentive trap
which has negative impacts on productivity and economic
growth. In addition, for socialist, autocratic, or
nondemocratic countries, the time and monetary costs of top-
down monitoring and enforcement should be extremely high
in order to ensure that everybody has equal income or gets
the same ration.5 Except for the ruler or head of state, in a
society where people are forced to have the same wage or
ration, it is usually coupled with social and economic
problems that could give rise to protests, riots, and/or
political up-risings.
Based on the potential harmful effects of both high and
low income inequality on societies as discussed above, it
follows that a country where income inequality is too high
should lower her income inequality while a country that has
too low income inequality should increase her income
5 This excludes the ruler or head of state who typically has extremely
much larger share of income.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
31
inequality in order to avoid such negative effects. Viewed
this way, the logic of an appropriate degree of income
inequality for a country could be established. The next task is
to find empirically an appropriate level of income inequality
for a country. This study hypothesizes that the appropriate
level of income inequality as measured by Gini coefficient
for a country should be positively correlated with population
size of that country. That is a country with small populations
should have relatively lower Gini coefficient than a country
with large populations. This is because it does not matter
whether a country is underdeveloped, developing, or
developed, if a country were to have only one population,
income inequality of that country as measured by Gini
coefficient would be zero. If a country were to have
population larger than one, the chance, that income inequality
as measured by Gini coefficient should rise, becomes higher
due to population heterogeneity.
Having established the logic of the appropriate degree of
income inequality and setting up hypothesis regarding the
positive correlation between the degree of income inequality
and population size, the next section explains research
methodology employed to test hypothesis whether there is
such a correlation. If so, what does the linkage imply about
the appropriate level of income inequality of a country?
3. Research Methodology
The degree of heterogeneity in social, economic, and
political factors, that could result in different income
inequality across countries, makes it difficult to find a
common set of variables that have similar effects for all
countries. It is hard to argue that Singapore with population
of 5.53 million should have the same social, economic, and
political factors affecting income inequality as those of China
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
32
with population of 1.37 billion.6 In addition, the number of
those factors may not be equal for both countries at a given
period of time. For these reasons, this study postulates that
the degree of social, economic, and political diversities for
any country could be reflected by population heterogeneity in
that country. In other words, the information regarding social,
economic, and political factors of a given country is already
compressed in the data on the number of population of that
country. This would allow us to examine the relationship
between the degree of income inequality as measured by Gini
coefficient and the size of population by employing ordinary
least squares regression,7 and to find out empirically the level
of income inequality as measured by Gini coefficient that is
appropriate for the size of population. To examine such a
relationship, this study employs income inequality and
population data of sixty-nine countries in the year 2012 from
the World Bank (2016a; 2016b).
The following section reports the empirical evidence of
the relationship between the level of income inequality as
measured by Gini coefficient and population size and
discusses the issue of an appropriate value of Gini coefficient
for a country given size of population.
6 The data on populations of Singapore and China come from the World
Bank (2016b). 7 It should be noted that the purpose of employing regression analysis is
to examine the correlation between income inequality as measured by
Gini coefficient and population size, not their causation. As argued in
Taleb ( 2012) , in a complex and multidimensional world, ‘ the notion of
“ cause” itself is suspect; it is either nearly impossible to detect or not
really defined.’
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
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4. Empirical Results
Figure 1 illustrates scatter plots of the relationship
between levels of income inequality as measured by Gini
coefficient and natural logarithm of population size by taking
into account the possibility that if a country has only one
population, then the Gini coefficient must be zero.8 The
scatter plots indicate that the relationship between the two
variables should be positive. By employing curve fitting technique, this study finds
that the relationship between the level of income inequality
as measured by Gini coefficient and natural logarithm of
population size is nonlinear that can be best described by a
second-degree polynomial function.9 The following nonlinear
equation is therefore employed to estimate the relationship
between Gini coefficient and natural logarithm of population
size. Gini = + 1*ln(Pop) + 2*[ln(Pop)]2 + (1)
Where
= 0, 1 0, 2 0 and Gini = Gini Coefficient
ln(Pop)= Natural Logarithm of Population Size
= Error Term
8 A country with one population is included in the sample in order to
make the case more physically and mathematically realistic in the sense
that if there were such a country, then income inequality as measured by
Gini coefficient would have to be zero. This is always true regardless of
social, economic, and political background of that country. 9 The authors also tried a linear function, a third-degree polynomial
function, and a nonlinear function that includes natural logarithm of
population size and square root of natural logarithm of population size to
fit the data points but found that a polynomial function of degree two
yields the best fit. These results are available upon request.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
34
Fig
ure 1
. Th
e R
elati
on
ship
betw
een
Levels
of
Incom
e I
neq
uali
ty
as
Measu
red
by
Gin
i C
oeff
icie
nt
an
d N
atu
ral
Logarit
hm
of
Pop
ula
tion
Siz
e
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
35
By using ordinary least squares estimator with
heteroskedasticity-consistent standard errors and covariance,
the estimated nonlinear relationship between Gini coefficient
and natural logarithm of population size is as follows:
Gini = 0.0304*ln(Pop) – 0.0005*[ln(Pop)]2 + (2)
The estimated results from equation (2) and from Table 1
below indicate that the coefficient on natural logarithm of
population size is statistically significant at 5 percent level
while that on natural logarithm of population size square is
statistically insignificant. The results confirm the hypothesis
of positive correlation between level of income inequality as
measured by Gini coefficient and natural logarithm of
population size. Adjusted R2 indicates that variations of
natural logarithm of population size and of natural logarithm
of population size square could explain variation of Gini
coefficient around 25 percent.
