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1
Does WTO Accession Raise Income?
May 22, 2006
M.K. Tang Shang-Jin Wei
Personal views, not necessarily shared by the IMF
2
Motivation IAccessions often involve extensive and
sometime politically difficult policy changes (in recent years)
It took China 14 years to join
The median time gap b/n application and accession was 71 months for countries that joined after 1995
3
Motivation IIDiverse Views on the Consequences Beneficial (if sometimes bitter)?
“WTO accession provides a predictable business environment and gives a powerful guarantee to investors that there will be no policy reversals.” An advisor to the Ethiopian government
Irrelevant? Andrew Rose (2004): “Do we really know that the WTO has
promoted trade?” American Economic Review
Worse than irrelevant? Developing countries squeezed for the benefits of rich and
powerful nations, Jawara and Kwa (2003) Behind the Scenes at the WTO: the Real World of International Trade Negotiations
4
Regime change for developing country applicants
Before the Uruguay Round: Very little policy change needed
After the Uruguay Round: Much more extensive policy changes typically demanded by existing members (except for countries qualified for GATT Article XXVI 5(c))
5
Value of accession Market access in exchange for political support from
reform-opposition Commitment against future policy reversal
Previous work: on trade volume Subramanian and Wei, 2004
This paper: Effects on growth and investment
6
Methodology:
Difference-in-differences in spirit Change in growth before/after 43 accessions Change in growth for non-accession developing
countries during the same period
Results: Higher annual growth and Inv/GDP than before,
especially for those undergoing more rigorous accession procedures
7
Addressing Endogeneity Concerns
Accessions with and without reforms Application vs. actual accession Formal statistical test using Heckman
selection equation Varying effects along commitment/
governance dimensions
8
Roadmap
1. Brief Description of Data and Specification
2. Statistical Results
3. Extensions and Robustness Checks
4. Conclusions
9
Data and Specifications
Data Per capita GDP, gross fixed capital
formation, trade from WEO Institution quality from WB’s “Governance
Matters” 1981-2003, exclude all industrial and
OPEC countries
10
Empirical Specifications
i: country, t: year s: “Time-profile” of accession, #years from
accession {null, -2, -1, 0, 1, 2, 3, 4, 5, beyond} Country and year fixed effects included Treatment group: accession countries Control group: other developing countries Beginning period: 8 years before accession
,*)log( ,,01,, ytitis ststi capitaperGDPGrowth
.)/log( ,,,, ytitis sstiGDPInv
11
Accessions: 1990-2001
Results for All Accessions Growth sped up from 1 year before
accession to 3 years after Little effect on Inv/GDP though
Positive coef. est. but insignificant
12
Coef est. t-stat. Coef est. t-stat.
Lagged log(GDP per capita) -0.115 -4.74
s = -2 0.009 0.91 0.045 0.64
-1 0.024 2.57 0.043 0.69
0 0.019 2.58 0.024 0.38
1 0.026 3.72 0.050 0.83
2 0.033 4.91 0.073 1.17
3 0.015 1.92 0.105 1.46
4 -0.002 -0.18 0.053 0.70
5 0.012 1.89 -0.011 -0.16
beyond -0.002 -0.37 -0.078 -1.09
Country fixed effects
Year fixed effects
2
Table 3. Changes in Growth and Investment Around Accessions
Annual Growth Rate Log(Pri Inv/GDP)
Y
Y
Y
Y
1
13
-2 -1 0 1 2 3 4 5-0.02
-0.01
0
0.01
0.02
0.03
0.04
0.05
Years Since Accession
Ch
an
ge
in G
row
th in
Pe
rce
nta
ge
Po
ints
Figure 1. Change in Growth Around Accession
90% C. I.
14
-2 -1 0 1 2 3 4 5-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
Years Since Accession
Pe
rce
nta
ge
Ch
an
ge
in I
nv
/GD
P R
atio
Figure 2. Change in Inv/GDP Around Accession
90% C. I.
