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Impact
of Trade on Economic Growth of Pakistan: 1975-2009

Ahmed
Shahid

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18-27020

 

Abstract

This study examines the relationship between trade and
economic growth of Pakistan. Theoretically, trade should increase the economy’s
growth if the Net Exports are greater than imports. Trade plays a vital role in
an economy’s uplift and many economies are enjoying the fruits of it. When it
comes to Pakistan, the relationship is not as strong as it should be. Trade
openness is not effecting Pakistan’s economic growth or you can say that there
is not a significant impact of trade openness on economic growth of Pakistan.
The study is based during the period of 1975-2009. The ADF is used to test the
Stationarity of the data and is turned out to be integrated of order I(1).
Engle and Granger is used to test for the Co-integration. After testing for
co-integration model is run in first difference and the results were showing a
non significant impact of exports on economic growth of Pakistan. The non
significant impact is due to the negative value of Net exports as our imports remained
higher than exports during the study period.

 

Introduction:

International trade plays a vital role in the uplift of an
economy. It promotes efficiency, welfare and equality. Trade openness promotes
small companies and entrepreneurs who want to take part in trade by exporting
goods, by removing trade barriers so that everyone can enjoy the fruits of
trade. Trade facilitates export diversification by allowing developing
countries to access new markets and new materials which open up new production
possibilities. Trade paves the way for developing economies to diversify their
exports and to increase their production possibilities by entering in new
markets. By doing so, trade increase the competitiveness and it helps the
developing economies to decrease their cost of inputs, they can also acquire
finances through investments, they can increase the share of their products and
by doing so moving up the ladder of economic growth.  When economies take part in trade they are not
just exchanging goods but the developing economies can also enhance their innovation
by learning and adapting different technologies to increase their exports. Trade
increases the choices for consumers and also due to competitiveness the prices
are relatively lower and hence the consumers have a lot of options to buy goods
at a much competitive price. Moreover, the quality of labor and goods are
improves through trade as every economy wants to increase their exports so by
competition the prices are brought down and the quality is maintained. Moreover
the trading countries are also bound by the trade regulations and it is
obligatory to follow the rules and regulations of trade. Trade strengthens ties
between nations by bringing people together in peaceful and mutually beneficial
exchanges and as such contributes to peace and stability. Trade also
strengthens the ties between different countries by bringing them together on a
single platform. It is not wrong to say that Trade is a peace treaty signed by
two economies. (Benefits
of Trade in developing countries)

For an economy to enjoy the
fruits of trade, it should be more open and should be less restricted. The
reason behind fewer restrictions is so that more and more people can take part
in trade and in return promote economic growth. 
When it comes to Pakistan, our Imports are way much higher than our
exports for very long time now. We are having serious problems in increasing
our exports. The aim of this study is to analyze the impact of exports and
imports on Economic Growth and to test whether it has a significant impact on
economic growth or not.

 

Literature
Review

 (Chaudhry & Baber, 2012) Their Study aims at the analyses of trade
openness on exports growth, imports growth and the trade balance of Pakistan.
The OLS and ARDL model is used in their study and the results show that
although trade openness has impacted imports and exports growth rate but the
trade balance has been worsened off.

(Umer, 2014) Their study also
emphasizes on the impact of trade on economic growth of Pakistan. They have
been seen using ARDL approach over the period 1960-2011. Their results show
that the impact of trade openness on economic growth is not obvious yet in
Pakistan. They have also suggested that Pakistan should adapt more liberal
policies to enhance trade openness and in return economic growth.

 (Ali &
Abdullah, 2015)
Their study also examines the relationship of trade openness on the economic
growth of Pakistan. The VECM and Johanson multivariate approaches were used to
find out the short run and ling run estimates. ADF and PP is used to test for stationarity
and the data were found to be integrated of order I(1). Their long run results
show that there is a negative impact of trade on economic growth of Pakistan.
They have given a plenty of reasons for that and majorly they focused upon the
quality of institutions. For policy recommendations they said that export
oriented trade policies are require and moreover conflict management
institutions are recommended.

 

(Ali & Panhwar, 2017)This study examines
impact of trade liberalization on economic development in Pakistan using ARDL
bound testing technique over the period of 1972 to 2015. Taking inspiration
from Sen’s ‘capability’ approach Human Development Index (HDI) is used as proxy
of economic development. Findings reveal that in the long-run trade
liberalization has significant and positive impact on HDI (with and without
income component) in all specifications. GDP growth has significant positive
impact on HDI in both short and long run, whereas, inflation exerted negative
impact in the short run only. Based on empirical findings, we reject anti-trade
liberalization argument in favor of both standard argument and broader argument
for positive impact of trade liberalization on development in Pakistan. The
study suggests that policy makers should have more trade friendly policies in
conjunction with growth enhancing and inflation targeting policies to achieve
the dream task of development as an explicit prime macroeconomic objective in
Pakistan.