Table 1. Estimated Nonlinear Relationship between Gini
Coefficient and Natural Logarithm of Population Size
Explanatory Variable Coefficient P-Value
Constant
0
N/A
Natural Logarithm of
Population Size
0.0304
(5.26)
0.0000
[Natural Logarithm of
Population Size]2
-0.0005
(-1.36) 0.1785
Notes: Adjusted R2 = 0.2455; t-statistics are in parentheses; number
of countries = 69; total of observations = 70 including an
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
36
additional sample where a country has one population which would
result in the Gini coefficient to be zero.
Figure 2 and Figure 3 illustrate the scatter plots between
the estimated Gini coefficient and natural logarithm of
population size and between the estimated Gini coefficient
and natural logarithm of population size square respectively.
In addition, the population sizes, the levels of actual income
inequality as measured by Gini coefficient, and appropriate
values of Gini coefficient estimated by this study for sixty-
nine countries in 2012 are shown in Table 2.
The empirical results from Table 2 show that there are
twelve out of sixty-nine countries that have the difference
between the estimated Gini coefficient and the actual Gini
coefficient by less than five percent.10 If the difference
between the estimated Gini coefficient and the actual Gini
coefficient is allowed to be less than ten percent, there are
twenty-three countries in this sample.11 This indicates that,
given countries’ population sizes, about one-fifth to one-
third of countries in the sample have Gini coefficients close
to their appropriate values while the other two-third to four-
fifth have either too high or too low Gini coefficients. As
explained in Section 2, too high or too low income inequality
could cause economic, social, and/or political difficulties in
the society. Therefore, countries that have high income
inequality should make an effort to reduce it whereas those
with low income inequality should try to increase it.
10 Those countries are Bulgaria, Cyprus, Estonia, Greece, Sri Lanka,
Lithuania, Montenegro, Mongolia, Portugal, Thailand, Turkey, and
Vietnam. 11 In addition to twelve countries listed in the previous footnote, there are
eleven more countries which are Spain, Guinea, Ireland, Italy, Lao PDR,
Luxembourg, Latvia, Mauritius, Philippines, Russian Federation, and
Democratic Republic of Congo.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
37
Fig
ure 2
. Th
e R
ela
tion
ship
betw
een
Est
imate
d G
ini
Coeff
icie
nt
an
d N
atu
ral
Logarit
hm
of
Pop
ula
tion
Siz
e
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
38
Fig
ure 3
. Th
e R
ela
tion
ship
betw
een
Est
imate
d G
ini
Coeff
icie
nt
an
d [N
atu
ral
Logarit
hm
of
Pop
ula
tion
Siz
e]2
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
43
However, this does not mean that countries that have the
levels of income inequality as measured by Gini coefficient
equal or close to the appropriate levels should stay passive. It
is possible that, given approximately equal sizes of
population and Gini coefficients, the ratio of income share
held by the rich to the income share held by the poor in one
country is much higher than that of the other country. In this
case, the former country should come up with public policies
in order to reallocate income among populations by
increasing income of the poor and at the same time reducing
income of the rich in such a way that the targeted or
appropriate level of income inequality remains unchanged.
5. Conclusions, Policy Implications, and Suggestions for
Future Research
This study views that the pursuit of having an
appropriate level of income inequality should be considered
as one of the biggest challenges facing academic scholars as
well as policy makers. Unfortunately, technical and empirical
research on this particular issue are currently lacking. As a
result, most, if not all, policy attempts by governments
around the world to either reduce or raise the level of income
inequality (mostly reducing) are designed and implemented
without prior knowledge about targeted Gini coefficients in
mind. By employing the World Bank’s data on population
size to reflect the heterogeneity in economic, social, and
political factors as well as to level playing field among
countries and on Gini coefficient, the logic and empirical
findings of appropriate levels of income inequality as
measured by Gini coefficient for sixty-nine countries from
this study could be used as a guideline for policymakers
before designing and conducting public policies in order to
pursue the targeted level of income inequality. This study
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
44
conjectures that, for a given population size, countries that
achieve the targeted level of income inequality should
perform better in terms of economic growth and well-being
than those that are far away from their appropriate levels of
income inequality.
In addition, the issue of widening gap between income
(and/or wealth) share held by the rich and income (and/or
wealth) share held by the average population has recently
caught public attention. For example, according to Frank
(2011), heads of the largest corporations in the United States
of America at present earn four hundred times as much as
average workers, compared to forty times as much back in
1980s. Research conducted by Oxfam also indicates that, in
2015, the richest sixty-two people in the world own half of
global wealth (Reuben, 2016). While the main focus among
academic scholars and policymakers has been on the issue of
how to narrow the income (and/or wealth) gap between the
richest and the poorest, this study believes otherwise. It
hypothesizes that the root of the problem may not lie between
income (and/or wealth) gap of the richest and the poorest, but
rather that of the richest and the second richest. The
theoretical idea behind this is that when income (and/or
wealth) of the richest group gets larger than that of the
second richest group up to the point that passes a critical
threshold, it could make the second richest group feels that it
is unfair. It might also be possible that the richest group feels
that their economic, social, and/or political statuses are
threatened by the second richest group. The battle between
the two hegemonic groups could cause chaos in the society
mainly because both the richest and the second richest have
all the resources to influence government policies, to bend
laws, regulations, and constitutions, to create large-scale
propaganda and conflicts of memes among interest groups
and grassroot people, as well as to shape referendum or
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
45
election outcome. It is of interest to examine whether this
hypothesis is rejected or not. If not, then it is worth to find
out what an appropriate income (and/or wealth) gap between
the richest and the second richest groups that yields no
conflict between these two hegemonic groups for the good of
the society.