15
Article XXVI 5(c) of GATT 1947
“If any of the customs territories, in respect of which a contracting party has accepted this Agreement, possesses or acquires full autonomy in the conduct of its external commercial relations and of the other matters provided for in this Agreement, such territory shall, upon sponsorship through a declaration by the responsible contracting party establishing the above-mentioned fact, be deemed to be a contracting party.”
16
Article XXVI5c vs. Non-Article XXVI5c Co’s Heterogeneity in accession procedures Article XXVI 5(c) – 18 countries
Upon becoming independent, former colonies of GATT members were entitled to formally join GATT almost automatically
The option can be exercised any time (up to the founding of the WTO)
Non-Article XXVI5(c) – 25 countries Acceded by normal procedures (Article XII),
meaning lengthy negotiations!
17
Results for AXXVI5c vs. non-AXXVI5c Faster growth after accession than before:
72% non-Article XXVI5c
vs.
47% Article XXVI5c Higher Inv/GDP after accession than before:
59% non-Article XXVI5c
vs.
38% Article XXVI5c
18
Non-Article XXVI 5c countries Growth became stronger since 1 year before
accession Inv/GDP became higher since 2 years after
accession Article XXVI 5c countries
Growth: Weakly positive, insignificant effects on change in growth
Inv/GDP: Negative, insignificant effects on change in Inv/GDP
19
Coef est. t-stat. Coef est. t-stat.
Lagged log(GDP per capita) -0.113 -4.66
s = -2 0.007 0.53 0.012 0.17
-1 0.027 3.29 0.056 0.95
0 0.024 2.76 0.088 1.51
1 0.043 4.84 0.098 1.48
2 0.047 5.52 0.135 1.96
3 0.038 3.47 0.177 2.27
4 0.027 3.18 0.159 2.44
5 0.020 2.48 0.110 1.54
beyond 0.020 3.42 0.148 2.70
s*AXXVI5c Dummy: -2 * AXXVI5c 0.006 0.31 0.083 0.60
-1 * AXXVI5c -0.007 -0.30 -0.029 -0.22
-0 * AXXVI5c -0.013 -0.88 -0.152 -1.09
1 * AXXVI5c -0.045 -3.33 -0.106 -0.86
2 * AXXVI5c -0.039 -3.01 -0.137 -1.07
3 * AXXVI5c -0.054 -3.98 -0.149 -1.03
4 * AXXVI5c -0.063 -3.30 -0.200 -1.44
5 * AXXVI5c -0.019 -1.67 -0.225 -1.81
beyond * AXXVI5c -0.041 -4.61 -0.401 -3.40
Country fixed effects
Year fixed effects
Article XXVI 5(c) vs. Non-Article XXVI 5(c) Countries
Y
Y
Y
Y
Table 5. Changes in Growth, Investment and Trade:
Annual Growth Rate Log(Pri Inv/GDP)
1 2
20
-2 -1 0 1 2 3 4 5-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
Years Since Accession
Ch
an
ge
in G
row
th in
Pe
rce
nta
ge
Po
ints
Figure 3. Change in Growth: Article XXVI 5(c) vs. Other Countries
Article XXVI 5(c) Countries
Non-Article XXVI 5(c) Countries
90% C.I.
90% C.I.
21
-2 -1 0 1 2 3 4 5-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
Years Since Accession
Pe
rce
nta
ge
Ch
an
ge
in I
nv
/GD
P R
atio
Figure 4. Change in Inv/GDP: Article XXVI 5(c) vs. Other Countries
90% C.I.
90% C.I.
