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Abstract
2
Causality between Trade and Growth:
Evidence from South Asian Countries
domestic economy with rest of the world in the form of increased export
small countries that do not have large internal market and a diverse and
specializing in a very few goods which is not possible without trade with
Examination of trade and growth data over the last two decades
shows that in more than fifty percent countries of the world, for which
and economic growth. Table-1 summarizes this result. The table shows
(GDP) growth rates between the periods 1980-1990 and 1990-2002 are
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plus import as share of GDP, between the period 1990 and 2002. In 32
with increase in GDP growth rate. In 13 countries GDP growth rate has
countries, trade and GDP growth rates show positive association over the
This proves some support to the claim that there is some causal
trade and growth has been the subject of a voluminous body of literature,
pointed out that this debate revolves around two main ideas:
Foreign trade is a step that comes after the agricultural, and in most
of markets.
growth can cause each other. This causation has been extensively studied
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and both stances have been evidenced in literature. Some researchers
find that more trade stimulates economic growth (Baldwin 1963; Keesing
1974; Krueger 1980; and Meier 1984); some has found evidences to the
trade liberalization, which has taken place in these countries, has been
employment and income of the poor. Empirical studies find that the trends
developing countries in which there has been the most rapid integration
with the global economy (Dollar and Kraay 2001; Dollar 2004). So an
of trade, policies to boost trade will not be beneficial for the economy. In
this paper this investigation has been made for five developing countries
in South Asia: Bangladesh, Nepal, Sri Lanka, India and Pakistan. Thus this
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between trade openness and economic growth and the objective of this
study is to examine this causality for these five South Asian countries.
and GDP growth rate and find that in developing countries export, as a
ratio of GDP, has strong positive relationship with GDP growth rate.
economic growth for a group of eleven countries for the period 1963-73.
His correlation and regression analysis show that export growth positively
affected the rate of economic growth. Tyler (1981) examined the same
and for two different time periods, i.e. 1960-1970 and 1970-77. He also
arrives at the same conclusion like Balassa (1978) and Tyler (1981) that
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exports’ contribution to economic growth is significant. Mbaku (1989)
exports’ impact on growth was significant, but this impact was stronger in
(1991), using annual time series data, also find positive association
(NICs). By using Sims’ causality tests he finds that in most NICs, there is a
between trade openness and GDP growth rate in five ASEAN countries,
period 1960 to 1997. They find that in all five countries trade openness
causality between trade openness and GDP growth rate. Frankel, Romer
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instrumental variable (IV) approach to examine trade’s impact on ten East
Philippines, China, Indonesia, Japan and Thailand. They find that in most
studies the relationship between foreign trade and economic growth in Sri
Lanka for the period 1960-1992 and Guillau met and Richaud (2001)
studies trade openness and economic growth in France for the period
1850-2000. Both the studies find that trade and growth are independent.
between trade openness and GDP in India. Although they find a long-run
(FDI) and output using quarterly data for Argentina, Brazil and Mexico for
the period between middle-1970s and 1997. Their findings do not support
and export.
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From the above literature review it is clear that there is no unique
All possible ways through which these two may be connected are found in
these studies, that is, trade causes growth, trade and growth are
countries like Bangladesh, Nepal, Sri Lanka, India and Pakistan that have
III. METHODOLOGY
between growth rates of trade openness and real GDP in five South
(i) Granger-causality
to the system. Vector Auto Regression (VAR) of the following forms are
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n n
Yt = α 0 + ∑ β i Yt −i + ∑ λi X t −i + µ t (1)
i =1 i =1
n n
X t = φ0 + ∑ϕ i Yt −i + ∑ηi X t −i + ν t (2)
i =1 i =1
for all possible pairs of ( X , Y ) series in the group. Where n is the number
VAR , Wald χ2 statistics is used to test the joint significance of each of the
equation (2) is significantly different from zero. If, in equation (1) ∑λ i ≠0;
equation (1) and ∑ϕ in equation (2) are significantly different from zero.
i
the VAR. If the time series are non-stationary, the stability condition of
VAR is not met, implying that the χ2 (Wald) test statistic for Granger-
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causality is invalid. In this case cointegration and vector error correction
underlying data are stationary or I(0). The most widely used unit root test
Phillips-Peron (PP) unit root. The present study makes use of this PP test to
check stationarity of the underlying time series data for its superiority
∆y = a + βy t −1 + ε t ;
slope and y t −1 is the first lag of variable y . The correction for the serial
N l N
1 2
N
∑εˆt 2 +
t =1 N
∑ω( s, l ) ∑εˆt εˆt −S ; Where l is a truncation lag parameter and
S =1 t =S +1
ω( s, l ) is a window.
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If the underlying series, say x and y, contain unit root i.e. are not
I(0), but, say, I(1), then the Granger representation theorem requires that
the current study, we find that the variables under consideration are
stationary at level, that is they are I(0). So the issue of cointegration is not
Growth for the five countries are carried out in VAR framework.
