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*** (0.001) adj R2 0.549 0.672 0.464 0.449 0.659 0.670 0.579 0.607 F-stat 58.89 98.15 42.10 39.77 92.95 97.35 66.32 74.45 Obs 96 96 96 96 96 96 96 96 Dependent variable: Rule of Law Index 2012 (F1 through F8 respectively) C: constant; GC0211: GDP per capita in thousands of US current dollars averaged over 2002-2011; Trade0211: Merchandise trade (exports and imports) as percentage of GDP averaged over 2002-2011 Observations include all countries in except Zimbabwe (whose per-capita GDP figures were unavailable) *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F statistics show validity at 99% confidence level Effects of Merchandise Trade (2002-2011) on 2012 Rule of Law Indices
uses service trade as a percentage of GDP (averaged over 2002-2012) as regressors. Only F6 (regulatory enforcement) shows service trade having a significant effect but in the negative so that higher percentage of service trade as a percentage of GDP leads to lower level of regulatory enforcement.
and
uses exports and imports as percentage of GDP averaged over 2002-2012 respectively. F3 ( and security) and F8 (criminal justice) are shown to be affected by trade. 40 Junsok Yang ⓒ Korea Institute for International Economic Policy F1 F2 F3 F4 F5 F6 F7 F8 C 0.485*** (0.017) 0.410*** (0.019) 0.641*** (0.016) 0.555*** (0.015) 0.434*** (0.014) 0.466*** (0.014) 0.495*** (0.012) 0.443*** (0.017) Svc0211 0.000 (0.000) 0.000 (0.001) 0.001 (0.000) -0.000 (0.000) -0.000 (0.000) -0.001** (0.000) -0.000 (0.000) 0.000 (0.001) GC0211 0.012*** (0.001) 0.016*** (0.001) 0.008*** (0.001) 0.010*** (0.001) 0.013*** (0.001) 0.012*** (0.001) 0.009*** (0.001) 0.011*** (0.001) adj R2 0.585 0.663 0.397 0.526 0.712 0.692 0.600 0.567 F-stat 65.15 90.51 31.00 51.56 113.36 103.07 69.28 60.23 Obs 92 92 92 92 92 92 92 92 Dependent variable: Rule of Law Index 2012 (F1 through F8 respectively) c: constant; GC0211: GDP per capita in thousands of US current dollars averaged over 2002-2011; Svc0211: Services trade (exports and imports) as percentage of GDP averaged over 2002-2011 Observations include all countries in except Iran UAE Uzbekistan and Zimbabwe (whose service trade data were unavailable) and Zimbabwe (whose per-capita GDP figures were unavailable). *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F statistics show validity at 99% confidence level
Effects of Services Trade (2002-2011) on 2012 Rule of Law Indices F1 F2 F3 F4 F5 F6 F7 F8 C 0.492*** (0.020) 0.386*** (0.021) 0.612*** (0.017) 0.554*** (0.020) 0.428*** (0.017) 0.442*** (0.016) 0.478*** (0.014) 0.415*** (0.018) X0211 -0.000 (0.000) 0.001 (0.000) 0.001*** (0.000) -0.000 (0.000) -0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.001** (0.000) GC0211 0.012*** (0.001) 0.015*** (0.001) 0.007*** (0.001) 0.010*** (0.001) 0.012*** (0.001) 0.011*** (0.001) 0.008*** (0.001) 0.010*** (0.001) adj r2 0.550 0.671 0.455 0.450 0.659 0.671 0.581 0.604 F-stat 59.09 98.20 40.62 0.111 92.81 97.73 66.89 73.34 Obs 96 96 96 96 96 96 96 96 Dependent variable: Rule of Law Index 2012 (F1 through F8 respectively) C: constant; GC0211: GDP per capita in thousands of US current dollars averaged over 2002-2011; X0211: Exports (goods and services) as percentage of GDP averaged over 2002-2011 Observations include all countries in except Zimbabwe (whose per-capita GDP figures were unavailable) *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F statistics show validity at 99% confidence level
Effects of Exports (2002-2011) on 2012 Rule of Law Indices The Effect of International Trade on Rule of Law 41 ⓒ 2013 Journal of East Asian Economic Integration F1 F2 F3 F4 F5 F6 F7 F8 C 0.490*** (0.023) 0.382*** (0.025) 0.592*** (0.019) 0.546*** (0.023) 0.428*** (0.019) 0.446*** (0.018) 0.480*** (0.016) 0.406*** (0.020) M0211 -0.000 (0.000) 0.001 (0.000) 0.001*** (0.000) -0.000 (0.000) -0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.001** (0.000) GC0211 0.012*** (0.001) 0.016*** (0.001) 0.007*** (0.001) 0.009*** (0.001) 0.012*** (0.001) 0.012*** (0.001) 0.009*** (0.001) 0.011*** (0.001) adj R2 0.548 0.670 0.476 0.448 0.659 0.669 0.578 0.604 F-stat 58.55 97.45 44.11 39.49 92.80 97.03 66.12 73.35 Obs 96 96 96 96 96 96 96 96 Dependent variable: Rule of Law Index 2012 (F1 through F8 respectively) C: constant; GC0211: GDP per capita in thousands of US current dollars averaged over 2002-2011; M0211: Imports (goods and services) as percentage of GDP averaged over 1992-2001 Observations include all countries in except Zimbabwe (whose per-capita GDP figures were unavailable) *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level; All F statistics show validity at 99% confidence level
