This paper is examines the causal relationships between gross domestic product (GDP) and exports in Pakistan by using time series data for the period between 1980 and 2000. Time series evidence shows that increase in exports has a significant effect on the economic growth of Pakistan in the previous two decades. This paper uses cointegration to check the causal relationship between export growth and economic growth in Pakistan. Granger Causality test shows that there is uni-directional causality between exports and economics growth in which running from exports to economic growth, it shows that there is long term relationship between exports and the economic growth. ADF and DF test are use to check the stationarity of the time series data.
The relationship between export and GDP growth has importance in both theoretical and empirical literature. The early analysis on this relationship examined the correlation coefficient between exports and GDP growth. According to these studies the export expansion and economic growth are positively correlated. Recent studies have emphasis on causality between export expansion and economic growth. This paper attempts to provide analysis of export-led growth hypothesis for the case of Pakistan. Export-led growth is an economic strategy used by some developing countries. Export-led growth is important because it can create profit and it allowing the country to balance their finance. The most common ways are to attain export-led growth by the exports of the manufactured goods and the exports of raw materials. Today, due to the global economic crisis, many countries are rightly worried about the benefits of a growth process built on export-led growth. This paper proceeds as follows.
The relationship between export and economic growth has been examined during the last two decades. The competition in exports may create the exploitation of economies of scale, more capacity may be utilize, allocation of efficient resources, and improvement in the uses of technical progress in production. The positive relation between exports and economic growth was explained as important evidence for the expansion and improvement in exports, so it is a development strategy. Examine the relationship and causation direction between exports and economic growth has importance for the policies implications of development strategies. If there is unidirectional causality and it is from exports to economic growth, then it will create the export-led growth strategy. If there is unidirectional causality and it is from economic growth to exports, then it will describe that a high level of economic activity is required for developing countries to expand their exports.
If there is bi-directional causality between export and economic growth, then it means that exports and economic growth have a reciprocal relationship. If there is no causality between exports and economic growth, it means that there is no need of export expansion strategies because there is the need of transformation of structural of developing countries. Because of its direct relevance to the choice of alternative development strategies investigated, using the Granger procedure, the direction of causation between exports and economic growth for many developing countries. Their findings have been mixed, ranging from one-way causality from exports growth to output growth to no causality. These studies suffer from two major shortcomings. The standard Granger or Sims tests are valid if the original time series are not co-integrated. If the time series are co-integrated, then any causal inferences are invalid. It is, therefore, essential to check for the co-integrating properties of the original time series before subjecting them to a test for causality.
2. Objective of this paper:
The objective of this paper is to identify the impact of increase in exports on the GDP growth of Pakistan. Exports are the important factor of economic growth and its important role to attain the economic growth. The purpose of this paper is to investigate the relationship between exports and GDP growth in Pakistan.
3. Review of selected Literature:
Vohra (2001) examined the relationship between the export and growth in developing countries (India Pakistan, Philippines, Malaysia and Thailand, using the time series data from 1973 to 1993. The results showed that when a country has attain some level of economic development than the exports of the country have a positive and significant effect on economic growth.
Shirazi (2004) found the relationship in short run and long run, between export, import and GDP growth by using the time series data from 1960 to 2003. And this study found unidirectional causality from export to GDP but did not find any causality between import and export.
Lee(2010)examined the short run and long run relationship between export, import and economic growth in Pakistan. This study uses the time series data from 1960 to 2006 for Pakistan. And he examined that the export and import are effecting the economic growth of Pakistan in short run.
Ekanayake(1999) uses the cointegration and error correction models to examines the causal relationship between export expansion and economic growth in Asian developing countries by using time series data from 1960 to 1997. The results of this study indicate that bi-directional causal relationship between export expansion and economic growth in Asian developing countries.
Farooq(2009) found the cointegration and causality between the exports and economic growth in Pakistan by using the time series data from 1970 to 2008. This study uses unit root test. Co-integration and granger causality test to examine the relationship between export and economic growth in Pakistan.
One study by Sharma(2003) examine the relationship between export and economic growth in India by using the time series data from 1971 to 2001. This study test the export led hypothesis for India Jordaan(2007) examined the causality between export and GDP growth Namibia by using the time series data from 1970 to 2005. This study showed that the positive relationship between export and economic growth. Another study by Zhang and Hu(1999) shows that when independent variable are correlated then an increase in investment and consumption may increase the imports and decrease in exports but the economic growth still increases. It shows that the negative relationship between both variables. One study by Khan and Saqib(1993) use a simultaneous equation model to find the relationship between the export performance and economic growth in Pakistan. This study found the unidirectional causality from export to economic growth. In cross section analysis, Kravis(1970) use the Spearman rank correlation test to find the relationship between exports and economic growth.
One study by Prem Ajhoja(2004), found that exports and economic growth are weakly co integrated, by using the Granger causality test. This study examined that the uni-directional causality from exports to economic growth. Oskooe and Alse(1993) examined the relationship between export growth and the economic growth for nine developing countries and nine strong support for the export-led growth hypothesis for all the countries included in the sample. One study by Kemal(2002) investigate export-led hypothesis for South Asian Countries including Pakistan. The study found that there in causation in the short run but the strong support for long run causality from export to GDP for Pakistan.
4. Methodology Framework:
Data Source: We use time series data in this paper for analysis purpose from1980 to 2000, which is compiled from the Economic Survey(2008-2009).
Methodology: We use the method of Ordinary Least Squares(OLS) for the estimation of Exports and GDP growth models.
The Model: The log log model is use to check the effect of increase in exports on the GDP growth rate in Pakistan.
In this model X is exports and it is independent variable. U is the error term which shows the effects of those variables which are outside from the model. It means it shows all other unpredictable impacts on economic growth and it is distributed with the zero mean and constant variance. lnY is the GDP growth rate.
α0 shows the percentage change in the growth rate and the effect of exports constant and α1 shows the percentage change in growth rate due to one unit change in exports.
We make hypothesis regarding the GDP growth rate is positively affected by changing in exports. Null hypothesis: α1 =0, exports has no significant impact on growth rate. Alternative hypothesis: α1 ≠ 0, exports has significant impact on GDP growth rate.