Trade Openness and Economic Growth
| Author | Syed Tehseen Jawaid |
| DOI | 10.1177/0015732514525223 |
| Published date | 01 May 2014 |
| Date | 01 May 2014 |
| Subject Matter | Commentary |
Trade Openness and
Economic Growth:
A Lesson from Pakistan
Syed Tehseen Jawaid
Abstract
This article is an attempt to examine the comparative effect of three differ-
ent measures of trade openness on the economic growth in Pakistan by using
more rigorous econometric techniques. Autoregressive distributed lag (ARDL)
method, JJ COintegration and ordinary least square (OLS) results suggest sig-
nificant positive long run relationship between export and economic growth. In
contrast, total volume of trade and imports have significant negative effect on the
economic growth. The addition of variables and results of fully modified ordinary
least square (FMOLS) suggest that the results are robust. The Granger causality
and variance decomposition analysis indicate the unidirectional causality between
trade openness and economic growth. In export model, causality runs from export
to growth. Whereas, in the model with total volume of trade and import, causal-
ity runs from growth to total volume of trade, and imports in Pakistan. From the
findings it is concluded that the policy makers should focus on export promotion
strategy to enhance the economic growth in Pakistan. Besides, efficient utilization
of capital goods should be ensured and reliance on non-capital goods should be
less in order to ensure high domestic production in the country.
JEL: F10, F43, C22
Keywords
Trade openness, economic growth, time series analysis
Introduction
Trade policies in developing countries are being examined from time to time,
especially in the past few decades due to uncertainty and volatility in world econ-
omy. The suitability of trade policy for growth and development has been argued
Commentary
Foreign Trade Review
49(2) 193–212
©2014 Indian Institute of
Foreign Trade
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/0015732514525223
http://ftr.sagepub.com
Syed Tehseen Jawaid is an Assistant Professor in IQRA University, Karachi, Pakistan.
E-mail: stjawaid@hotmail.com
Foreign Trade Review, 49, 2 (2014): 193–212
194 Syed Tehseen Jawaid
extensively in the literature. During 1980s worldwide trade policy was shifted
from import substitution (IS) to export-led growth (ELG). For example, the
achievement of ELG was exposed by South Korea and Taiwan which endorsed an
example for other developing countries.
In 1950s and onward for few decades, many developing countries such as
Pakistan followed IS policies to develop their own future. Since mid-1970s, there
has been significant change in the trade policy that follows export promotion strat-
egy. This move towards export promotion may leads to efficient allocation of
resources through capital formation, technological transfer and results in raising
the economic growth of the country. Second, Pakistan continued its liberalization
policies towards more export-oriented industries. The adoption of flexible exchange
rate, tax free raw material and fundamental machineries to particular export indus-
tries, export rebates and export finance scheme provided evidence to be major
factors of exports growth during this period. Moreover, the Government of Pakistan
took different steps for liberalization of imports which contained elimination of
banned and free import system in 1983 and beginning of negative list items.1 Due
to these policies, contribution of manufacturing and semi-manufacturing exports to
total exports increased from 58 per cent in 1980 to 80 per cent in 1990.
Simultaneously, share of intermediate and capital good in total imports increased
from 78 per cent in 1979 to register 86 per cent in 1988.
In Pakistan, the trends in trade suggest that in beginning of 1990s imports
increased due to liberalization of policies with the increase in oil prices in interna-
tional market. The trade policies pursued in Pakistan since 2000 are evidenced for
further trade liberalization with a view to enhancing country’s growth by improv-
ing trade and investment.
Overall, since 1970s Pakistan follows trade liberalization policies to increase
investment and production as well as transfer of technology to enhance social
welfare in the country. Various studies have been carried out to identify the effect
of trade liberalization or trade openness on the economic growth of Pakistan2,
however, the last decade is considered critical to get structural and technological
changes in Pakistan economy. Trade liberalization policies have also remained
under scrutiny and were amended.
Motivation of the Study
In most of the studies mentioned in the second section, cross-country or panel and
time series data have been used to analyze the relationship between trade open-
ness and economic growth at aggregate level or export or import separately. The
usage of panel data may be suitable for answering greater question on average. It
only provides the aggregate average results of sample but it fails to explain the
effect on each individual country to formulate and manage the domestic policies.
Hye (2012) reports the negative association between trade openness index and
economic growth in Pakistan. However, dimensions of trade like export and
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