Import Demand Income Elasticity and Growth Rate in Pakistan

Publication Date01 Aug 2016
AuthorChandra Emirullah,Muhammad Azam,Saleem Khan
/tmp/tmp-17oMogHoZcL61x/input Article
Import Demand Income
Foreign Trade Review
51(3) 201–212
Elasticity and Growth Rate
©2016 Indian Institute of
Foreign Trade
in Pakistan: The Impact
SAGE Publications
of Trade Liberalization
DOI: 10.1177/0015732516646208
Saleem Khan1
Muhammad Azam2,3
Chandra Emirullah4
This article applies the import demand function and constrained growth model in
case of Pakistan and investigates for the impact of trade liberalization using data
for the period of 1981–2010. The autoregressive distributed lag method and roll-
ing regression analysis are employed to estimate import demand income elasticity.
In results, the imports are found to be highly sensitive to the changes in income
level. In addition, a trend of gradual increase in income elasticity of imports has
been found since the aftermath of trade liberalization. However, no evidence has
been found that indicates that the growth rate is increased as a consequence of
liberalization. The liberalization has not increased export growth in association
with the rising growth in import demand income elasticity. Thus, it is concluded
that liberalization has increased the external constraint over economic growth.
JEL: F13, F14, F43, O53
Import demand, Thirlwall’s model, trade liberalization, time series, Pakistan
Data for this study are partially extracted from Dr Saleem Khan’s PhD thesis. “Trade
Policy Reforms, Export-Import Demand and Economic Growth Analysis with Reference
to Pakistan (1981–2010)”. Gomal University, Dera Ismail Khan, Pakistan.
1 Department of Economics, Islamia College, Peshawar, Pakistan.
2 School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia, Kedah,
3 Department of Management Sciences, Abdul Wali Khan University Mardan, Mardan, Khyber
Pakhtunkhwa, Pakistan.
4 School of Government Col ege of Law, Government and International Studies, Universiti Utara
Malaysia, Kedah, Malaysia.
Corresponding author:
Saleem Khan, Department of Economics, Islamia College, Peshawar, Pakistan.

Foreign Trade Review 51(3)
It is extensively described in the literature that in 1980s and 1990s most develop-
ing countries have implemented extensive and fast trade liberalization (Santose-
Paulino & Thirlwall, 2004; Wacziarg & Welch, 2008). This notion of trade
liberalization has been strongly advocated and supported by the Bretton Woods
Institutions, both rationally and financially (Jenkins, 1996), rationally through
studies of the effect of high liberalization on macroeconomic activities and finan-
cially through loans under structural adjustment programs. The case of Pakistan is
not an exemption. During the era, it has also undergone rapid and periodical
reforms in trade policy. Mostly, quantitative restrictions were substituted with
tariff barriers and then tariffs structure simplified and gradually eliminated (Baig,
2009). The country has been signatory of World Trade Organization (WTO) since
1995. The country’s involvement in regional bilateral and multilateral trade agree-
ments further witnessed to breakdown the wall of protectionism.
In the literature, the broad purpose of reducing trade barrier is to enhance the
overall economic performance and stimulate the rate of output without creating
balance of payments crisis. Empirically, supportive evidence has been found that
indicates that liberalization enhances the overall trade flows (Santose-Paulino,
2003). However, the results are contrasting about the relationship between liber-
alization and growth. Particularly, using the constrained growth model, liberaliza-
tion was found to contribute to the growth of countries, but with the expense of
wider trade deficit (Pacheco-Lopez & Thirlwall, 2006). Normally, constraint
occurs when import income elasticity exceeds the export growth of a country.
This external sector constraint on economic growth is the hypothesis of balance of
payments constrained growth model, originally developed by Thirlwall (1979).
This study investigates the impact of trade liberalization on import demand and
in turn on economic growth of Pakistan, using the import function and constrained
growth model. The analysis is merely empirical and inspired by the two bona fide
experiences of the economy. First, the country is a participant player from the last
three decades in the race of trade liberalization under the obligations of interna-
tional financial institutions and WTO. Second, the country’s trade and growth-
related data are found to be nearly in congruence with what constrained growth
model predicts. In 1970s and 1980s, the Pakistan economic survey recorded the
country’s average growth rate to be 6 per cent, while in the later decades on aver-
age the growth rate to be 4.5 per cent. This growth rate on average shows a decline
in value. The same concern is also related to exports and imports—the data
reveal that trade deficit is widening and getting high since the launch of trade
liberalization. The growth in imports and exports has led to an increase in trade
flows, but the higher growth in imports than in exports has contributed to an
imbalance in trade and has contributed to the deficit successively. Although dur-
ing this period the economy has shown some economic growth benefits from
foreign investment and remittances (Ahmad, Hayat, Luqman & Ullah, 2012;
Khan & Jehan, 2015), depreciation of the rupee, trade liberalization and the rising
external debt have left the economy extremely helpless to external shocks.

Khan et al.
Generally, by evidence, the imports are increased with trade liberalization
(Ghani, 2009; Santose-Paulino, 2002); however, it is found in the result of trade
liberalization that countries did grow quicker but at the cost of worsening balance
of trade (Pacheco-Lopez, 2005). Therefore, here the constrained growth model is
used which can help us to better understand the country’s pattern of growth given
that trade deficit prevails. Contribution of the study is twofold: on the one hand, it
provides relatively new and inclusive evidence about imports growth sensitivity
to the income level; on the other hand, it estimates the long-run equilibrium
growth rate and tests whether trade reforms have enhanced or repressed the growth
rate performance. The issues are tested using autoregressive distributed lag
(ARDL) method,...

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