The Impact of Trade Liberalization on the Employment Level in Sri Lanka

Transcription

1 58 The Impac of Trade Liberalizaion on he Employmen Level in Sri Lanka Herah H.M.S.P., Cao Liang and Cheng Yongbing Absrac This paper examines he relaionship beween rade liberalizaion and employmen level of Sri Lanka. Accordingly, he main objecive of he sudy is o invesigae he degree of relaionship beween rade liberalizaion and employmen level of Sri Lanka. The secondary daa were used o analyze he sudy problem during he ime period. Daa published by he Deparmen of Census and Saisics and he Cenral Bank of Sri Lanka were used. The behavior of major variables which are direcly relaed o rade liberalizaion and employmen were analyzed quaniaively. The presen sudy has employed Ordinary Leas Square mehod (OLS) o assess he muliple regression model. In assessing he effecs of rade liberalizaion, empirical model mainly employed hree independen variables, impor peneraion raio, expor inensiy and weighed ariff rae, o disenangle he rade effecs on employmen wih several conrol variables. Gross domesic produc, capial labor raio, foreign direc invesmens and real wage rae are he major conrol variables included in he empirical model. As he major finding of he sudy, i is concluded ha one percen increase of expor inensiy increases he employmen by percen. Also, impor peneraion raio has a significan negaive effec on Sri Lankan s oal employmen; one percen increase of impor peneraion raio leads o per cen reducion of counry s oal employmen. The regressor which is included o he model, weighed ariff rae, is no saisically significan. Saisically significan coefficien for capiallabor raio indicaes ha one percen increase resuls o decrease employmen by percen. Key Words: Trade Liberalizaion, Employmen, Expor Inensiy, Impor Peneraion Inroducion Sri Lanka enered o he free rade environmen in 1978 afer he severe closed economic period during he period. Low economic performance during he closed economic era moivaed o move he counry for more liberalized economic environmen. Average annual economic growh rae during ha period was less han 3 percen. Also he counry experienced high unemploymen level in his period. One of he major reasons for he civil unres prevailed during his period was his high unemploymen level. Sri Lanka 58

2 59 experienced highes unemploymen level which is 24 percen in 1972 and average rae was 17 percen during period. As a resul, one of he major objecives of opening up he economy is o generae more employmen opporuniies o decrease he high unemploymen rae prevailed during he closed economic era. Eemploymen generaion is a vial issue o address in he developing world. Wih higher populaion growh of developing counries, hey are facing a severe issue of generaing employmen opporuniies o newly enered laborers o he labor force. Limied marke of hese counries has become as he major barrier for domesic producers o expand heir business and his may work as a consrain o creae new job opporuniies in hese counries. Therefore limied marke and less generaion of employmen opporuniies has become a major problem o be solved by governmens of developing counries. Therefore employmen generaion has become a major issue in he poliical scenario as well. Therefore economiss who have done research on inernaional rade are advocaing developing counries o sar expor oriened indusries (EOI) in heir counries o generae new employmen opporuniies o address he problem. Wih his backdrop, he primary objecive of his sudy is o invesigae he rade liberalizaion and is impac on Sri Lanka s employmen generaion in aggregae level during he pos liberalizaion period. Analyical conex and Lieraure Review Regarding he argumen on free rade and employmen linkage, he Hecksher Ohlin model which is well popular rade heory in inernaional rade provides a sound heoreical basis for his argumen. According o he Hecksher-Ohlin heory, a naion expors he commodiy whose producion requires he inensive use of he naion s relaively abundan and cheap facor and impors he commodiy whose producion requires he inensive use of he naion s relaively scarce and expensive facor. In shor, Hecksher-Ohlin heory demonsraes ha he relaively labor-rich naions expor relaively laborinensive commodiy and impors he relaively capial-inensive commodiy. Also capial rich naion expors he relaively capial inensive commodiy an impors he relaively labor inensive commodiy. 59