(iii) Stability of VAR: In order for the conclusions drawn from the VAR, it
polynomial will have modulus less than one and lie inside the unit circle.
test is that the results are valid within the sample, which are useful in
sample period, but are unable to deduce the degree of exogeneity of the
Growth. A shock to the i-th variable not only directly affects the i-th
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variables in the VAR. Sims (1980) notes that if a variable is truly
(v) Data: Data used for the analyses are growth rates of trade openness
and real GDP. Causality is examined between these two variables in three
South Asian countries, namely, Bangladesh, Nepal, Sri Lanka, India and
Pakistan. The study uses annual data on GDP, export and imports.
Bangladesh: 1974-2003
Nepal: 1972-2003
India: 1961-2002
Pakistan: 1961-2004
with rest of the world through its export and import. Different policies
the ratio of the sum of export and import to GDP, that is,
( Export + Im port )
x100 . Growth rates are calculated by the transformation
GDP
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(Xt − X t −1 )
x100 , where X represents trade openness and real GDP. Real
X t −1
No min alGDP
GDP is calculated as GDPDeflato r x100 . All data are collected from
variance decomposition.
(i) Unit Root Test: PP unit root test results for Trade and Growth
PP test results show that for Trade and Growth variables in all three
significance level in all five countries. That is the variables under study do
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analyzing Granger-causality test results, it is necessary to examine
Optimum lag order for Bangladesh is found to be three and one for other
number of roots for Bangladesh is six and two for other countries. From
(AR) polynomial have modulus less than one and lie inside the unit circle
causality test results show that the Wald χ2 statistic fails to reject the null
hypothesis that Trade does not Granger cause Growth in all five countries.
Test statistic also fails to reject the other null hypothesis that Growth does
not Granger cause Trade in four countries, except India. In case of India
causality test results obtained in the previous section to examine the out-
Table-5(a) through Table-5(e) for a 15-year period. Results show that the
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causality or non-causality between variables in the sample period is also
each country. At the end of 15 years the forecast error variances for
its own innovations are 95.14 percent, 97.33 percent, 98.68 percent,
Pakistan are 96.96 percent, 97.54 percent, 92.44 percent and 90.73
Trade.
V. CONCLUSION
This paper examines the causal relationship in Granger sense between the
growth rates of trade openness and real GDP in five South Asian countries,
namely Bangladesh, Nepal, Sri Lanka, India and Pakistan within VAR
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consistency of within-sample Granger-causality result with out-of-sample
method is employed for this purpose and it is found that growth rates of
VARs are found less than one and lie within the unit circle implying the
causality tests fail to reject both null hypothesis that Trade does not
χ2 statistic fail to reject the other null hypothesis that Growth does not
growth rates in all five countries are explained by their own innovations.
Sri Lanka, but contradicts with Sinha and Sinha’s (1996) study on India.
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trade. India’s fascination with the planned economy model began to
between trade and GDP. This finding is in line with the view of Guillaumet
study is that trade openness does not has any role in reducing poverty in
causal effect on growth may also stem from the fact that the trade regime
of South Asian countries has not been truly liberal (Geest, 2004). If this
were the case then the policy implication would be to adopt truly liberal
of trade openness and real GDP in Bangladesh, Nepal, Sri Lanka and
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Pakistan and unidirectional causality from growth rate of trade openness
to GDP growth, still there is room for further research, such as, impact of
19
References:
20
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TABLES
Increase Decrease
Trade Increas 47 32
e
Decreas 14 13
e
Source: World Development Indicator 2004.
23
-0.205599 + 0.491475
0.446404i
0.229979 0.229979
Nepal -0.299552 0.299552
0.244419 0.244419
Sri Lanka 0.261132 0.261132
-0.079302 0.079302
India 0.027991 – 0.247235
0.245645i
0.027991 + 0.247235
0.245645i
Pakistan 0.108287 0.108287
-0.051522 0.051522
Table-4: VAR Pair-wise Granger causality Test
Null Hypothesis Wald χ2 Probabilit
Statistic y
Bangladesh
Trade Does not Granger Cause 2.550878 0.6355
Growth
Growth Does not Granger Cause 1.208525 0.7510
Trade
Nepal
Trade Does not Granger Cause 1.017115 0.6014
Growth
Growth Does not Granger Cause 0.019207 0.8898
Trade
Sri-Lanka
Trade Does not Granger Cause 0.131640 0.7167
Growth
Growth Does not Granger Cause 1.545707 0.2138
Trade
India
Trade Does not Granger Cause 2.232065 0.1352
Growth
Growth Does not Granger 2.836867 0.0921
Cause Trade
Pakistan
Trade Does not Granger Cause 2.70E-05 0.9959
Growth
Growth Does not Granger Cause 0.314498 0.5749
Trade
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Table-5(a): Variance Decomposition of Growth and Trade:
Bangladesh
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1 100.0000 0.000000 9.758107 90.24189
5 95.34160 4.658398 16.96902 83.03098
10 95.34155 4.658448 16.96911 83.03089
15 95.34155 4.658448 16.96911 83.03089
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