Export-Led Growth Hypothesis in Pakistan: A Reinvestigation Using the Bounds Test

Abstract

Trade is presumed to act as a catalyst to economic growth. This paper reinvestigates the export-led growth hypothesis in Pakistan by using annual time series data on exports, imports, terms of trade, and the labor force participation rate as explanatory variables and gross domestic product (GDP) as the dependent variable for the period 1971-2005. The study uses the more comprehensive and recent bounds test or autoregressive distributed lag model (ARDL) proposed by Pesaran et al (2001) to examine the existence of short-run and long-run relationships between exports and economic growth, which is crucial in designing policy to enhance traderelated potential in Pakistan. The results indicate that exports, labor force, and imports have a positive effect on growth, while the terms of trade has a negative effect. The proxy for trade liberalization has a positive impact on economic growth. Finally, the chief finding of this study is that the hypothesis of export-led growth in the Pakistan economy is supported in both the short and long run. Economic growth in Pakistan is accompanied by fluctuations in exports and imports both in the short and long run, but the labor force participation rate has a negative effect only in the short run. The terms of trade has the same effect in the short and long run. JEL Classification: C22, F49.

Impact of Trade on Economic Growth of Pakistan: An Ardl to Co-Integration Approach

“…In this way, they adopt the new techniques and try to diminish different inefficiencies which exist in the local markets. Numerous studies, confirm the relationship between the exports and economic growth (Siddiqui, et al (2008), Alam (2011) and Shirazi and Manap (2005) etc).…”

“…They have found that majority of the countries have short run effect of export in econmic growth in both direction while in long run, 60% export led hypothesis is supported and 40% output led hypothsis is supported in the above mentioned study. Siddiqui et al (2008) re-investigated the causality between export and economic growth in case of Pakistan. They have used more than two variables exports, imports, terms of trade, and the labor force participation rate as explanatory variables and GDP as the dependent variable for 1971-2005 and used the more broad and recent bounds test or ARDL.…”

The Effect of Depreciation of the Exchange Rate on the Trade Balance of Albania

“…The second step relates to the long-term relationship variables and determining their value, and assessment of the short-term elasticity of variables showing the error correction representation of the ARDL model. The result of the error correction model tells us about the speed of adjustment from the short-term shock to the long-term balance (Siddiqui et al, 2008;Kurtovic et al, 2016). The ARDL model is represented by the following equations:…”

“…Finally, diagnostic and stability tests are used to assess the reliability of ARDL models. The assessment of the diagnostic tests includes Lagrange Multiplier test, the Ramsey Reset test, the Jarque-Berra test and the KB test (Siddiqui et al, 2008;Kurtovic et al, 2016). Stability tests of variables are carried out by applying cumulative sum of squared recursive residuals, cumulative addition of recursive residuals (CUSUM), and cumulative sum of squared recursive residuals (CUSUMSQ) (Kurtovic et al, 2016).…”