Effects of Imports (2002-2011) on 2012 Rule of Law Indices 2. Effects of Rule of Law on Trade In this section we look at the feedback effects namely the effect of rule of law on trade. For this section the working interpretation is that rule of law has an effect on trade. The basic regression equation is the following: x  c  αf  βl  γt  δy  ϵ where x = trade (total merchandise trade service trade or exports or import) as a percentage of GDP (average for 2002-2011) f = rule of law index (one index among F1 through F8) (2012 figures) c = constant l = landlock dummy (l=1 if landlocked l=0 other wise) t = simple average (across industries) MFN tariff rates (average for 2002-2011) y = GDP in constant PPP dollars (in billions) (average for 2002-2011) ϵ = error The fi figures are again from the 2012 Rule of Law Report while landlock values were taken from the World Bank list of landlocked developing countries 42 Junsok Yang ⓒ Korea Institute for International Economic Policy supplemented by the Wikipedia list of landlocked countries for developed countries. Tariff and GDP figures were taken from the World Bank database. Taking the lead from gravity models and unlike the regressions in the previous section we use the countries total GDP figures (in constant 2005 PPP dollars) rather than GDP per capita figures as one of the additional independent variables. We also attempted regressions with GDP per capita and the population instead of total GDP but both were unsatisfactory – the former because it was highly correlated with the rule of law indices and the latter because it usually did not show any significance and led to slightly lower adjusted R 2 without showing significant differences in results for the significance of the rule of law indices so we do not explicitly report them here. Further taking lead with gravity models we include a landlock dummy variable as an independent variable. We note that overall this set of regressions show a significantly lower adjusted R 2 and F-statistic 21 so that these regressions have much less explanatory power. As to be expected all regressions show that tariff rates have negative effect on merchandise trade and imports. However somewhat surprisingly tariff rates also have a negative effect on services trade 22 and exports. 23 Very surprisingly whether the country is landlocked or not seems to have little effect on trade at least as a proportion of GDP 24 . The landlocked countries included in the regressions are indicated in Appendix 1. Regression results also show that larger countries have lower percentages of trade as GDP 25 . If GDP rises by a billion dollars (in constant PPP terms) merchandise trade as a percentage of GDP drops by roughly 0.007% services trade drops by around 0.0025% exports of goods and services drop by 0.004% and imports of goods and services drop by 0.005%. We also note that in this set of regressions we used the rule of law index for the year 2012 as an independent variable but used average trade figures for 2002-2011 as a dependent variable. Thus literally the timing of these 21 Though F-statistics are still valid at 99% confidence level 22 Perhaps countries with high tariffs on goods trade tend to be protectionist so they have strong non-tariff barriers for goods and services as well 23 Arguments can be made that weak domestic producers (who find it difficult to export) demand high import tariff barriers. 24 Perhaps the landlocked countries are very dependent on directly neighboring countries so they show very high proportion of trade with the surrounding countries but not with countries further off-distance. 