3 60 Low Income Low Produciviy Vicious Cycle of Povery Low Savings Low Invesmen Figure 1: Vicious Cycle of Povery Therefore many economiss have given increasingly heir ineres on rade liberalizaion o enhance he economic developmen. Theoreical explanaions always suppor on free rade for increasing producion of economies. I explains ha free rade enables world economies o consume beyond heir producion possibiliy froniers. Moreover inernaional rade enables economies o allocae heir scarce resources more efficienly from non producive secors o producive secors. Inernaional rade permis developing counries o increase he performance of no only heir expor secor bu also he oher non producive secors of he counry via he spread of echnology. In addiion o he performance improvemen in merchandise, services and agriculural secors in economies, rade has become a significan facor o improve he invesmen level of developing economies. One major barrier for developing counries o escape from he vicious cycle of povery is he low level of invesmen. Due o he low per capial income level of developing counries has led o significanly conrac he savings and invesmen level of economies. Hence economies which experience hardships are wih lack of savings hereby lowering he invesmen and counries are sruggling o escape he vicious circle of povery. Therefore expor le growh may lead o developing counries o escape from his vicious cycle of povery via increased income, savings, invesmen and produciviy. Ulimaely, increased oupu wih rade liberalizaion can increase more job opporuniies o people and increase he employmen level of economies. 60

4 61 Lieraure provides numerous sudies on invesigaing rade liberalizaion and employmen linkage. However, hose sudies have no been able o produce clear linkage beween rade liberalizaion and employmen. While some sudies provide evidence for he relaionship beween rade liberalizaion and employmens oher sudies provide weak or no relaionship beween rade liberalizaion and employmen. Sankaran, Abraham and Joseph (2010) argue ha reason for mixed bag of resuls on he rade liberalizaion and employmen relaionship is due o counry specific issues. Lieraure on rade and employmen provide few ways which and affec inernaional rade on employmen of counries. Firs, employmen can be affeced by impor changes hrough rade liberalizaion. I is explained ha rade liberalizaion can impac on imporaion of raw maerials, inermediae and capial goods and can subsiue labor (Rodric,1997; Feensra and Hasan,1996; Hasan, Mira and Ramaswamy,2007). However, his argumen is challenged by some researchers and hey explain ha impacs on employmen due o imporaion of inpus depend on he naure of impors (Davis and Mishra, 2007). In his case, if impors are no subsiues for domesic producs bu are complemenary o hem rade liberalizaion can enhance he employmen in he domesic counry. Based on he above facs, i can be argued ha when impored inpus are largely subsiues o labor rade can creae negaive impac on employmen and if impored inpus are largely complemens o domesically produced inpus rade can creae posiive impac on employmen in home counry. Secondly, increased expors wih rade liberalizaion can generae posiive impac on employmen and his is called as he scale effec of rade on employmen. Since he demand for labor is derived demand, any increased demand for final goods can increase he demand for facors of producion which were used o produce hose goods. Hence labor inensive counries, paricularly developing counries have opporuniy o specialize on labor inensive commodiies and expor he surplus of hose wih freer rade liberalizaion environmen. In his conex, since Sri Lanka is relaively labor abundan counry she has opporuniies o specialize on labor inensive commodiies and expor he surplus o world marke wih rade liberalizaion. Ulimaely, his can increase he employmen level of he counry. Finally, employmen level of rading counries can be affeced via he changes of rade polices of hose counries (LaRochelle,2007; Revenga, 1997; Brander, 1981;). In his conex, rade barriers of home counry and foreign counries can impac on employmen level of hem. Brander (1981) and LaRchelle (2007) explain ha when he home counry decreases ariffs or any rade barrier would resuls o increase he sales of foreign firms in home marke. On he oher hand, when foreign firms decrease he ariffs or any rade barrier would resuls o 61

5 62 increase he sales of domesic firms in foreign marke. Also he opposie is rue when home counry and foreign counries increase he ariffs and oher rade barriers on heir raded commodiies. In a major sudy of rade liberalizaion and employmen, Sankaran, Abraham and Joseph (2010) have developed a model o disenangle subsiuion effec, scale effec and rade policy effec of rade liberalizaion on employmen in India. Using several oher indicaor variables, capial labor raio, real ne value added, real emolumens per employee, man days los per employee, hey found ha rade liberalizaion have creaed negaive impac on employmen of India. Furher hey argue ha his resul migh be due o India s capial-inensive naure of he composiion of rade. In invesigaing he impac of subsiuion effec of rade liberalizaion or impor peneraion of rade reforms on employmen, Feensra and Hansam (1996) ; Qnaran (2008) have found a negaive relaionship wih impor peneraion and employmen. Feensra and Hansam show ha employmen in Unied Saes of Americas has been decreased due o impor peneraion. Also, one of major findings of Onaran is ha peneraion has caused o lessen employmen by 1.8 percen in Ausrian manufacuring indusries. In anoher sudy by Sen (2008) for idenifying rade liberalizaion and employmen relaionship hey have found ha inernaional rade has rivial posiive impac on manufacuring employmen in India, and concluded ha rade liberalizaion is no he main he major source of job creaion for India s large pools of surplus unskilled labor. Mehodology Daa The sudy is mainly based on secondary daa. In idenifying he impacs of rade liberalizaion on employmen daa were colleced on a specific ime inerval. The ime period seleced is from 1990 o Since he sudy is based on secondary daa, basically sudy uses daa on expors, impors, employmen, gross domesic produc, ariffs published in annual repors of Cenral Bank of Sri Lanka (CBSL) and various annual and monhly repors issued by he Deparmen of Census and Saisics of Sri Lanka. As he sudy is based on ime series daa for wo decades, price effecs of variables are removed by using consumer price index (CPI). In his conex, he price effecs of Gross Domesic Produc, oal expors, oal impors, foreign direc invesmen and fixoloo9ed capial formaion are adjused o remove inflaionary effecs. 62