Non-Article XXVI 5(c) Countries
Article XXVI 5(c) Countries
22
Extensions and Robustness ChecksTiming of Spurs Median interval b/w application and accession:
71 months after 1995, or 55 months since 1990
Pickups in Growth and Investment after application die down gradually
But Growth and Investment rise again around accession
23
Coef est. t-stat. Coef est. t-stat.Lagged log(GDP per capita) -0.101 -3.89Year from application 0 0.013 0.92 -0.005 -0.04
1 0.024 1.50 -0.003 -0.032 0.029 2.57 0.017 0.123 0.026 2.25 0.109 1.404 0.009 0.71 0.126 2.035 0.006 0.53 0.068 1.266 -0.001 -0.07 0.005 0.10
s = -2 0.014 1.11 -0.031 -0.39-1 0.030 3.52 0.006 0.100 0.030 3.09 0.034 0.501 0.050 4.69 0.056 0.722 0.057 5.56 0.120 1.523 0.048 3.59 0.159 1.674 0.043 3.67 0.164 1.975 0.035 2.84 0.106 1.16
beyond 0.028 2.89 0.163 2.17
Country fixed effectsYear fixed effects
YY
YY
Table 7. Changes in Growth and Investment for Non-AXXVI 5(c) Countries Around Application and Accession
Annual Growth Rate Log(Pri inv/GDP)1 2
24
0 2 4 6 -2 0 2 4
-0.01
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08C
ha
ng
e in
Gro
wth
in P
erc
en
tag
e P
oin
tsFigure 5. Change in Growth Following Application and Around Accession
90% C.I.
Years Since Application Years Since Accession
25
0 2 4 6 -2 0 2 4-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4P
erc
en
t C
ha
ng
e in
In
v/G
DP
Ra
io
Figure 6. Change in Inv/GDP Following Application and Around Accession
90% C.I.
Years Since Application Years Since Accession
26
Testing Selection Bias Formally Does the endogenous nature of
membership status bias our results? Employ 2-stage estimation a la Heckman
1st stage: Probit estimation of membership status as a function of lagged GDP and Trade/GDP ratio
2nd stage: Add in the inverse Mills ratio as an independent variable
Coef. est. on the inverse Mills ratio are insignificant => No evidence that selection biase is quantitatively important
27
Coef est. t-stat. Coef est. t-stat. Coef est. t-stat.
Inverse Mills Ratio -0.002 -0.97 -0.033 -1.17 -0.003 -1.48
s = -2 -0.012 -0.82 0.053 0.58 -0.002 -0.16
-1 0.009 1.28 0.108 1.06 0.014 1.99
0 0.085 1.06 0.136 1.41 0.014 1.56
1 0.027 4.14 0.143 1.58 0.029 3.79
2 0.027 4.07 0.177 1.92 0.026 3.53
3 0.015 1.74 0.185 1.88 0.014 1.39
4 0.005 0.66 0.237 2.67 0.009 1.22
5 -0.001 -0.13 0.160 1.78 0.001 0.09
beyond -0.001 -0.35 0.169 4.33 0.001 0.15
s*AXXVI5c Dummy: -2 * AXXVI5c 0.035 1.82 0.015 0.10 0.025 1.26
-1 * AXXVI5c 0.032 2.28 -0.163 -0.86 0.032 2.33
-0 * AXXVI5c 0.001 0.06 -0.242 -1.14 -0.001 -0.06
1 * AXXVI5c -0.030 -2.46 -0.119 -0.77 -0.025 -1.87
2 * AXXVI5c -0.013 -1.37 -0.161 -0.94 -0.008 -0.71
3 * AXXVI5c -0.024 -2.06 -0.148 -0.89 -0.022 -1.65
4 * AXXVI5c -0.034 -1.60 -0.278 -1.47 -0.041 -1.81
5 * AXXVI5c 0.011 0.94 -0.280 -1.75 0.007 0.64
beyond * AXXVI5c -0.014 -2.25 -0.463 -4.62 -0.012 -1.89
Country fixed effects a/
Year fixed effects
Bera-Jarque-Lee LM test statistics
N
Y
N
Y
18.38 0.67
Annual Growth Rate Log(Pri Inv/GDP)
1 2
Table 8. Testing for Selection Bias
3
Annual Growth Rate
N
Y
0.67
28
Effects of Policy Commitments Sample: Accessions after WTO formation
More standardized documents 15 accessions
Commitments touch on general policies Wide-ranging: e.g., TRIPs, transparency,
competition policy, price controls, etc. Might spillover to other non-trade areas Clearly incorporated in Protocol – enforceable
