Trade liberalization and economic growth nexus: cointegration

evidence from Pakistan.

Tayyab Raza Shah

Bs economics 8th (Regular)

BECF16M016

University of Sargodha

Email:tayyabraza.sherazi514@gmail.com

Sir Adeel Saleem

Professor, University of Sargodha

Abstract;
Basically, this is the study which based upon the effect of trade liberalization on GDP of
Pakistan. Different economics variables are attached with the trade liberalization and collectively
effect the growth rate of Pakistan. How the growth rate of Pakistan linked with the trade
openness and there is the role other variables which are inflation and gross fixed capital on the
growth rate of Pakistan. Properly worked on this paper like addition of previous studies as a
literature review, collection of data, applications of econometrics techniques and the analyzation
of results after the application of econometrics model.

Introduction;
Trade liberalization put a capable fight in sentiment of GDP in any country. GDP is one of
appealing and fundamental marker use to check the condition of country’s economies and money
related characteristics. GDP shows the financial condition of a country. Total national output as
often as possible considered the best extent of how well an economy is performing. The purpose
behind GDP is to gather all data with a lone number addressing the rupee estimation of financial
development in a given time period. There are two unique approaches to see this estimation, one
way to deal with see GDP is the finished pay of everyone in the economy; another way to deal
with see GDP is as the total utilization on top of the economy's yield of items and adventures.
From either point of view, it is clear why GDP is a check of monetary execution, GDP measures
something people are care about their profit. Basically, an economy with extremely large yield of
product and undertakings can all the almost certain satisfy the enthusiasm of households, firms,
and the organization.

Mercantilists were draw out the limits the upsides of world trade. There all perspective relied
upon the grouping of gold and distinctive important metals. By then Adam Smith tells about the
centrality of world trade and present a theory. That speculation is the called theory of Absolute
inclinations. In the start of ninteenth century the David Ricardo gave the speculation which is
known as relative theory. Which is about the trade between two countries.

Trade openness assume a significant job in economic growth. Trade liberalization fundamentally
in an outgoing way trade of products and ventures with different nations. At the point when a
nation will change in trade its growth will increment. Country will concentrate on the fares of
merchandise and because of this interest for products determination increment and creation of
merchandise likewise increment. This is a repeating procedure and it impact the joblessness. The
joblessness will diminish in light of the fact that interest for work increment underway
procedure.

Inflation is additionally assuming a significant job in the economic growth. Inflation have useful
outcome on economic growth in brief timeframe period yet in prolonged stretch of time period it
has negative impact on economic growth. All things considered inflation is a circumstance in an
economy wherein cash gracefully and costs of products and enterprises increment. In brief
timeframe period economy help up and long timespan economy goes down.

Objective of the study;

Main objective;

Main Objective of the this paper to check that how liberalization of trade consequences the GDP
of Pakistan.
Sub-objectives;

Check that how trade liberalization effect the growth.

Combine effect of trade liberalization, inflation and gross capital formation on the growth rate of
Pakistan.

Remand suitable policy to Government in order to improve the trade with other countries.

Literature review;
The paper was presented by the Salma shaheen in 2013 in which paper uses the financial
development as poor variable and trade transparency, FDI and gross fixed capital as the free
factors and she apply the ARDL strategy by using the data from 1975-2010. This paper gives this
result by using the given information that monetary development increase in view of the trade
advancement. Right when the world trade falls the world GDP decrease and the reverse way
around. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

In 2017 Rashid Ahmad and Sobia Seher present the paper wherein study utilize the econometrics
strategies that are the unit root test and ADF test by utilizing the GDP as reliant variable. What's
more, study utilizes the imports of merchandise, fares of products and gross fixed capital
arrangement as free factors. In this investigation utilized the information from 1975 to 2013.
They gave the yield that imports and fares of merchandise decidedly impact on the GDP while
the gross fixed capital developments have negative impact on the total national output.