Moreover, it is of challenge to search for appropriate
gaps of percentage share of income among subgroups of
population in the society such that those who have lower
income feel wholeheartedly that it is fair and square for them
to have less income than those who earn more. These
interesting issues await future research.12
12 The authors thank Suradit Holasut for pointing out these issues.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
46
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Reuben, A. (2016, January 16). Wealth of Richest 1% ‘Equal
to Other 99%’. BBC News. Retrieved from
http://www.bbc.com/news/business-35339475
Soubbotina, T. P. & Sheram, K. A. (2000). Beyond Economic
Growth: Meeting the Challenges of Global
Development. Washington, D.C.: The World Bank.
Streeten, P. (1993). The Special Problems of Small
Countries. World Development, 21 (2), pp. 197-202.
Taleb, N. N. (2012). Antifragile: Things That Gain from
Disorder. New York: Random House.
The World Bank. (2016a). Gini Index (World Bank Estimate)
[Data file]. Retrieved from
http://data.worldbank.org/indicator/SI.POV.GINI
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The World Bank. (2016b). Population Ranking [Data file].
Retrieved from
http://databank.worldbank.org/data/reports.aspx?Code=
SP.POP.TOTL&id=af3ce82b&report_name=Popular_i
ndicators&populartype=series&ispopular=y
Thammasat Review of Economic and Social Policy
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50
South-South Trade Growth Prospects and Policy
Implications
Panit Buranawijarn Candidate for MA (Economics)
Faculty of Economics
Thammasat University
Thailand
The contents of this article do not reflect the author’s affiliations. The
author thanks two anonymous referees for their comments and criticisms,
and Associate Professor Euamporn Phijaisanit, Thammasat University for
comments on an earlier version of this paper submitted for coursework.
All errors rest with the author.
Thammasat Review of Economic and Social Policy
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ABSTRACT
South-South Trade, or more broadly South-South
Cooperation, is the collaboration between developing
countries of the Global South across various dimensions such
as political, economic, and social issues. This paper analyses
trends and developments in the trade between developing
countries in contrast to other orientations of trade, focusing
particularly on China and India. The paper looks at their trade
flows, as well as their other activities which fall under the
aegis of South-South Cooperation. Lastly, the literature on
South-South Trade is reviewed to study the motivation for
engaging and encouraging South-South Trade, as well as its
overall effectiveness. Policy recommendations for the
development of South-South Trade are made based on
evidence from the study.
Keywords: South-South Trade, China, India, economic
development
JEL Classification: F01, F10, F50
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1. Introduction
Throughout history the integration and connectedness of
the world has ebbed and flowed; in modern times this
connectivity and globalisation has been enhanced by
advances in communications technologies that have left a
permanent mark on how the world communicates and does
business. However, the oldest force which has driven this tide
of interconnectedness is the trade between cities, regions and
nations. The wealth and exchange of information that
international trade brings to nations has determined their
success or failure throughout human history.
In economics, the basis for the championing of trade
between nations as a way to raise overall welfare in both rests
with Ricardo’s theory of comparative advantage. Subsequent
theories and models have sought to both build and improve
this idea, as well as attempting to prove and better
understanding the nature of trade empirically. Furthermore,
understanding trade also requires understanding the nature of
firms as recent developments have seen greater focus on the
role of networks, intra-firm trade, and the trade in
intermediates.
These theories and models are helpful in analysing
North-South trade where major differences exist in factor
endowments, or trade between developed countries which
have strong ‘gravitational’ pull towards each other. These
theories present motivations for trade which are purely
pecuniary, however other incentives for trade may also exist:
for example, the European Commission provides a list
benefits that developing countries may receive when
engaging in trade such as increased investment, knowledge
transfers and job creation1.
1 Retrieved from
http://trade.ec.europa.eu/doclib/docs/2012/january/tradoc_148991.pdf
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Building on this, South-South Trade, or more broadly
South-South Cooperation, is the collaboration between
developing countries across various domains including
politics, economics, social, cultural, environmental and
technical. Congruent to this is the notion of the Global South
which is made up of the world’s developing countries (and
hence South-South). The most concise definition for the term
‘developing country’ (and the definition this paper will
employ) is the World Bank’s classification of all countries
that are not high income, or below $12,476 income per
capita. This encompasses 138 of 217 ‘economies’ as the
World Bank defines them2. More concretely, what this
difference in income and development levels translates into
include deficiencies in hard and soft infrastructure like roads,
hospitals, and bureaucratic transparency, weak enabling
institutions for education, political involvement, and the rule
of law, and a poorly developed manufacturing or service
sector failing to provide jobs for skilled individuals. The
motivation for this paper is to understand how South-South
Trade has fitted into the development path of developing
countries, and what it may mean for the Global South as
whole in the future.
