The impact of export on the economic growth of Pakistan: Time series evidence

AUTHOR Saiyed Muhammad Fauzan Ali MBA Candidate, Iqra University, Karachi, Pakistan. Email: saiyedfauzan@live.com

ABSTRACT

The purpose of this paper is to study the impact of export on economic growth of Pakistan using 20 years time series data from 1980 to 2009. Import is taken as an exogenous variable; the least squared method is applied to investigate the export led growth hypothesis. Results indicate that both the variables have a significant effect over the growth rate of GDP however export has a stronger effect on the economic growth of Pakistan. It is suggested that Pakistan should focus on boosting up its foreign trade and improve its economic growth. Key words: Export, Import, Economic Growth

1. INTRODUCTION Every society in the world is focused on their economic development which is fundamental to economic growth and exports and imports are the most important contributors to economic growth. The link between export, import and economic growth has been discussed for over two centuries however there is controversy among various economists regarding the export and import-led economic growth hypothesis. (Shirazi and Manap, 2004) explain that there is a long run relationship between export and economic growth, while (Anwer S and Sampath R, 1997) found that out of 96 countries only 9 show a positive relationship between export, import and economic growth. Export, Import, labor force and investment have a significant behavior towards the economic growth of Pakistan (Quddus and Saeed, 2005). Pakistan should focus on boosting up its foreign trade; export and import increases the living standard of the masses by increasing the level of income. Pakistan has been trying its best to increase its foreign trade; growth in export increases the level of income which results into an increase in demand and increase in consumption. According to the Trade development authority of Pakistan, export during 2008-09 had been around Rs. 17,688,007 of which 79% of the earning was made by Raw Cotton and Rice. A large part of the earning is coming from the Agriculture side, but Zahir Faridi (2012) argues that agricultural growth has a negative impact over GDP. As we go through several studies on the subject we find evidence that export promotes economic growth but many economists argue with the idea of export-led growth hypothesis, Pakistan is focused on improving its economic growth and the country is constantly trying to increase its export growth rate but due to poor infrastructure the cost of production has been increasing as well while on the other hand Pakistan is facing stiff competition with countries like India and China in the export market.

The rest of the paper is organized as follow: Literature review has been discussed in section 2, methodology and empirical results are presented in section 3, and theoretical findings are presented in section 4, and the two final sections present conclusion and policy recommendation.

2. LITERATURE REVIEW The export-led and import-led growth hypothesis explains that these two variables impact on the economic growth of a country. According to S.Anwer and R.K Sampath (1997) the unit root and co integration techniques found that out of 96 countries only 8 countries show a positive relationship between export and economic growth. Quddus and Saeed (2005) revealed that Export growth rate and labor force have a significant behavior towards GDP and that Pakistan should focus on boosting up its foreign trade. Export is an important contributor to economic growth and it improves the standard of living of a society, it has access to worldwide market and it increases the level of income by generating foreign exchange [Shirazi and Mannap (2004)]. Using import as additional variable, economists can have a better insight on the affect of export on economic growth [Chew Ging Lee (2010)] there is evidence in the short-run that support the export-led growth hypothesis in Pakistan and both variables are important in fueling up the economic growth of Pakistan [Chew Ging Lee (2010)] In the long run both independent variables import and export have a positive relationship with economic growth while in the short run imports have a negative effect over GDP [Mobeen Alam (2011)]. Export is an engine for the economic growth of an under developed country like Pakistan, there are two important type of export, agricultural and non-agricultural. The country should focus on the type that contributes more to GDP, according to Zahir Faridi (2012) agricultural export has a negative impact on GDP and the government should promote non-

agricultural export in Pakistan. There have been different studies on the subject and various findings have been presented by economists, some accept the export-led growth hypothesis while some reject the hypothesis, some relate Export granger to GDP growth and other economist have a different insight over the subject, Abou-stait (2005) revealed in his analysis for Egypt that export and GDP are not co integrated and that export granger cause GDP to grow. According to the Chinas growth model analyzed by Andong and David (2010), appropriate consumption along with export could provide sufficient demand and result into a balanced growth model.

3. METHODOLOGY This study examines the impact of Export on the growth rate of GDP while considering import as an exogenous variable. The following equation is used to examine the results of the study.

In the above equation, X is the proxy for the growth rate of export and M is the proxy for the growth rate of Imports. All of the data used in this study from 1980 to 2009 is taken from various economic surveys, World Bank and Trade Development authority of Pakistan.

Results and Estimation Table I Variable C EXPORT IMPORT Adjusted R2 F-statistic Prob(F-statistic) Coefficient 2.95E+10 67443.35 18887.7 t-Statistics 20.48415 6.571597 3.437957 0.98414 837.6954 0.0000 Prob. 0.0000 0.0000 0.0019

To determine the long term relationship of the two considered variables with economic growth, we used the least squared method. The Results in table I indicate that Export and Import have a positive and significant effect on the economic growth of Pakistan. If Export increases by one unit then GDP increases by 67443.35 which is a high impact while on the other hand if import increases by one unit then GDP increases by 18887.7. The coefficient of Export is much greater than that of Import thus Export has a strong effect on the economic growth. Adjusted R2 indicate that if there is any variation in the independent variables then there will be a 98% change in the dependant variable. F-statistics is 837.6954 and its Prob. value is zero which clearly shows that there is a combine significant effect of both the variables on GDP growth. The Findings are very much interesting and quite similar with the results of Mobeen A (2011), Shirazi and Mannap (2004), Quddus and Saeed (2005), and Lee C (2010) the results support the export-led growth hypothesis.

4. FINDINGS Export and Import are great determinants of economic growth in Pakistan. Export and Import have a positive significant effect over GDP growth. Pakistan should boost up its foreign trade. Import should be considered as an external variable to have a better insight of export-led growth hypothesis. Export has a stronger effect over GDP as compared to Import. Pakistan should improve its infrastructure so to have an improved growth rate of Export. Both Export and Import are huge predictors of economic growth. They both have a huge combine effect over GDP growth.

5. CONCLUSION Various studies have been made to discuss the export-led growth hypothesis. This study empirically examines the effect of export on economic growth of Pakistan while considering import as an exogenous variable and using annual data from 1980 to 2009. The results are quite similar to various economists who support the export-led growth hypothesis. Results also indicate that export is more effective than import in Pakistan while both the variables have a huge combine effect on economic growth and if any variation occurs in both the independent variables then there will be a high change in GDP growth of Pakistan.

6. RECOMMENDATION It is suggested that Pakistan Policy makers should be more focused on boosting up the countrys foreign trade in order to ensure economic growth, natural resources should be utilized in order to enhance gas consumption which is utilized in transportation, public and private investment should be made to enhance physical infrastructure in order to remove the bottlenecks in export and reduce cost. Further, Pakistan policy makers should also take steps to enhance agricultural export. It is also recommended that further research should be done on the components of poor infrastructure that leads to ineffectiveness of export in order to enhance economic growth in Pakistan.

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