Afzal Mahmood presents the paper in 2017 wherein study applies the wits smart model. The
investigation utilizes the customer's income as reliant variable and he utilize the trade
liberalization the autonomous factors utilizing the information from 1991 to 2013. The give the
outcome that when increment by and large trade the customer's income increment yet because of
this trade charge income decline.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

In 2010 Sofia Anwar presents the study wherein the investigation applies the Error correction
model and Cointegration tests. The study utilizes the exports of cotton as reliant variable and
world interest for cotton of exports, seriousness and openness of farming area as the free factors.
Here utilizes the information from 1971-2008 and gave the outcome that world interest decidedly
influences the cotton sends out. Exports power and openness similarly expanded prices of cotton.
In 2010 A U Santos-Paulino present the paper where there is the utilization of the fixed effects
and generalized’ estimators. There is trades volume is dependent variable and the world salary,
pace of trade of genuine swapping scale and real growth of exports in the past period are the
independent factors. The information is utilized from the 1972 to 1998. The outcomes
demonstrated that trade liberalization is a critical determent of fares regardless, its effect varies
across terrains.

In 2017, the paper was introduced by the Fasil Asghar in which the information was utilized
from the1980-2015. The utilization of unit root test and diagnostic test. The dependent variable is
genuine expense income while the trade openness, net capital development and FDI are the
independentvariables. The outcome demonstrated that trade openness connected with charge
income and expense expanded because of liberalization of trade negative connection among
trade and remote guide.

The paper waspresented by the Imran Sharif Chaudhary in 2013. There is utilization of ARDL
Engle's ARCH. The joblessness utilizes as needy variable while trade openness, net capital
arrangement and FDI as independent variables. The information is utilized from 1980-2010 the
outcomes indicated that imports and fares of merchandise and ventures are useful to the poverty.

In 2012, the paper was introduced by the “M. Aslam and Babar Amin”. In this paper the OLS
and ARDL are applicate. The trade balance was utilized as needy factors while genuine
conversion scale, trade openness and household pay were utilized as the free factors. The
information was utilized from 1980-2010 the outcome indicated that liberalization may build
growth of imports and fares yet genuine impact on the parity of installment.

In 2017 the paper was presented by the Liaqat Ali wherein there was conversation about the
advancement of the Pakistan. The ARDL procedure was utilized in this investigation. The
information was utilized in this examination from 1972-2015. Economic advancement was
utilized as needy variable and trade openness and per capita trade were utilized as autonomous
factors. The outcomes indicated that the liberalization of trade has constructive outcome on
growth rate government assistance of economy.

Muhammad Zakaria and Amad Bilal present a paper in 2011 by utilizing the procedure
Generalized method of moments and basic relapse. The genuine swapping scale was utilizing as
reliant variable while trade openness, term of trade, government utilization, remote speculation,
outside obligations and capital inflow were utilized as the Independent factors. The information
utilized for this investigation from 1972-2010. The outcomes indicated that results of the
investigation are incredible to elective trade responsiveness measures and unmistakable model
subtleties.

Bulent Ulasan present an examination about openness of the trade in 2014. The unit root test and
Johansan cointegration procedure utilized for this investigation. In which growth rate utilized as
needy variable while trade openness and instruction utilized as autonomous factors. The
information was taken for this from 1960-2000 for this examination. The consequence of the
examination indicated that solid connection between factors. The examination tells trade may not
impact GDP within the sight of frail administration.

Sadia Bilal present an examination in 2014 in which ADF and DFGLS cointegration methods are
utilized. This investigation takes the genuine gross household items as needy variable while trade
openness and FDI and genuine swapping scale were utilized as free factors. The taken from the
1980-2011 for this investigation. The consequence of this examination demonstrated that there
exists since a long time prior run association between all variables use in this investigation.

A paper was introduced by the Edward in 1992 where information of crosscountry was set.
Investigate about the relationship about the openness and growth pace of 30 nations. The
information was utilized for this from 1970 to 1982. The outcome indicated that trade
liberalization was certain related with the growth rate while trade mediation records were
contrarily related with the growth pace of various nations.

This study has been inquired about and said about the effects of global trade liberalization at the
nation level; yet little is thought about its social and natural nearby level effects. Since national
midpoints can cover the presence of victors and failures, national-level investigations might be a
poor manual for tending to the predicament of the rustic poor and the condition that are at the
center of the motivation of the social and preservation development. This article contrasts the
worldwide trade-liberalization banter and the findings of nearby provincial based contextual
investigations in seven nations, coordinated by WWF and the World Bank during 2004–2007. It
talks about certain activities that the preservation and social development could take to improve
the conversation and the act of trade liberalization, poverty easing, and ecological protection.
A paper was introduced by the Tuqeer and Haseeb in 2017 in which the examination about the
openness of trade and outside interest in Pakistan. The information was utilized for this
examination from 1980 to 2011. The ARDL econometrics strategy was utilized for this study.
The outcome appeared from this investigation that the trade has positive sign the outside interest
in Pakistan. FDI was reliant and trade openness was free factor for this investigation.