This paper studies the trends and developments,
motivations and policies behind South-South Trade through a
review of the literature and data. This will then be used to
formulate policy recommendations. The paper is structured as
a review of the literature which has been written on South-
South Trade, and is split into the following parts: first the
characteristics of South-South Trade are analysed, followed
by a discussion of the influence exerted by two major players
in the Global South, China and India, both in Asia and
2 Retrieved from http://data.worldbank.org/about/country-and-lending-
groups
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beyond. The paper will then examine the effectiveness of
South-South Trade, as well as explore other non-economic
motivations for encouraging the growth of South-South
Trade. Lastly, the paper ends with a series of policy
implications and a conclusion based on the issues which have
been discussed.
2. Literature Review
This main body of the paper explores in the detail the
literature which has been written on South-South Trade and
its characteristics, as well as the importance of certain key
players in world trade and the Global South. Lastly, this
section explores the effectiveness of South-South Trade and
discusses some of the other potential motivations for
developing South-South Trade.
2.1. Characteristics of South-South Trade
To begin the discussion, it is important to paint a broad-
strokes picture of South-South Trade compared to world
trade. Figure 1 shows how exports by developing countries
has changed over time, against the back drop of world trade. Since 1995, total exports by developing countries has
grown modestly, mirroring overall global trends. Total
exports by developing countries, however, has grown faster
than South-South Trade indicating strong growth in exports
by developing countries to developed countries.
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Fig
ure 1
. Exp
orts
by
develo
pin
g c
ou
ntr
ies,
1995
-2015
So
urc
e: U
nit
ed N
atio
ns
Co
nfe
rence
on T
rad
e an
d D
evel
op
men
t/UN
CT
AD
stat
(20
16
)
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Table 1 breaks down exports of merchandise by region,
with the two major regions being Europe and Asia.
Furthermore, China is also the world’s largest exporter of
merchandise accounting for 12.7 per cent of the world’s total
merchandise exports in 2014.
Table 1. World merchandise exports by region/country in
2014
Percentage of world
merchandise exports
North America 13.5
South and Central America 3.8
Europe 36.8
Commonwealth of Independent States 4.0
Africa 3.0
Middle-East 7.0
Asia 32.0
China 12.7
India 1.7
Six East Asian traders 9.6
Source: World Trade Organisation (2015)
Breaking exports down further, at the individual country
level the second largest exporter is the United States,
followed closely by Germany. The largest exporter in terms
of dollar value in the Global South, aside from China, is
Mexico followed by Russia; India is the fourth largest
exporter in terms of developing countries and was globally
ranked 18th in 2015 (United Nations Statistics
Division/Comtrade, 2010). However, the outsized growth of
China and its influence on South-South Trade statistics has
led to some researchers crediting almost all the growth and
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development in South-South Trade as being due to China
(Aksoy & Ng, 2014).
Table 2 below highlights the discrepancies between
developed and developing regions. Total manufacturing
exports in the world amount to 66.2 percent of the goods
trade (the remaining is divided between the trade in
agriculture, and fuels and mining), and the split between
regions is as previously described. What Table 3 shows,
however, is that as a share of their exports or imports,
developing regions (aside from Asia, and of course this
picture is distorted by wide differences in the region) depend
more on imports of manufactures while their exports are
mainly in other sectors.
Table 2. Share of manufactures in total merchandise
trade by region in 2014
Exports Imports
World 66.2 66.2
North America 67.6 75.0
South and Central America 25.5 65.3
Europe 74.8 68.5
Commonwealth of Independent States 22.4 75.6
Africa 20.7 72.1
Middle East 20.7 72.1
Asia 80.0 59.9
Source: World Trade Organisation (2015)
While it is easy to discuss international trade from a
macro perspective, it is also important to remember the ways
and means in which trade is conveyed around the world. In
the developed world, the network of logistics that can provide
consumers with next day (or even same day) delivery is taken
for granted, and it is only remarked upon when it fails. The
picture in the developing world is the complete opposite. The
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World Bank’s 2014 Logistics Performance Index (LPI) paints
a stark picture of the compounding effect that poor
infrastructure and/or poor logistics service providers has on
developing countries. Furthermore, the border control
agencies in developing countries are often poorly equipped
and are unable to provide efficient clearing services, much
less delivering consistent timely outcomes. Arvis, Duval, Shepherd and Utoktham (2013) use data
from trade data from manufacturing and agriculture sectors in
178 countries over the period 1995-2010 to quantify this
effect: trade costs are sharply decreasing in income per
capita. Furthermore, while trade costs all over the world are
falling, they are falling slowest in the lowest income groups.
This has possibly dire consequences for their development,
and poses a significant barrier to their integration into global
trade. De (2006) investigates countries in Northern Asia and
demonstrates the direct effects that trade costs have on trade
volume, and how integration into the world economy is a
direct result of improving trade-related infrastructure and
services.
There is a myriad of reasons for this failure in closing the
logistics gap. Cadot and de Melo (2014) discuss the
experiences learned in the Aid for Trade programme and
provide an excellent insight into the problems that developing
countries face. Issues include the many non-tariff barriers
that developing countries run up against, for example the
inability to meet sanitary and phytosanitary (SBS) regulations
that developed countries impose on agricultural products,
while another issue analysed in the book is the poor
implementation of the programme due to fragmented
government and unclear lines of authority between ministries
in many developing countries.