6 63 Mehods of Daa Analysis The variables idenified in he main objecive of he sudy are esed by employing quaniaive analyical mehods o make accurae and reliable conclusions. Therefore, simple saisical echniques as well as advanced saisical mehods are applied in he sudy. Descripive saisical echniques, simple and muliple regression analysis are used o assess he degree of relaionships among variables concerned in he sudy. Specificaions of Empirical Model The sudy uses ordinary leas square (OLS) mehod o derive simple and muliple regression models which are used o analyze he impacs of rade liberalizaion on employmen generaion of Sri Lanka. In he empirical model wo vial independen variables have been consruced o analyze he rade and employmen relaionship. Accordingly, impor peneraion raio and expor inensiy are employed o magnify he impac of rade liberalizaion on employmen. Impor peneraion helps o evaluae he impor compeiion. Also his measure can be used o separae he effecs of impor compeiion from expor orienaion on he efficiency in use of labor (Sen, 2008). According o Sen (2008) impor peneraion can be compued by dividing he oal impor from he domesic demand and presen as a percenage (impors/ oupu+ impors-expors). Expor inensiy is calculaed as o a raio of oal expors o he value of oal oupu (Expors/Oupu). The effec of expor on employmen depends on he naure of expor (labor inensive or capial inensive) and he correlaion can be negaive or posiive (Sankaran, Abraham and Joseph, 2010). The sudy mainly employs regression analysis o achieve he objecive of he sudy. Empirical model which is employed in he presen sudy can be described in equaion 1. EMP (1) 0 1XI 2MPR 3WTR 4FDI 5GDP 6KLR 7 RWRI u Where, EMP = Employmen XI = Expor Inensiy MPR = Impor Peneraion Raio WTR = Weighed Tariff Rae 63

7 64 Resuls FDI = Foreign Direc Invesmen GDP = Gross Domesic Produc KL = Capial Labor Raio RWRI = Real Wage Rae Index U = Error Term The presen sudy employs muliple regression echnique o disenangle he effec of rade liberalizaion on employmen of Sri Lanka. Since he esimaion of he empirical model is based on ime series variable all he variables were employed afer making hem saionary. Augmened Dicky fuller es confirms ha all he variables of he empirical model are saionary wih firs deference of hem. The model is esed for auocorrelaion by using Durbin's alernaive es for auocorrelaion and Breusch-Godfrey LM es for auocorrelaion and found ha model is free from auocorrelaion. In esing for heeroskedasiciy, Whie's es is employed and i confirms he homoskedasiciy in he error erm of empirical model. Finally, he model was esed for he mulicollineariy wih esa vif STATA command. The resuls proved ha he model is free from mulicollineariy since he maximum vif value of each variable is less han en (Baum, 2006). The esimaed muliple regression resuls is shown in Table 1. Table 1:The Effec of Trade Liberalizaion on Employmen Level Dependen Variable : Employmen Regressors Coefficien Sd. Err. p (95% Conf. Inerval Consan Ln_GDP LN_XI LN_MPR