25 though traditional gravity models of trade tends to show that larger countries have higher volume (amount) of trade. The Effect of International Trade on Rule of Law 43 ⓒ 2013 Journal of East Asian Economic Integration Fi=F1 Fi=F2 Fi=F3 Fi=F4 Fi=F5 Fi=F6 Fi=F7 Fi=F8 C 100.95*** 25.858 68.340*** 21.517 -6.296 32.990 139.89*** 35.74 88.333*** 26.575 75.374*** 27.509 64.856** 30.309 46.420* 24.775 Fi 2.825 33.245 51.251* 26.551 136.98*** 38.820 -43.748 42.861 24.860 36.607 43.589 37.591 61.475 43.724 87.444** 33.863 Landlock 0.196 12.542 4.521 12.052 -3.168 11.326 -4.070 12.603 2.266 12.519 2.575 12.187 2.370 0.197 3.658 11.720 GDP0211 -0.007** 0.003 -0.008** 0.003 -0.008** 0.003 -0.007** 0.003 -0.007** 0.003 -0.007** 0.003 -0.007** 0.003 -0.007** 0.003 Tar0211 -3.319*** 0.994 -2.261** 0.996 -1.643* 0.943 -3.911*** 1.143 -2.831*** 1.026 -2.604** 1.015 -2.607*** 0.972 -1.961** 0.982 adj R2 0.117 0.152 0.225 0.127 0.121 0.130 0.136 0.178 F-stat 4.07 5.17 7.75 4.37 4.20 4.46 4.65 6.04 Obs 94 94 94 94 94 94 94 94 Dependent variable: Merchandise trade (exports and imports) as percentage of GDP averaged over 1992-2001 C: constant; Fi: Rule of Law variable (2012); Landlock: landlock dummy variable; GDP0211: GDP in constant 2005 PPP dollars averaged over 2002-2012; Tar0211: Simple average MFN tariff rates averaged over 2002-2011. Observations include all countries in except Liberia and Sierra Leone (tariff data unavailable) and Zimbabwe (GDP data unavailable). *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level. All F statistics show validity at 99% confidence level
Effect of Rule of Law (2012) on Merchandise Trade (2002-2012) variables can be interpreted as that future variable affects the past which is contrary to the laws of physics as known at this time. However we use these variables under the argument that rule of law usually takes time to change and that survey data for the rule of law variables were taken between 2009 and 2011 so that the two variables give a picture of the economy and the rule of law over roughly a similar period of time. More practically using older rule of law index figures for independent variables was ruled out because the index numbers are only available from 2009 the sample size of countries becomes significantly smaller and the method of calculation in the first set of index figures were slightly different from the current index figures. Using a shorter period average for trade figures was ruled out because the trade figures may have been distorted due to the global financial crisis which began in 2008. While the equations are framed in terms of “independent” variables (“cause”) 44 Junsok Yang ⓒ Korea Institute for International Economic Policy Fi=F1 Fi=F2 Fi=F3 Fi=F4 Fi=F5 Fi=F6 Fi=F7 Fi=F8 C 24.687*** 7.392 22.472*** 6.311 2.323 10.044 31.631*** 10.559 25.496*** 7.703 25.985*** 8.060 19.771** 8.392 17.089** 7.255 Fi 5.475 9.484 8.476 7.695 32.019*** 11.722 -3.821 12.666 4.557 10.464 3.771 10.852 13.284 12.678 17.160* 9.875 Landlock -3.451 3.601 -3.274 3.525 -4.416 3.353 -4.315 3.667 -3.534 3.631 -3.771 3.551 -3.455 3.505 -3.360 3.450 GDP0211 -0.002*** 0.001 -0.003*** 0.001 0.003*** 0.001 -0.002*** 0.001 0.002*** 0.001 -0.002*** 0.001 -0.002*** 0.001 -0.003*** 0.001 Tar0211 -0.794*** 0.294 -0.703** 0.304 -0.464 0.296 -0.926*** 0.339 -0.798** 0.308 -0.809** 0.311 -0.722** 0.299 -0.618** 0.300 adj R2 0.123 0.132 0.190 0.121 0.122 0.121 0.131 0.150 F-stat 4.16 4.42 6.28 4.09 4.12 4.10 4.39 4.96 Obs 91 91 91 91 91 91 91 91 Dependent variable: Service trade (exports and imports) as percentage of GDP averaged over 1992-2001 C: constant; Fi: Rule of Law variable (2012); Landlock: landlock dummy variable; GDP0211: GDP in constant 2005 PPP dollars averaged over 2002-2012; Tar0211: Simple average MFN tariff rates averaged over 2002-2011 Observations include all countries in except Liberia and Sierra Leone (tariff data unavailable) Iran UAE and Uzbekistan (service trade data unavailable) and Zimbabwe (service trade data and GDP data unavailable). *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level. All F statistics show validity at 99% confidence level
Effect of Rule of Law (2012) on Services Trade (2002-2012) and “dependent” variables (“results”) the statistical relationship does not necessarily infer causality. Thus we expect that the rule of law indices which were shown to have effects on trade in the previous section to also show significant effects in the regressions listed in this section as well and that is what we see. However there are some interesting differences.