One other issue that Cadot and de Melo bring up that has
direct relation to South-South trade is the failure in
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realisation of the gains from unilateral liberalisation. In this
situation, a country undergoes liberalisation of its trade
policies, while neighbouring countries do not. This
disconnect in policy and lack of regional coordination
presents particular problems for the least developed and land-
locked developing countries which are highly dependent on
their neighbours as intermediaries for trade into and out of
the country. This lack of regional-level projects is where the
push for South-South Cooperation has a policy space, and
where an intra-regional push for greater cooperation between
neighbouring developing countries may yield benefits.
On the topic of regional cooperation, the failure of the
World Trade Organisation (WTO) in concluding the Doha
Round and the stop-go progress in negotiations since the
Ninth WTO Ministerial in Bali where signs of life seemingly
appeared over the issue of Trade Facilitation has cast doubt
on changes to the multilateral trading regime. Furthermore,
vulnerabilities and alarming weaknesses in global trade
growth and potential increases in protectionist policies
(Evenett & Fritz, 2016) have not been helped by the latest
crisis in the form of Brexit and the relationship between
members of the European Union. It is not surprising that
major exporters like China may be seeking to cultivate long-
term alternatives or simply diversify its pattern of trade.
2.2. Focus: China and India
China and India are two most populous countries in the
world, together comprising nearly 40% of the world’s
population. China, by some measures, is now the world’s
largest economy3 while India is perennially described as the
3 Retrieved from http://www.economist.com/news/finance-and-economics/21623758-chinas-back
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next economic power. Both countries are also undertaking
policy changes designed to address what have been seen as
long term issues: India’s Prime Minister, Narendra Modi, was
elected on a platform of business-friendly policies (though
this has yet to yield significant changes), while President Xi
Jinping of China has been actively rooting out corruption in
the Chinese economic system.
While China and India are two of the leading countries
in the Global South (both are members of the eponymous
BRICS group of nations), relations have not always been
smooth: the Sino-Indian Border Conflict of 1962 still has
effects today with respect to the disputed Kashmir region.
Unrest in the region and border tensions with neighbouring
Pakistan has cemented this as an intractable problem of
sovereignty. Of course, it would be remiss to not mention the
increasingly tenuous and rapidly building issue that is the
South China Sea. How China handles these issues, and its
relationships with regional neighbours and partners, will set
the path for China on the world stage.
Having said the above, there are signs that economic ties
between China and India are improving, and if there is any
bilateral relationship that is likely to shape the course of
South-South Cooperation in the world, it will be the relations
between these two countries. China and India dominate the
economic and political landscape in the Asia-Pacific region.
Furthermore, their push for a South-driven development
process through initiatives such as the New Development
Bank and Asian Infrastructure Investment Bank in the face of
continued economic woes both at home and abroad is an
attempt to find an answer from the South to the global
economic malaise.
At present, however, both China and India are still
highly dependent on the developed world as trade partners.
Table 3 and Table 4 show China and India’s major trading
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partners by share of trade flow. It is interesting to note that
China’s major partners on both the import and export side are
firmly in the North, and that while China registers as one of
India’s major partners for exports and imports, India is but
one of China’s minor partners.
Given the evidence, it is possible to see that, despite the
rhetoric coming from both countries on South-South
Cooperation, the two countries are still mostly dependent on
developed countries as export markets and import sources for
their production processes (for the time being). This can be
seen at the 2-digit SITC Rev.4 level; China is a major
importer of electrical machinery and parts, as well as raw
materials in the form of petroleum and its related products, as
well as metal ores and scrap. On the export side, China’s
major exports are telecommunications and related equipment,
electrical parts, and computer related products. Clothing and
apparel also remains a major export of China (United Nations
Statistics Division/Comtrade, 2016).
Table 3: China’s Major Trade Partners in 2015
Export Destinations Share (%) Import Sources Share (%)
USA 18.0 South Korea 10.4
Hong Kong 14.6 USA 9.0
Japan 6.0 Taiwan 8.6
South Korea 4.4 Japan 8.5
Germany 3.0 Germany 5.2
Vietnam 2.9 Australia 4.4
Source: United Nations Statistics Division/Comtrade (2016)
There is, however, an important caveat when discussing
China’s trade. China’s position as the leading manufacturer
and exporter of merchandise is due to its positioning in the
global value chain as the central assembly centre. This poses
an issue when analysing trade statistics as it is difficult to
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determine China’s actual value added in the production
process, with the actual amount likely to be lower than
reported values in trade statistics, thereby flattering to
deceive China’s actual technological capabilities in
manufacturing (Xing, 2014). Having said that, Chinese firms
are unlikely to remain idle, a good example being the
smartphone industry. Though the Apple iPhone may be
China’s most famous smartphone ‘export’, domestic
manufacturers such as Huawei, OPPO, and Xiaomi are fast
growing in both sales and reputation (Kastrenakes, 2016).
