Exports―Led Growth Hypothesis: The Econometric Evidence From Pakistan

[a]Lecturer of Economics， the Islamia University of Bahawalpur， Pakistan， Bahawalnagar Campus.

[b]M. Phil Scholar of Economics， Pakistan Institute of Development Economics， Islamabad， Pakistan.

[c]Ph. D. Scholar of Economics， Bahauddin Zakariya University， Multan， Pakistan.

*Corresponding author.

Received 2 April 2015; accepted 14 June 2015

Published online 26 July 2015

Abstract

The study aims at investigating the Export-led growth hypothesis in Pakistan by applying Unit root test， Co-integration， Vector error model and Granger causality tests. Time series data of the selected variables （Real GDP， capital， employed labor force， exports， consumer price index and terms of trade） for the period of 1972-2012 is used for analysis. The export-led growth hypothesis claims that exports positively contribute to economic growth. The results revealed that there is a strong positive long run as well as short run relationship between exports and economic growth in Pakistan. It is recommended on the basis of findings that the government should announce export bonus， export financing and export credit guarantee schemes to encourage the exports. Export processing zones should be established. These zones will not only catch the attention of foreign investors but also provide access to international markets to Pakistani exporters.

Key words： Export-led growth; Co-integration; Vector error model; Granger causality; econometric evidence;

Bashir， F.， Iqbal， M. M.， & Nasim， I. （2015）. Exports-Led Growth Hypothesis： The Econometric Evidence from pakistan. Canadian Social Science， 11（7）， <Page>-0. Available from： http：///index.php/css/article/view/7270

DOI： http：///10.3968/7270

INTRODUCTION

In this era of globalization nations want to improve the living standards of their public. Improvements in the living standards come from economic development. Thus， economic development is the primary objective of all nations in this world. Economic development requires economic growth and structural adjustments. So， economic growth is essential for economic development. Here a question arises， that， how nations can promote economic growth？ There are so many sectors of the economy which can make contribution to the economic growth. Export sector is one of the most important sectors which can accelerate the economic growth. This answer started a debate among economists， researchers， policy makers and think tanks， whether exports orientation leads to economic growth or economic growth lead to exports promotion.

Thus， economists put forward different opinions regarding exports and economic growth. One group of economists is in favor of exports-led growth hypothesis， while the other group is in favor of growth-led exports hypothesis. The exports-led growth hypothesis advocates the causality from exports to economic growth. It is also termed as unidirectional causality from exports to economic growth but not vise-versa. These studies （Vohra， 2001; Siliverstovs and Herzer， （2005） confirmed the export-led growth hypothesis. Causality from exports to economic growth and economic growth to exports is termed as bidirectional

causality.

On the contrary， growth-led export hypothesis advocates the causality from economic growth to exports. These studies （Mishra， 2011; Iqbal， 2012; Santos， 2013） confirmed the growth-led exports hypothesis.

Table 1

Average Growth of Real GDP and Exports in HPEA’s

Country name Growth of real GDP Growth of exports

1980-1990 1991-1995 1980-1990 1991-1995

Hong kong 6.9* 5.6* 14.4* 13.5*

Indonesia 6.1 7.6 5.3 21.3

Korea 9.4 7.2 12.0 13.4

Malaysia 5.2 8.7 10.9 14.4

Singapore 6.4 8.7 10.0 13.3

Thailand 7.6 8.4 14.0 14.2

Average 6.9 7.7 11.1 15.0

China 10.2 12.8 11.5 15.6

Developing countries 2.3 2.1 7.3 5.2

Industrial countries 3.2 2.0 5.2 6.4

Note： All values in above take are in percentage.

Nurkse （1970） was of view that exports played an essential role for swift growth and economic development of region of recent settlements （USA， Canada， Australia， New Zealand， Argentina， Uruguay， and South Africa）. Haberler （1964） pointed out that the trade leads to full deployment of resources， growth of market size and betterment in economies of scales. It stimulates the flow of capital from developed to developing nations. Endogenous growth theories of Romer （1986） and Lucas （1988） offer realistic and accurate theoretical basis for the positive relationship among global trade and economic growth.

Growth rate of real GDP in high-performance Asian economies （HPAE’s） shows that exports growth played a fundamental role in their growth during 1980-1995. Following table shows the Average growth of real gross domestic product and growth of exports of High-performance Asian economies and China. These achievements strongly convince that exports promotion is essential for economic growth.

The objective of this study is to investigate the export-led growth hypothesis in Pakistan. Co integration， Vector Error Correction Model and Granger Causality techniques are applied in this study. So far only few researchers have applied these techniques in case of Pakistan. Thus it is expected that this study will make enormous contribution to the pragmatic literature.