 

Theoretical Framework:
Theoretical framework provides the link between variables of study through
which we can provide a strong theoretical base to our hypothesis. Theoretical
framework provides most relevant theories that explain the research hypothesis.
Trade liberalization/Openness-led-economic growth is a most debated topic among
the economist. Mercantilist, Smith and Ricardo put a lot of emphasis on
importance of international trade. Neo-classical theories suggests that trade
openness/liberalization enhances the economic growth in the medium term but in
the long run not much the evidence is found.

This paper is based upon the
theory that the trade is a major component of any Economy. We can analyzed the
impact of trade on economic growth through the following equation:

 

Y=C + I + G +
NX(Exports-Imports)…(1)

The increase in net exports
increases the GDP of the economy, explained in simplest terms. The aim of this
paper is to analyze Pakistan’s economy keeping in view equation 1.Whether trade
has a significant impact on Pakistan’s economic growth or not.

 

Data & Methodology:

The data is taken from World Bank
website. The model and variables under study are:

RGDP = ?0+?1Exports+?2Imports+µt

1.       Real GDP

2.       Exports

3.       Imports

Real GDP is
taken as dependant variable while Exports and Imports are treated as
Independent variables. The data is from years 1976-2009.

First of
all, ADF is applied to test for Stationarity of variables. The variables are
non-stationary at levels but stationary at first difference. So that is why
first I have tested Johanson test for co-integration and after testing Johanson
test I have moved towards ECM based upon my results.

 

 

 

 

 

Results and Discussions:

The
variables are found to be Non-Stationary at levels but Stationary at first
differences. It can be seen from the following table

Augmented Dicky Fuller Test Results:

Variables

DF At levels

DF At first Difference

Real GDP

-2.586

-4.374**

Exports

-1.604

-3.79***

Imports

-1.378

-2.826*

*,**,**
Shows Significance at  1%, 5% & 10%
respectively

 

As the data
is integrated of order I(1) so the next and only step is testing for
Co-Integration. I have used Johanson test for Con-Integration. The results of
the tests are as follows:

H0= There is
no Co-Integration

H1= There is
Co-Integration present

 

It can be clearly
seen from the above results that we do not reject the null hypothesis which
means that there is no Co-Integration among error terms.

 

Our
variables are Non-Stationary and there is no Co-Integration variables as well.
The next and only step is to run an Error Correction Model.

The results
of Error Correction model is as follows:

It can be
clearly seen from the above table that Exports do not have significant impact
on Real GDP as the P-Value is greater than 0.005. Moreover Imports do not have
significant impact as well.

 

So, this
analyses shows that trade does not have a significant impact on the economic
growth of Pakistan. It does show that the results are positive but they are
insignificant. According to trade theories the results should be positive and
significant but it is not the case in Pakistan. The reason could be that we are
not as much open to trade as we should be and we need to liberalize trade as
much as we can.

 

 

 

 

 

 

Policy Suggestion and Recommendations:

The paper empirically analyzes
the impact of International trade on economic growth in Pakistan over the
period 1976-2009 by utilizing Johansen co integration technique. Results reveal
tha the exports and imports does not have a significant impact on Economic
Growth of Pakistan. This result highlighted the importance of trade
liberalization in order to enhance economic growth. Based on these findings,
the study suggests that Pakistan should go more of trade liberalization
policies to enhance more economic growth.

Major policy changes are required
to enhance trade and in return economic growth. Government should initiate such
programs which promotes entrepreneurship. We need such people which can take
part in trade to enhance the trade volume. A lot of work done is required when
it comes to institutions in Pakistan. A clean sweep is required and corruption
should controlled if not eliminated. Nation friendly policies are required and
the policies that are biased and only centered to benefit the big sharks in the
economy should be nullified.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

Ali, L., & Panhwar, A. (2017). Impact of Trade
Liberalization on Economic Development in Pakistan: A Co-integration Analysis
. GMJACS .
Ali, W., & Abdullah, A. (2015). The Impact of Trade Openness on the
Economic of Pakistan:1980-2010. Global Business and Management Research:
An International Journal .
Benefits of Trade in developing countries. (n.d.). European
Commission .
Chaudhry, A., & Baber, A. (2012). Impact of Trade Openness on
Exports Growth,. Forman Journal of Economic Studies , 63-81.
Umer, F. (2014). Impact of Trade Openness on Economic Growth of
Pakistan: An ARDL Approach. Journal of Business & Economic Policy .
 

 

 

 

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