In 2016 an article was introduced by the Christelle Luengue Mputu. The ARDL was utilized as
strategy in this examination. Growth rate was taken as needy variable while trade openness, net
fixed capital development was utilized as free factors. The information was utilized for this
investigation from the 1980-2-11. The consequence of the investigation demonstrated that the
nation has recorded most noteworthy and reasonable growth rate because of liberalization of the
trade. . . . . . . . . . . . . . . . . . . . . . . .

In 2001 a study introduced by the Mattoo. The investigation utilized per capita growth as needy
variable and trade liberalization and administrations as the independents. The aftereffect of the
study is resolved that trade liberalization have beneficial outcome on the growth rate. Per capita
pay likewise increments by the trade liberalization.

Ynikkaya present an investigation in 2003. In which for the estimation of impact of trade
liberalization on per capita pay of 120 nations. The example time frame was taken for this study
from 1970 to 1997. The aftereffect of this investigation indicated that openness of trade may
cause to expand the per capita pay of 120 nations.

Sinha D, Sinha T, examination growth pace of Asian nations in 2000. Information was utilized
for this examination from 1950 to 1992. The ARDL econometrics strategy was utilized for this,
the outcome indicated that growth pace of GDP is certain related with growth pace of openness
and local speculation.

In 2014 a paper was introduced by the Ahmad Mujtaba. This paper is viewed as the
unemployment as dependent variable while trade openness and the fares growth as the
autonomous factors. The information is utilized for this investigation from 1980 to 2010. The
have end that liberalization of the trade has constructive outcome to dispose of poverty for any
economy.
Methodology;
GDP = f (Trade openness, Inflation, Gross capital Formation)

Gross domestic product is the dependent variable while trade liberalization, inflation and gross
capital formation are the independent variables.

Data and sources;

The annual data of time series GDP, trade liberalization, inflation, and gross capital formation
for this paper is taken from various sources like the WDI. SBP and economic survey of Pakistan
from period 1973 to 2017.

Empirical strategy;
Unit root test:

The unit root test is utilized to check the fixed in the variables these tests reveals to us a variable
has pattern or not and furthermore discloses to us the variable is fixed at level or distinction a
couple.

Auto regressive distributive lag model (ARDL):

ARDL procedure is utilized for evaluating since quite a while ago run connection between the
economic time.

ADF Test Results (with intercept)

At LEVEL

Variables 1% 5% 10% ADF statistics Probability

GDP -4.198503 -3.523623 -3.192902 -2.189773 0.4824
TR -4.180911 -3.515523 -3.188259 -3.826129 0.0234
K -4.180911 -3.515523 -3.188259 -5.013516 0.0010
IN -4.205004 -3.526609 -3.194611 -3.649383 0.0380

At 1st difference

Variables 1% 5% 10% ADF statistics Probability

GDP -4.186481 -3.518090 -3.189732 -5.089100 0.0008
TR -4.186481 -3.518090 -3.189732 -7.952924 0.000
K
IN -4.186481 -3.518090 -3.189732 -7.304662 0.000
Note: *significance at 1% level ** significance at 5% level *** significance at 10% level

Explanation;
It is necessary to check the stationary of the data in the time series analysis. In above table we
checked stationarity of the variables.

GDP is stationary at 1st difference because T-statistic (-5.08)> critical value (-4.18). we reject Ho
its mean GDP has no unit root. Trade liberalization is stationer on both at level as well as 1 st
difference at level T-statistic (-2.19) < critical value (-4.18) we accept Ho.

Trade liberalization at level T-statistic (-3.82) > critical value (-4.18) so we reject Ho. At 1 st
difference T-statistics (-7.950) > critical value (-4.18) so we accept Ho.

Gross capital formation is stationer at level. At level T-statistic (-5.01) > critical value (-4.18) we
accept Ho.