shows the regression results using merchandise trade as a percentage of GDP averaged over 2002-2012 as the dependent variable. F3 ( and security) and F8 (criminal justice) show significance at 99% confidence level while F2 (absence of corruption) show significance at the 90% confidence level. While it may not be surprising that and security have such an important effect on trade we note that the degree of its importance seems wildly high – indicating that for every 0.01 point increase in F3 26 the 26 Note that the rule of law index is calculated to be between 0 and 1. The Effect of International Trade on Rule of Law 45 ⓒ 2013 Journal of East Asian Economic Integration Fi=F1 Fi=F2 Fi=F3 Fi=F4 Fi=F5 Fi=F6 Fi=F7 Fi=F8 C 56.561*** 15.968 34.508** 13.146 -10.248 20.213 78.314*** 22.151 43.800*** 16.325 35.560** 16.849 27.443 18.521 22.208 15.169 Fi 3.741 20.529 39.444** 16.222 89.800*** 23.785 -19.569 26.567 28.245 22.488 39.973* 23.024 54.031** 26.719 60.472*** 20.733 Landlock -3.404 7.745 -0.758 7.363 -6.325 6.940 -6.089 7.812 -1.626 7.691 -1.861 7.464 -2.143 7.366 -1.715 7.176 GDP0211 -0.004** 0.002 -0.005** 0.002 -0.005** 0.002 -0.004** 0.002 -0.004** 0.002 -0.004** 0.002 -0.004** 0.002 -0.004** 0.002 Tar0211 -1.851*** 0.614 -1.261** 0.608 -0.961 0.578 -2.294*** 0.709 -1.574** 0.630 -1.441** 0.622 -1.466** 0.594 -1.126* 0.601 adj R2 0.112 0.166 0.233 0.116 0.126 0.140 0.150 0.188 F-stat 3.94 5.63 8.08 4.05 4.35 4.77 5.09 6.39 Obs 94 94 94 94 94 94 94 94 Dependent variable: Exports (goods and services) as percentage of GDP averaged over 1992-2001 C: constant; Fi: Rule of Law variable (2012); Landlock: landlock dummy variable; GDP0211: GDP in constant 2005 PPP dollars averaged over 2002-2012; Tar0211: Simple average MFN tariff rates averaged over 2002-2011 Observations include all countries in except Liberia and Sierra Leone (tariff data unavailable) and Zimbabwe (GDP data unavailable). *: 90% confidence level; **: 95% confidence level; ***: 99% confidence level. All F statistics show validity at 99% confidence level
Effect of Rule of Law (2012) on Exports (2002-2012) share of trade in GDP rises by 1.4% (making it more influential than the GDP) and the constant term for that regression is effectively zero. In
we repeat the same regression but replacing the dependent variable with services trade as percentage of GDP averaged over 2002-2012. Only F3 ( and security) and F8 (criminal justice) are shown to be significant though F8 at only 90% confidence level. The coefficient for F3 has come down greatly compared to merchandise trade.
uses exports of goods and services as percentage of GDP averaged over 2002-2012 as dependent variable. Many more variables are now shown to be significant. F6 (regulatory enforcement) is significant at 90% confidence level F2 (absence of corruption) and F7 (civil justice) is significant at 95% level and F3 ( and security) and F8 (criminal justice) at 99% level. At least in terms of estimated coefficient F3 is shown to have the highest effect but as with Merchandise Trade in
the effect seems excessive.
uses imports of goods and services as percentage of GDP 46 Junsok Yang ⓒ Korea Institute for International Economic Policy averaged over 2002-2012 as dependent variable. Again F3 and F8 are shown to be the only significant variables. Fi=F1 Fi=F2 Fi=F3 Fi=F4 Fi=F5 Fi=F6 Fi=F7 Fi=F8 C 71.079*** 14.225 53.271*** 12.006 7.463 18.302 90.440*** 19.198 63.582*** 14.671 58.924*** 15.244 52.304*** 16.811 42.338*** 13.891 Fi -8.004 18.288 16.940 14.816 71.300*** 21.536 -31.394 23.505 2.681 20.209 9.504 20.832 20.036 24.251 34.411* 18.986 Landlock 0.091 6.899 2.450 6.725 -0.675 6.283 -1.927 6.912 1.178 6.911 1.506 6.754 1.728 6.685 2.401 6.571 GDP0211 -0.004*** 0.002 -0.005*** 0.002 -0.005*** 0.002 -0.005*** 0.002 -0.005*** 0.002 -0.005*** 0.002 -0.005*** 0.002 -0.005*** 0.002 Tar0211 -1.981*** 0.547 -1.574*** 0.556 -1.078** 0.523 -2.403*** 0.627 -1.389*** 0.566 -1.751*** 0.562 -1.691*** 0.539 -1.398** 0.551 adj R2 0.154 0.165 0.245 0.169 0.153 0.154 0.159 0.183 F-stat 5.24 5.58 8.56 5.73 5.19 5.24 5.39 6.19 Obs 94 Requirements: 1 Page
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