Exports, Growth and Causality: An Application of Co-integration and Error-correction Modelling

Abstract

The relationship between export expansion and economic growth has been examined extensively during the last two decades in the context of the suitability of the alternative development strategies. The decade of the 1970s witnessed an emerging consensus in favour of export promotion as development strategy. Such a consensus was based on the following facts. First, higher export earnings working through alleviating foreign exchange constraints may enhance the ability of a developing country to import more industrial raw materials and capital goods, which, in turn, may expand its productive capacity. Secondly, the competition in export markets abroad may lead to the exploitation of economies of scale, greater capacity utilisation, efficient resource allocation, and an acceleration of technical progress in production. Thirdly, given the theoretical arguments mentioned above, the observed strong correlation between exports and economic growth was interpreted as empirical evidence in favour of export promotion as a development strategy. The empirical evidence in favour of export promotion rests on the general approach where real growth is regressed on contemporaneous real export, growth and the significance of the export growth coefficient supports the proposition that export growth causes output growth. Balassa (1978); Feder (1982); Fosu (1990); Kavoussi (1984); Tyler (1981) and Ram (1985) have followed such an approach.1 Khan and Saqib (1993), on the other hand, examined the relationship between exports and economic growth by constructing a simultaneous equation model comprising equations for exports and economic growth. They found a strong association between export performance and GDP growth for Pakistan, and that more than 90 percent of the contribution of exports on economic growth was indirect in nature.

Causality between exports, world income and economic growth in Pakistan

“…There is bi-directional causation between exports and GDP. This result is in agreement with Khan et al (1995). In equation (3) for GDP and imports, neither EC t21 nor lagged terms are significant.…”

“…The standard Granger causality results show that there is UDC from GDP to primary exports (X p ) and BDC between GDP and manufactured exports (X m ). This result is in agreement with Khan et al (1995). There is no causality between GDP and semi-manufactured exports (X sm ).…”

“…Khan et al (1995), following BahmaniOskooee & Alse's (1993) method, extended the study to 1994 and also examined the relationship between primary and manufactured exports. They found a stable, long-run two-way relationship between exports and output and also between manufactured exports and output but reported a oneway stable relationship between output and primary exports.…”

Economic Liberalization and Economic Growth: An Empirical Analysis of Pakistan

“…Based on causality test, Khan et al (1995) find exports stimulate economic growth in Pakistan. Iqbal and Zahid (1998) In the long run trade openness and financial development reforms play a vital role in promoting economic growth Khan and Qayyum (2006).…”

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

“…The study finds long-run equilibrium relationships among exports, imports, and output for Bangladesh and Pakistan. Khan and Saqib (1993) and Ashfaque Khan, and Afia (1995) find a strong relationship between export performance and economic growth in Pakistan. Mutairi (1993) finds no support for the period 1959-91, while find strong evidence of bidirectional causality between export growth and economic growth.…”