Inflation is stationer at both at level as well as 1 st difference. At level T-statistics (-3.64) < the
critical value (-4.21) we reject Ho. At 1 st difference the value of T-statistics (-7.30) > the critical
value (-4.19) so we accept Ho.
Auto regressive distributive lag model (ARDL):

ARDL technique is used for forecasting long run relationship between the economic time.

ARDL Long Run Form and Bounds Test

Dependent Variable: D(LOGGDP)
Selected Model: ARDL (2, 1, 3, 0)
Case 2: Restricted Constant and No Trend
Date: 05/06/20 Time: 14:36
Sample: 1973 2017
Included observations: 44

Conditional Error Correction Regression

Variable Coefficient Std. Error t-Statistic Prob.   

C -3.363158 0.806157 -4.171837 0.0002

LOGGDP (-1)* -0.032968 0.046529 -0.708553 0.4837
LOGIN (-1) 0.118493 0.012860 9.214024 0.0000
LOGK (-1) -0.059001 0.048914 -1.206213 0.2366
LOGTR** -0.209963 0.048787 -4.303661 0.0001
D(LOGGDP (-1)) -0.518317 0.117481 -4.411927 0.0001
D(LOGIN) 0.057042 0.009278 6.148286 0.0000
D(LOGK) 0.049442 0.057470 0.860297 0.3960
D(LOGK (-1)) -0.006600 0.046436 -0.142133 0.8879
D(LOGK (-2)) -0.111770 0.043718 -2.556602 0.0155

  * p-value incompatible with t-Bounds distribution.

** Variable interpreted as Z = Z(-1) + D(Z).

Levels Equation
Case 2: Restricted Constant and No Trend

Variable Coefficient Std. Error t-Statistic Prob.   

LOGIN 3.594140 5.204220 0.690620 0.4948

LOGK -1.789604 3.930766 -0.455281 0.6520
LOGTR -6.368599 8.713202 -0.730914 0.4702
C -102.0113 140.5366 -0.725870 0.4732

EC = LOGGDP - (3.5941*LOGIN -1.7896*LOGK -6.3686*LOGTR -102.0113)

F-Bounds Test Null Hypothesis: No levels relationship

Test Statistic Value Significance. I(0) I(1)

Asymptotic:
n=1000
F-statistic  32.47441 10%   2.37 3.2
K 3 5%   2.79 3.67
2.5%   3.15 4.08
1%   3.65 4.66
 Finite Sample:
Actual Sample Size 42 n=45
10%   2.56 3.428
5%   3.078 4.022
1%   4.27 5.412

Finite Sample:
n=40
10%   2.592 3.454
5%   3.1 4.088
1%   4.31 5.544

Stability Tests
To check the reliability of ARDL model of both short run and long run study analyzed the
cumulative sum (CUMSUM) and cumulative sum of square test on residual of the model. First
figure show that critical values lies between 5% level of significance of cumulative sum test. The
model is fit because CUSUM square lies between 5% level of significance.

Cumulative Sum of Recursive Residuals

..........................................................................................................................
....................................................................................................
20

15

10

-5

-10

-15

-20
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

CUSUM 5% Significance

.....................................................................................................................
..........................................................................................................
 Cumulative Sum of Squares of Recursive Residuals
1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

CUSUM of Squares 5% Significance

Results;
We use ARDL technique for the estimation in this paper. Basically, this paper the is consist on
the variables which are trade openness, inflation, GDP, and the gross fixed capital formation.
When we use the ARDL bound test we get the efficient results in the science the regarded
variables which are used in this paper. Trade openness have positive impact on the GDP of
Pakistan both in short run also in the long run. The fixed capital formation also has positive
effect on the GDP in short run and long run. Inflation have positive effect on GDP in short time
period while in long time period it has negative effect on the GDP of Pakistan.

Conclusion;
This study is the analyzing the trade openness and its effect on the growth of Pakistan. In this
study there is analyzation of Pakistan’s trade with other countries and how it is beneficial the
growth of Pakistan. This study has econometric model in which the growth rate is depending
upon the trade liberalization, inflation and gross capital formation. The data of these variables are
taken from the world development indictor and economic survey of Pakistan from the 1973 to
2017. The unit root test is used to check the stationarity of the data. The ARDL technique is
apply to check the short run and long run trend of model.

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