8 65 LN_KLR LN_FDI WTR RWRI Number of obs = 22 F = Prob > F = R-squared = Adj R-squared = DW = The resuls derived based on he OLS regression confirms ha overall mode is significan a 5% level of significance. The adjused R-square auhenicae ha almos 90 percen of he variaion of dependen variable is explained by he OLS regression line. Each independen variable excep FDI, WTR and RWRI are saisically significan. In his case all significan variables excep GDP are significan a 5% level. One of he main independen variable of deermining he employmen level is he oal value addiion of oupu. The presen sudy uses o real gross domesic produc o measure he aggregae oupu level of he counry and i is marginally saisically significan a 10 % significance level. The resul reveals ha imporan deerminans which have been included in he regression model ha is expor inensiy, impor peneraion raio shows expeced signs of regression coefficiens. The esimaed OLS regression model indicaes ha expor inensiy has a significan posiive effec on employmen. Tha is, one percen increase in expor inensiy leads o percen increase of oal employmen. Also, impor peneraion raio has a significan negaive effec on Sri Lankan s oal employmen; one percen increase of impor peneraion leads o -.523per cen reducion of counry s oal employmen. Saisically significan coefficien of capial-labor raio indicaes ha i is posiively affecs o employmen generaion. One percen increase in capiallabor raion resuls o increase employmen by percen. This resul is conrary o he one expeced in heory. However, one explanaion for he posiive effec of capial labor raio on employmen is he relaively capial inensive producion echnique apply for new enries o indusries. The regressor which is included o he model, weighed ariff rae, is no saisically significan. The reason migh be he availabiliy of few observaions for he sample period. The sign of marginally significan coefficien of gross domesic 65

9 66 produc is conrary o he heoreical explanaion of posiive relaionship beween oupu and employmen. However, he consruced confidence inerval a 95% confidence level exhibis ha his coefficien even can ge a posiive value up o percen. The regression resuls exhibis saisically insignifican resuls for foreign direc invesmen and real wage rae index. Also, hese wo regressors have no presened heoreical relaionship wih employmen level. Conclusion The presen sudy encompassed wo decades which belong o he rade liberalizaion period of Sri Lanka. Findings of he presen sudy are on he relaionships beween rade liberalizaion and employmen level of Sri Lanka. In assessing he effecs of rade liberalizaion, he empirical model of he sudy employ vial hree variables, impor peneraion raio, expor inensiy and weighed impor ariff raes, which are imporan o deermine employmen due o rade liberalizaion wih several oher conrol variables. The major hypohesis of he sudy is o es he relaionship beween rade liberalizaion and he Sri Lanka s employmen level. Findings of he sudy confirm ha one percen increase of expor inensiy increases employmen by.614 percen. Also, impor peneraion raio has a significan negaive effec on Sri Lankan s oal employmen; one percen increase of impor peneraion raio leads o 0.523per cen reducion of counry s oal employmen. Reference Baum, C.F. (2006), An Inroducion o Modern Economerics Using Saa, Deparmen of Economics, Boson College, Brighon, Massachuses Brander A James (1981), Inra-Indusry Trade in Idenical Commodiies, Journal of Inernaional Economics, Vol. 11(1):1-14 Davis R., Donald and Mishra, P. (2007), Solper-Samuelson is Dead and Oher Crimes of Boh Theory and Daa, Harrison A. (Ed.) Feensra C. Rober and Hanson H., Gordon (1996), Globalizaion, Ousourcing, and Wage Inequaliy Auhor(s): Hanson, The American Economic Review, Vol. 86(2): Hasan R., Mira, D. and Ramaswamy, K.V. (2007), Trade Reforms, Labor Regulaions, and Labor-Demand Elasiciies: Empirical Evidence from India, The Review of Economics and Saisics, 89(3): Hasan, R., Mira, D. and Ramaswamy K.V. (2003), Trade Reforms, Labor Regulaions, and Labor-Demand Elasiciies: Empirical Evidence from India, Working Paper No. 9879, Naional Bureau of Economic Research, July. LaRochelle, S. (2007), Tariff Reducion and Employmen in Canadian manufacuring, Canadian Journal of Economics, Vol. 40(3) 66

10 67 Revenga, A. (1992), Exporing Jobs? The Impac of Impor Compeiion on Employmen and Wages in US Manufacuring, Quarerly Journal of Economics, Vol.107 (1): Sankaran, U., Abraham, V. and Joseph, K.J. (2010), Impac of Trade Liberalizaion on Employmen: The Experience of India s Manufacuring Indusries, Available from: hp:// Sen, K. (2009), Trade Policy, Inequaliy and Performance in Indian Manufacuring, Rouledge Advances in Souh Asian Sudies, Rouledge Sen, K.(2008), Inernaional Trade and Manufacuring Employmen Oucomes in India A Comparaive Sudy, Research Paper No.2008/87, UNU-WIDER 67