Table 4: India’s Major Trade Partners in 2015
Export Destinations Share (%) Import Sources Share (%)
USA 15.2 China 15.8
UAE 11.3 Saudi Arabia 5.5
Hong Kong 4.6 Switzerland 5.4
China 3.6 USA 5.2
United Kingdom 3.4 UAE 5.2
Singapore 3.0 Indonesia 3.6
Source: United Nations Statistics Division/Comtrade (2016)
On the other hand, India’s trade profile is suggestive of a
country at a lower level of manufacturing development. Their
major export is refined petroleum and related products which
has arisen because of their strategic location linking the
Middle-East (the source of India’s unrefined oil) with the rest
of Asia (India’s other major exports include non-metallic
minerals, clothing and apparel, and textile yarns and fabrics).
Of note on the import side is the country’s voracious appetite
for gold which is both used as jewellery and a safeguard
against an ill-perceived financial system4. Given China’s role
4 Retrieved from http://www.economist.com/blogs/economist-explains/2013/11/economist-explains-11
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as the largest producer of gold in the world, and given the
recent establishment of the Shanghai Gold Exchange
(Songwanich, 2016), there is a potential for issues to arise in
the future over the gold trade.
These trade profiles highlight the possible differing
priorities for China and India, and it remains to be seen if the
differences will bring them closer to engage in trade for their
mutual benefit, or if it will drive them apart.
2.3. South-South Cooperation: looking beyond trade
Trade, though important, is but one consideration for
countries in the Global South. China views South-South trade
as but one facet of its aid strategy along with technical
assistance and capacity building, investment in infrastructure,
and preferential trade agreements to name a few (OECD,
2012a). India, too, views South-South trade as part of a wider
cooperation strategy between developing countries designed
to enhance capabilities for self-development. Both China and
India have had a long history as donors; both China and India
were part of the Bandung Conference in 1955 which laid the
ground work for the Non-Aligned Movement, a part of which
lives on in the non-interference nature of aid rendered as part
of the South-South Cooperation framework (OECD, 2012b).
Initially, China focused its aid on neighbouring countries
sharing, at the time, similar political views such as North
Korea and Vietnam. After the Bandung Conference however,
China gradually expanded its aid programme eventually
stretching to include Western Asia, Africa, and Latin
America. Indeed, since 2009 China has been Africa’s largest
trading partner, and China’s aid to Africa can even
overwhelm domestic conditions; in 2008 China signed a deal
to provide a 6 billion US dollar loan to the Democratic
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Republic of the Congo which had a GDP of 11.2 billion US
dollars in the same year (Sun, 2014).
India’s aid flows have mostly been targeted towards
countries in its vicinity such as Bhutan, Afghanistan,
Maldives, Nepal, and Sri Lanka. Like China, India has also
directed a significant portion of its aid to the African
continent. The majority India’s aid is focused around training
civil servants, engineers, and public sector managers, with
smaller amounts being directed towards concessional export
credits for purchasing Indian goods and services (OECD,
2012b). This aid focus towards generating business
opportunities for home country firms is also reflected in
Chinese aid which is designed to provide business
opportunities for Chinese state-owned firms. While recipients
of aid obviously benefit from these development projects and
assistance, it is also important to question the long-term
viability of an aid strategy where the focus is on providing
opportunities for home country firms rather than developing
the recipient country (Sun, 2014).
2.4. The effectiveness of South-South Trade: empirical
evidence
The focus of this literature review has revolved around
the significance of South-South trade. While the strong
empirical basis which links trade and economic growth is
acknowledged (indeed the push for South-South trade would
otherwise not make sense), as well as the success of export-
oriented policies that so benefited the Asian tigers from the
early 1960s to the 1990s, the literature on those topics will
not be restated here.
The narrative thus far has been one of North-North and
North-South flows driving world trade. Page (2004)
highlights the relative unimportance, thus far, of South-South
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trade. She notes that the major markets for developing
countries all over the world are still in the North, and of the
South only India, and potentially China, are major trading
partners for most developing countries. Page does note,
however, that liberalising India’s high tariff rates could be
beneficial for other developing countries, but the chances of
this given India’s own status as a developing country are low.
There is also an empirical and theoretical basis for the
benefits that arise from increasing South-South trade; Ratna
(2009) documents the rise of South-South trade from 1990 to
2006, and highlights the channels through which South-South
trade can be a driving force for growth. Ratna makes these
claims by asserting that given the higher level of barriers in
the South, liberalising South-South trade has the potential to
generate more welfare compared to further liberalisation of
North-South trade. Secondly, developing countries provide
many of the intermediary goods used in final production, and
thus reducing trade barriers between countries in the South
will allow their goods to become more competitive price-
wise.
The trend of late in Official Development Assistance
(ODA) has also bolstered this: Aid for Trade now accounts
for roughly a third of all ODA (Cadot & de Melo, 2014).
Hühne, Meyer and Nunnenkamp (2014) show that Aid for
Trade has been beneficial for promoting South-South trade.
While their focus on South-South trade was to alleviate
endogeneity concerns in measuring North-South exchanges,
their conclusions show the benefit that developing countries
would gain from increased Aid for Trade flows.
Having said that, even though South-South trade was
envisioned to promote a more symmetrical exchange, things
have not always turned out that way. Udeala (2010) explores
the trade between Nigeria and China, and shows that trade
outcomes have been tilted in China’s favour, thereby
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resembling the interaction between countries engaged in
North-South trade.
