Objeto de estudio

This section describes the model’s theoretical justification. These theories combine the mercantilism concept, the impact of trade policy according to traditional as

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well as new trade theory, and the perceived impact of FDI on growth, the EGT, the macroeconomic policy approach and the open economy.

4.5.2.1 Mercantilism Concept

Mercantilism was the principal economic thought between 1500 and 1750. Under this concept, the wealth of a nation can be determined by its precious metal holdings. Mercantilists strongly believe that in order to increase wealth, the government must control trade by using policies designed to maximise trade balance. Consequently, exports can be subsidised whereas high quotas and tariffs are applied to imports. This relationship between Thailand’s trade and growth can be seen in equation (7) by including the trade variable.

Mercantilism generally supports protectionism as opposed to Smith’s laissez faire. Mercantilism can be applied consistently with the overall theme of the thesis, as well as the policy recommendations in Chapter 7 by the following rationale. Although the government must exert trade policies to achieve a favourable trade balance, it should be conditional to the obligated free trade requirement, as is the world’s trend today.

4.5.2.2 Impact of Trade Policy According to Traditional Trade Theory

Based on traditional trade theory, trade liberalisation through decreasing import and export barriers is the best policy in term of welfare. This welfare can be improved via gains from specialisation (Ricardo, 1817). However, this point of view is valid only in the case where perfect competition exists. Moreover, the related markets must not have any other distortions. If this situation occurs, then restricting trade policy will become the second best policy. This traditional relationship between trade and Thailand’s growth can be seen in equation (7) by including a trade variable.

4.5.2.3 Impact of Trade Policy According to New Trade Theory

The new trade theory relaxes the assumptions of perfect competition and the absence of market failure. This theory states that even though perfect competition conditions emerge, trade restrictions still lead to welfare improvement (Brander and Spencer, 1983; Krugman, 1986; Dixit, 1986; Grossman, 1992; Klodt, 1992). This theory

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describes the channel of growth through trade in three dimensions. First, trade exploits specialisation via comparative advantage. Second, the impacts of knowledge and technology flows can accelerate growth. Third, the early stages of industrialisation can be fostered by capital accumulation via lower costs of capital goods and technologies. This new trade theory relationship between trade and Thailand’s growth can be seen in equation (7) by including a trade variable.

4.5.2.4 Impact of FDI on Growth

The impact of FDI on growth can be explained from various perspectives. In view of the new growth theory, the technology generating process, to be cutting edge, causes growth by its specific characteristics (Grossman and Helpman, 1991). So, it can be called the endogenous growth theory. In contrast, the neoclassical growth theory explains that as capital accumulation proceeds, growth will slow down due to the diminishing returns to capital. This is the reality paradox because new technologies are accompanied by new capital goods. Therefore, capital accumulation in newly industrialising countries can be regarded as the exogenous technological diffusion process. The growth performance in much of developing Asia is the consequence of this process.

Solow’s growth model attributes economic growth to capital accumulation, labour force growth and technological change (Bhagwati, 1994). For the developing economies, capital accumulation can be generated by FDI via the lower costs of capital supplies. The impacts of knowledge and technology spillovers and diffusion can improve the technology transformation. Bhagwati presented the effect of trade policy regarding to gains from FDI in the host country in 1978. This theory was also extended to an immiserising growth theory (Bhagwati, 1994). It is described that FDI flows to a country with import substitution but restrictive trade policy can slow growth. Because FDI mostly moves into high capital intensity production, these countries lack a comparative advantage. On the other hand, the export promotion regime is superior to the import substitution regime in reaping gains from FDI. Beyond this regime, low labour cost and an abundance of raw materials in the host countries attracts FDI. Consequently, the internationally competitive export output production expands.

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FDI is considered an important channel of knowledge and technology spillover from developed to developing countries through research and development including human capital development (Grossman and Helpman, 1991). This can be created by multinational enterprises (MNEs) subsidiaries in many ways such as local staff training, increasing managerial skills, and stimulating backward and forward related industries production, enhancing the competitive environment and technological transformation. However, these benefits need a conducive investment and trade policy. The correlation between FDI and growth can be seen in equations (5) and (7) by including the FDI variable.

4.5.2.5 Endogenous Gravity Theory (EGT)

The gravity theory is the most commonly used to describe the pattern of trade. The main concept of the gravity theory is that bilateral trade between countries is determined by the geographic distance separating these countries that is used to construct a proxy for transportation and other transaction costs, and the addition of economic size of these countries measured by their GDPs. It can be seen that this theory comprises only the geographic and economic size aspects.

The EGT, an endogeneity extension of the standard gravity theory, has been developed to link trade and growth between say two trading partners, by not only concerns about geographic and economic size (or population for economy size) attributes, but also by comprehensive macro-economic and micro-economic theoretic factors (Tran Van Hoa, 2004a and 2004b) and in the time domain. The relationship among the variables of the EGT model can be seen from equations (7) and (8) by including trade between Thailand and its partners and contributing variables.

4.2.5.6 Macroeconomic Policy Approach

The classical macroeconomic policy approach of Adam Smith believed in the market mechanism adjustment or invisible hand, that is the economy could adjust automatically to the equilibrium without government intervention (Keynes, 1936). On the other hand, the Keynesian macroeconomic approach disagreed with the classical thought. This approach strongly believed that government interventions are necessary to equilibrate the economy. There are many intervening policies that can be implemented

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by government for example fiscal, monetary, and industrial and trade policy. The impact of applying government intervention using fiscal, monetary, exchange rates and trade and industrial policies on growth can be seen in equation (8) by including the government budget, interest rate and unemployment rate variables.

4.5.2.7 Open Economy

The small open economy can be affected by not only internal factors but also external factors (Mundell, 1960; Flemming, 1960). There are many examples of these external factors, e.g. world economy, world interest rates, global crises and regional shocks (see Figure 1.1). Because Thailand is a small open economy, it is necessary to incorporate the external crises and shocks variables into the model. Furthermore, there is considerable evidence supporting the fact that the Thai’s economy is affected by these factors. The effect of these external crises and shocks can be seen in equations (7) and (8) by including both the external crises and shocks as dummy variables.

4.6 RELEVANCE OF THE MODEL TO THAILAND’S DEVELOPMENT AND