The rest of study is organized as follows： Few studies are reviewed in 2nd section. Model building， Variables and Data Sources are discussed in 3rd section. Econometric and Economic criterion Analysis is explained in 4th section. Concluding remarks and policy implication are given in 5th section.

1. LITERATURE REVIEW

The view regarding the role of exports as one of the deterministic feature of economic growth is not new. It goes back to the Mercantilists and Classical school of thought. A vast literature is available on exports and economic growth. The studies diverge regarding the variables and time period. Some of these are offered below：

In 17th and 18th centuries a group of bankers， govt officials and philosophers （famously known as mercantilist） was of view that exports promotion is a powerful tool for a nation to become rich and influential. They established their view on the ground that export promotion would result in inflows of valued metals （gold and silver）. Heaps of Gold and silver were the symbol of power and richness.

Classical economists Adam Smith （1776） and David Ricardo （1817） were of view that international trade has a major impact on economic development. They demonstrated that a country can increase exports of products in which they have comparative advantage and thus faster their development process.

Khan et al. （1995） investigated the direction of causation between exports growth and economic growth in Pakistan. The researchers adopted Co-integration and Error-correction model for examination. The study found a stable， long-run two-way relationship between exports and output， but an one-way stable relationship between output and primary exports. Furthermore， the study also found bi-directional causation between exports growth and economic growth.

Anwar and Sampath （1997） traced the causal link between exports and economic growth. The time series data of 96 countries for the period of 1960 to 1992 are used for analysis. The researchers applied unit root test and co-integration techniques. Study explored that 20 countries are experiencing causality only in one direction ， 12 countries with unidirectional causality from GDP to exports ， from exports to GDP 6 countries and bidirectional causality for 2 countries and 11 countries do not show any relationship between exports and growth.

Ekanayake （1999） has shed light on the causal relationship between exports and economic growth in eight Asian developing countries. Time series data has been chosen from 1960 to 1997 for this study. The authors selected Co-integration and error-correction model to analyze the results. The study revealed bi-directional causality between exports and economic growth in India， Indonesia， Korea， Pakistan， Philippines， Sri Lanka and Thailand. The study also explored short-run Granger causality from economic growth to exports in all countries under study except Sri Lanka.

Chemeda （2001） tried to assess the Export-Led Growth hypothesis for Ethiopian country. The author used unit root tests， Co-integration and error correction model supported by Cobb Douglas function. The analysis is based on time series data （1950-1986）. The author suggested that the growth of real exports has a positive effect on economic growth in short run as well as in long run.

Vohra （2001） evaluated the link between exports and economic growth in India， Pakistan， Philippine， Malaysia and Thailand. The scholar used the time series data for period of 1973 to 1993 for examination. The study recommends that， when a country has achieved some stages of development， then exports have a positive relationship with economic growth.

Zentos and Tao （2002） illustrated the causal link between growth rate of exports， imports and GDP of Canada and USA .They selected time series data （1948-1996）. The analysis was based on unit root tests， Co-integration， vector error model and Granger causality test. The study exposed strong bidirectional causality for Canada between trade to GDP and GDP to trade and weak causality for USA between trade and GDP growth.

Siliverstovs and Herzer （2005） have critically focused on the export-led growth hypothesis using annual time series data from Chile. The authors employed Toda and Yamamoto （1995） procedure for testing Granger non causality in Vector Error Model. The results confirmed the export-led growth hypothesis for Chile.

Shirazi and Manap （2005） studied the export-led growth hypothesis for five South Asian countries. They practiced Co-integration and multivariate Granger causality tests for assessment. The study found long run relationship between exports and outputs for all countries expect Sri- Lanka.

Tsen （2010） exemplified the Granger causality among exports， domestic demand and economic growth in China. Time series data over the period of 1978-2002 was chosen. The examination resulted in bidirectional Granger Causality among above mentioned variables.

Stait （2007） examined the export-led growth hypothesis for Egypt using data from 1977 to 2003. Researcher employed various analytical tools including Co-integration， granger causality， unit root tests， vector auto regression and impulse response function. Researcher concluded that exports， imports and GDP growth are Co-integrated and that exports causes GDP growth.

Li et al. （2010） conducted a research on the relationship between foreign trade and growth of East China .The researchers endorsed the hypothesis by confirming a positive and strong relation between foreign trade and GDP growth. The researchers applied unit root test， time series Co-integration and Error Correction Model to time series data （1981-2008）.The study determined that there is a long run as well as short run bidirectional causality between foreign trade and GDP growth.