Furthermore, given the present small size of South-South
trade relative to other trade flows, the possible impacts are
hardly significant: Behar and Cirera (2010) employ gravity
models to show the positive impacts that trade liberalisation
in the form of the effect of free trade agreements on bilateral
trade. While they show that developing countries
unequivocally benefit from more liberalised trading regimes,
they are unable to come to a conclusion on whether engaging
in more South-South agreements would be beneficial to
developing countries. They come to this conclusion due to
their model’s inability to capture the perceived technological
benefits of engaging in North-South trade, compared to the
deeper economic and political ties engendered by South-
South trade.
2.5. Other motivations for South-South Trade
Beyond the reasons explored in the previous section,
there are other, non-economic, reasons for why countries are
promoting South-South Cooperation. China has ramped up its
efforts to be recognised on the world stage, through
economic, diplomatic, and military means. Examples of these
efforts include the promotion of the Renminbi and the
establishment of the Shanghai Gold Exchange, their
rapprochement with India and Russia, and on a somewhat
different note, the nexus of security, military, and power
issues that is the South China Sea. They are not, however, the
only players in the Global South trying to make their voice
heard: Putin’s Russia is again making a resurgence in global
politics, if not always for peaceful reasons. An agenda
pushing South-South Cooperation would certainly suit these
two countries who have recently reached an agreement for
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increased natural gas imports. This deepening in Sino-
Russian ties is a potential worry for developed countries such
as Australia (which exports gas and coal to China) or
countries in the EU which depend on Russian gas imports
(Paton & Guo, 2014).
The continued failure of WTO members to bring a close
to the Doha Development Round has not improved the
situation. Instead, it has contributed to a proliferation of
Regional Trade Agreements (RTAs). These are free trade
agreements that are usually centred on a particular
geographical location, for example the Trans-Pacific
Partnership (TPP) which is part of the United States’ ‘pivot to
Asia’, as well as the Regional Comprehensive Economic
Partnership (RCEP) which covers the ASEAN group plus its
major economic partners minus the USA. While progress
with the TPP may be seen as a set-back for China, the pursuit
of increasing South-South Cooperation would help to
mitigate potential diversionary flows that arise from the TPP.
Newfarmer (2006) counts over 200 RTAs that are in force,
with the vast majority of RTAs being South-South, however
despite this proliferation in agreements, the magnitude of
South-South trade flows means that of the 30 percent of
world trade which happens between reciprocal RTA
members, most still involve the US or EU. However, given
the political uncertainties across the globe, with each region
experiencing its share of instability it is difficult to see what
path future developments may take. The extent to which
these uncertainties are affecting developed countries,
however, may help to push more developing countries to
further strengthen South-South ties in the near future.
There are two divergent views on what this increase in
regionalism means for world trade, coined as ‘stumbling
blocks’ or ‘building blocks’ by Jagdish Bhagwati (Frankel,
1997). The ‘stumbling block’ view imagines the formation of
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a few major trading blocs with highly liberalised internal
trade, and relatively less liberalised external trade thereby
creating a cycle where trade occurs mostly between members
of the same trading bloc. The ‘building block’ view, on the
other hand, postulates that over time market pressures will
lead to an equalisation of prices and barriers, thereby
reaching an end-game of a fully open multilateral system
through plurilateralisation. This is of course under the
assumption that there aren’t political barriers to prevent this,
such as special interest groups within or between countries
that deliberately hinder efforts at integration.
Looking at South-South Cooperation through this
political lens, it is not difficult to see why major developing
countries such as China would seek to develop closer ties to
other countries part of the Global South. While China has a
history of foreign aid which goes back some 60 years, the
volume of aid has increased significantly in the last decade
(OECD, 2012a). Sun (2014) explores some of the reasons for
China’s expansion of aid in Africa: Sun states that while the
primary factor driving China’s investment in Africa is
probably due to the continent’s natural resources, China is
also seeking to bolster its security, political, and ideological
interests. One possible reason is the support that the African
voting bloc of 54 members in the United Nations General
Assembly brings (this is roughly a quarter of the votes in the
UN GA).
Not everyone views these developments in a positive
light however. Hanauer and Morris (2014) highlight some of
the negative impacts that China’s investment has had on
Africa, particularly stemming from China’s ‘hands-off, no-
interference’ approach to foreign policy. They characterise
this as having potential destabilising effects in the region,
through supporting corrupt practices and oppressive regimes.
It should be noted that the report is told from the perspective
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of the United States’ security interests. Furthermore, the
authors envision China’s involvement as potentially freezing
out the United States’ opportunities on the region.
These geo-political considerations should thus be kept in
mind whenever evaluating the increased push for South-
South Cooperation.
3. Policy Implications for South-South Trade
The central question to answer here is, of course, should
developing countries push the agenda to deepen South-South
trade? The empirical evidence backs the view that South-
South trade can help promote economic growth and
development, though is this more effective than broad trade
liberalisation?
In 1993 Daniel Trefler used a Hecksher-Ohlin-Vanek
(HOV) model augmented with productivity differences to
show that the HOV theorem does, in fact, work empirically
on a general basis (Trefler, 1993). Before that however, the
HOV theorem was able to explain much of the trade flows
between North and South countries. This is both straight
forward and intuitive: developed countries in the North
would export their abundance in capital, while developing
countries would export based on their abundance in labour.
With this in mind, it is clear to see why most trade still occurs
along North-South lines.