thru’ WTO dispute settlement mechanism
29
Measure of degree of policy commitments # commitments explicitly stated in Protocol
Transparent, non-subjective Not one-size-fits-all:
“…accessions to the WTO will be ‘on terms to be agreed’… essentially a process of negotiation,” WTO.org
Alternative measure: # words in WP Report
30
# Commitments in WPRs Governance Index # Words in WPRsBulgaria 27 2.83 24542Albania 29 2.84 38829China 147 2.49 78641Croatia 27 2.39 38479Ecuador 21 2.56 25835Estonia 24 4.76 22920Georgia 29 1.32 27139Jordan 29 3.26 36608Kyrgyz 29 2.15 32149Latvia 22 3.72 25717Lithuthania 28 3.23 43029Moldova 28 2.87 43859Mongolia 17 2.91 12055Oman 26 4.73 24695Panama 24 3.91 19558
mean incl. China 33.8 3.06 32937 excl. China 25.7 29672
median 27 2.87 27139standard dev. incl. China 31.5 0.92 15537 excl. China 3.7 9370
Table 9. Extent of Commitments and Governance Quality of Acceding Countries
31
Differential effects of policy commitments First View: Countries w/ weak governance
May lack incentives to implement reforms May lack credibility to follow through
Second View: Accession commitments may be a partial remedy for weak governance
So, effect of #commitments is stronger or weaker for countries w/ weak governance?
32
Differential Effects: Results Interact the commitment variable w/
governance measure Interaction terms negative and significant
in both growth and investment regressions
Support the interpretation that accession-related commitment may partly offset the shortcomings of weak governance
33
Coef est. t-stat. Coef est. t-stat.
s*log(# Com.)*Gov Quality: a/ -2 * log(#Com.) * gov. -1.549 -2.10 -4.976 -2.68
-1 * log(#Com.) * gov. -1.351 -2.98 -7.917 -5.62
-0 * log(#Com.) * gov. -0.971 -2.08 -6.845 -4.00
1 * log(#Com.) * gov. -1.489 -3.27 -8.309 -4.19
2 * log(#Com.) * gov. -1.476 -3.18 -8.378 -4.56
3 * log(#Com.) * gov. -2.620 -5.94 -9.656 -5.20
4 * log(#Com.) * gov. -1.475 -1.88 -9.383 -4.05
5 * log(#Com.) * gov. -0.870 -1.52 -1.966 -0.88
beyond * log(#Com.) * gov. -3.933 -4.24 17.081 3.98
Country fixed effects
Year fixed effects
Tables 13-14. Differential Effects of Policy Commitments on Changes in Growth and Inv/GDP
Y
Y
Annual Growth Rate Log(Inv/GDP)
Y
Y
34
Discrete categorization Governance
Above world median (3): Good governance Otherwise: Poor governance
Policy commitments Above sample median (27): Many com. Alternatively, #words > sample median: Many com. Otherwise: Few com.
Basic results hold: Policy commitments have stronger effects among poor-gov countries (Table 13)
35
Conclusions Accessions entail wide-ranging reform
commitments We yield affirmative results of accession
benefits by1. Distinguishing countries by the degree of accession
requirements
2. Tracing out the trajectories of performance changes
3. Considering the endogenous nature of membership
4. Showing the differential effects of accession requirements on countries with different governance quality
37
Stronger effects among poor-gov. countries on both growth and Inv/GDP Difference in year 2 after accession among:
Poor-gov.: 7.3 perc. points (change in growth)
40% (change in Inv/GDP)
Good-gov.: -0.8 perc. points (change in growth)
-52% (change in Inv/GDP)
Basic results hold with #words Caveat: based on only small sample