Causal Relationship between Trade & Economic Growth in India during Post WTO Period.

AuthorVarshini, N.M.


The World Trade Organization (WTO) is the only global organization dealing with the rules of trade between nations. The aim of this organization is to help producers of goods and services, exporters, and importers who conduct their business. It has been theoretically well known that both export and import play a crucial role in economic development. The theoretical and empirical studies mainly concentrate on either the relationship between export and growth or between import and growth or the association between export, import and economic growth. The majority of WTO members are developing countries, so one of the main focuses in the organization is on ensuring that these countries are able to benefit from participating in international trade and from the multilateral trading system. The WTO recognizes the need for positive efforts to ensure that developing countrie's, and especially those that are least-developed, share in the growth of international trade. This was also reiterated in the Doha Ministerial Declaration of 2001, which launched the current multilateral trade negotiations. These negotiations, known as the Doha Development Agenda (DDA), are central to the WTO's contribution to achieving the MDGs (Millennium Development Goals) which include (1) eradicate extreme poverty and hunger; (2) achieve universal basic education; (3) promote gender equality and empower women; (4) reduce child mortality; (5) improve maternal health; (6) combat HIV/AIDS, malaria, and other diseases; (7) ensure environmental sustainability; (8) develop a global partnership for development. In the Agreement establishing the WTO, it is recognized that "there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development". Developing countries are increasingly driving the performance of the world economy. Trade between developing countries is becoming as important as trade between them and developed economies. Moreover by growing their domestic market and pursuing regional economic integration, developing countries can diversify their production away from their traditional available export markets. Economic growth depends upon enhancing productivity (of labor, capital, land and knowledge); a stable and conducive policy environment; and strong incentives for investment by individuals and businesses.

Over the years, trade openness has contributed considerably to enhancing developing countries' participation in the global economy. The export led growth hypothesis (ELGH) assumes that export advancement is one of the key indicators of growth. It encourages that the overall progress of countries can be achieved not only by mounting the quantity of manpower and investment within the economy, but also by increasing exports. Another relationship of causality from growth to export is called growth led exports and it tells that there is unidirectional causality from economic growth to exports but not vice versa. There is also a possibility of two way causality link from exports to growth and from growth to exports. This study contributes to the literature in the following ways. First, previous studies focused mainly on the interactions between exports and economic growth. Recognizing the role of imports on economic growth and possibly on export activities of a country, this study empirically examines the relationship between exports and economic growth and imports and economic growth. Second, this study will use co-integration test to investigate for the presence of a long run relationship. To investigate co-integrating relationship between exports, imports and economic growth, approaches by Engle and Granger (1987), Johansen (1988) and Johansen and Juselius (1990) were used. The aim of this study, therefore, is to econometrically investigate direct linkages among trade and economic growth for India. In particular, this study tries to empirically find an answer for the question of whether export leads economic growth or whether import leads economic growth or economic growth leads exports and imports.

Economic growth is one of the most important determinants of economic welfare. The relationship between exports and economic growth is a topic of frequent discussion, when economists try to explain the different levels of economic growth between countries. Exports of goods and services represent one of the most important sources of foreign exchange income that ease the pressure on the balance of payments and create employment opportunities. The argument concerning the role of exports as one of the main deterministic factors of economic growth is not new. It goes back to the classical economic theories by Adam Smith and David Ricardo, who argued that international trade plays an important role in economic growth. The neoclassical approach emphasizes the importance of competitive advantages in international trade. Each country maximizes its welfare through the activities which are the most efficient regarding resource and production factors scarcity in the economy. In this case, the benefits of the trade are static and trade liberation and openness cannot lead to increase in long run growth rate, but it influences income levels (Ruba Abu Shihab, 2014).

Related Studies

The study of Vohra (2001) assessed the relationship between the export and growth in India, Pakistan, Philippines, Malaysia, and Thailand for the period from 1973 to 1993. The empirical results indicated that when a country has achieved some level of economic development then the exports have a positive and significant impact on economic growth. The study also showed the importance of liberal market policies by pursuing export expansion strategies and by attracting foreign investments.

Ullah et. al (2009) investigated export led growth by using time series econometric techniques (Unit Root Test, Cointegration and Granger causality through Vector Error Correction Model) over the period 1970-2008 for Pakistan. The results revealed that export expansion leads to economic growth. They also checked whether there is unidirectional or bi-directional causality between economic growth, real exports, real imports, real gross fixed capital formation and real per capita income. Based on the Granger causality test it was found that there was unidirectional causality between economic growth, exports and imports. On the other hand Granger causality through vector error correction was checked with the help of F-value of...

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