On the other hand, the increased unbundling of the
production process may be a boon for the South-South
Cooperation agenda. Baldwin (2014) summarises the effects
on industrialisation of what he terms the second unbundling
in rather unflattering terms. While industrialisation is now
easier for developing countries, it is less meaningful as they
become a part of the production line. This reduces the
chances of knowledge transfers and spillovers as the
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
70
technologically demanding tasks remain in the North. Thus,
the benefits from engaging in North-South trade are reduced,
putting it on more even footing with benefits which may be
accrued from South-South trade flows.
Is there a policy space for South-South Cooperation in
this unbundling? The issue still is that countries in the South,
for the most part, lack the technological know-how and
capital stock of developed countries. It is unclear how
pushing for increased South-South Cooperation would
alleviate this problem. Instead the policy implication here
would still be the same message of developing local human
capital capabilities, thereby improving the capacity for
knowledge absorption and moving up the value chain.
If the reason for the South-South Co-operation agenda is
not economic, then we must refer back to the ‘Other’
motivations explored earlier. Indeed, the Financial Times, in
response to Krugman’s assertion that the TPP is insignificant,
claims that the economist is missing the point entirely. For
the United States, the deal is much more about fostering
tighter economic cooperation and enhancing their security
than it is about the economic gains from trade5. For now,
however, it still remains to be seen if the TPP will survive to
the point of ratification and enforcement by all member states
given the increasingly tenuous political situation in the
United States.
One aspect in which the TPP can be seen as
revolutionary is the inclusion of ‘FTA-plus’ or ‘Singapore
Issues’6. The successful completion and establishment of an
5 Retrieved from http://blogs.ft.com/the-world/2014/02/tanks-or-cars-why-krugman-is-missing-the-point-on-trade-deals/ 6 Introduced at the First WTO Ministerial in Singapore, these issues are
trade and investment, trade and competition policy, transparency in
government procurement, and trade facilitation.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
71
RTA incorporating these issues could potentially act as a
model for similar agreements to be reached elsewhere.
However, many in the South (including China) view that they
are not sufficiently prepared to address these issues, not to
mention enforcing stringent laws on intellectual property
rights and domestically unpopular investor-state dispute
settlement mechanisms. Thus, viewing South-South
Cooperation as a collective bargaining block to slow down
these developments is another plausible consideration.
The discussion thus far has mostly focused around major
developing countries in the South, namely China and India.
The implications of increased South-South Cooperation are
very different for them compared to the vast majority of
developing countries who lack the economic and political
leverage to tilt proceedings in their favour. It should thus then
be hoped that the spectre of South-South Cooperation is not
used to drive a wedge between North-South trade.
What policy implications can be drawn from this? One
would argue that for the majority of developing countries, the
answer is not very different from standard export-oriented
economic development policies. However, as stated earlier
trade costs in the developing world are still the highest,
leaving a lot of room for improvement in this area. Focusing
on the issues that surround that first (for example improving
hard and soft infrastructure to lower trade costs, cutting
bureaucratic red tape) is a difficult enough challenge for
many developing countries. To take full advantage of the
possibilities that South-South Cooperation could bring,
however, means having products to sell. This involves
domestic development of industries and small businesses, as
well as the development of rural areas. An example of this
would be One Village One Product (OVOP)-style policies
run in countries such as Thailand and Malawi which are
based on the original (now defunct) rural development
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
72
programme in Oita, Japan (Kurokawa, Tembo & te Velde,
2010).
4. Conclusion
The development of South-South Cooperation will not
be the be-all end-all for economic growth, development and
the shape of world trade. While more of the share of
manufacturing and production may shift to the developing
world in the coming years, and indeed may even be
accelerated by continued weaknesses and instabilities in the
developed world, a lot of that will still be due to China
(ADB-ADBI, 2014). Having said that, even China is immune
from potential threats to its economy as its growth slows
down (Einhorn, 2016). This may present itself as an
opportunity for other developing countries (such as those in
South-East Asia) already part of global value chain, though
obviously, any economic troubles in China will have large
knock-on effects for global economy.
For the remaining developing countries, however, the
long and arduous road to economic development is still a
process that requires a multi-faceted and all-inclusive
approach. South-South Cooperation should be pushed for
what it can achieve, and that is increased freer trade among
developing countries, but the industrialisation and
development process will still require inputs and engagement
with developed countries. While South-South Cooperation
thrives through non-interference, developing countries will
need to understand that continued development, growth, and
stability will depend on reducing inefficiencies in the
domestic economy.
Furthermore, for countries dependent on aid from China
and India, a long and hard look is required to look at the
long-run demands for growth in the country. While
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
73
infrastructure developments and outside assistance provides
short-term opportunities for improvement, it must be backed
up by improving domestic conditions for job seekers and
local businesses. However, for developing countries
dependent on North-South trade, weaknesses in the global
economy engendered by domestic instabilities in many
developed countries should be a clear warning sign. Fostering
greater South-South ties, and improving domestic capabilities
to move up the value chain should be a priority for these
countries.
To conclude, South-South Cooperation presents many
potential benefits and pitfalls, and requires each individual
country to be aware of their own situation and what the best
way to make use of South-South Cooperation to better their
growth prospects may be.
Thammasat Review of Economic and Social Policy
Volume 2, Number 2, July - December 2016
74
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