Academic journal article Journal of Economic and Social Studies

Is a Regional Trade Agreement with Balkan Countries Applicable for Turkey? A Time Series Analysis

Academic journal article Journal of Economic and Social Studies

Is a Regional Trade Agreement with Balkan Countries Applicable for Turkey? A Time Series Analysis

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Economic growth and competitiveness depend on the realization of investments and gross fixed capital formation and accordingly increasing economic growth may lead to an expansion of international trade. Besides, historical and cultural connections promote trade relations.

Turkey, as a Balkan country, has historical, cultural and political ties with other Balkan countries and economic relations have been growing especially after the collapse of the Eastern Bloc. As shown in Table 1, foreign trade volume of Turkey with its major trade partners (Bulgaria, Greece and Romania) in the Balkans has been increasing gradually from 1990. Thus, GDP of Turkey may be affected positively by the increasing foreign trade volume with Bulgaria, Greece and Romania.

In this study, we examine whether regional integration between Turkey and Balkan countries (Bulgaria, Greece1 and Romania) may promote the real economic activity in Turkey, whereupon it is attempted to determine whether it is reasonable for Turkey to make a regional trade agreement with Bulgaria, Greece and Romania. Thus, we examined the causal relations among GDP of Turkey and foreign trade volume of Turkey with Bulgaria, Greece and Romania using Vector Error Correction (VEC) model framework.

Theoretical Considerations and Previous Research

Various researches have investigated the welfare implications of regional trade agreements and their impact on the global economy. Beginning with contributions by Viner (1950) and Meade (1955), regional integration arrangements have been widely studied in economic analysis. Viner (1950) concluded that regional integration might be predominantly trade diverting and therefore welfare reducing. Thus, regional integration arrangements have failed to yield universally applicable policies. However, economic theory says that a regional integration agreement can be structured in a way that creates gains for the member countries without harming any nonmembers (McMillan, 1993, p. 2). Viner (1950) also suggested that the theory of second best implying that reducing tariffs under a regional integration arrangement moving in the direction of Pareto optimality does not guarantee an improvement in welfare for individual countries or the world economy as a whole (DeRosa, 1998, p. 21). According to the economic theory, it is possible for regional agreements to avoid harm to outsiders while improving their own welfare. Chang-Winters (2002) found that preferential trade agreements reduced trade diversion and harmed nonmembers by reducing the prices of imports from nonmembers. It is denoted that the neoclassical Ricardian model is failed to provide an adequate empirical framework to explain the growth of open economies (Robinson, 1999, p. 10).

Although regional trade agreements are questioned whether they increase welfare, research on regional trade agreements show that trade creation greatly exceeds trade diversion and increase welfare for all members. Regional trade integrations represent trade diversion by shifting production from an efficient nonmember country to a less efficient member country. According to the Kemp-Wan theorem; if a regional integration arrangement promotes exports from nonmember countries to the members, the welfare of nonmember countries and the world economy as a whole must improve (Robinson, 1999, p. 2).

Any change in trade policy produces gainers and losers. Member countries' welfare increase as new members join the regional trade agreement providing evidence that there are gains from expanding the regional trade agreements (Robinson, 1999, p. 15). Meade (1955) admitted the possibility of not only spillover effects of regional integration arrangements on non-member countries, but also feedback effects of international adjustments to the formation of regional integration arrangements on member countries themselves (De Rosa, 1998, p. 22). Empirical studies about foreign direct investment also demonstrated a positive incidence of regional integration on foreign direct investments (Montout-Zitouna, 2005, p. …

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