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Economic Growth, Exports and Imports in Pakistan: Granger Causality Analysis
Economic Growth, Exports and Imports in Pakistan: Granger Causality Analysis
Economic Growth, Exports and Imports in Pakistan: Granger Causality Analysis
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Volume 13 (2014) Economic Growth in Pakistan 32
1.1. INTRODUCTION
causality and of course some of them could not found any evidence
for causality between export and GDP.
Hatemi and Irandoust (2000) investigated the causal
relationship between export growth and economic growth for the
Nordic economies. The results show unidirectional Granger
causality running from economic growth to export growth in
Denmark and bidirectional causality in Finland, Norway and
Sweden.
Hatemi (2002) studied causality between export growth and
economic growth in Japan by performing augmented Granger-
causality tests using the bootstrap simulation technique. The results
show that the Granger-causality is bidirectional, which means the
expansion of exports is an integral part of the economic growth
process in Japan. However, they point to a causal relationship
between international trade and exports and economic growth.
Finally and crucially, for the purpose of this paper, the
strong correlations of export, import and GDP growth rates has
nothing to say about a relationship between the export (import) and
the GDP trend development, as it may arise from a purely short-
run relationship. In order to test for the existence of a long-run
relationship among GDP, exports and imports, the theory of
cointegration developed by Engle and Granger (1987). Johansen
(1988) and Stock and Watson (1988), among others, has to be
applied. To this end, we analyze annual data for Pakistan using a
vector autoregressive (VAR) framework.
These arguments by diversified researchers and their
studies led the authors to explore into the economic growth or
decline of Pakistan as a nation, which was further supported by
following economic details. The immense change in economic
indicators took place after the terrorist attacks in 2001. In the year
2001 – 2002, Pakistan had a per capita income of less than $600,
$35 billion in external debt, 8% unemployment, 4% inflation
(Pakistan Economic Survey 2003-04) and a 15% increase in
37
1
The annual Economic Surveys from 2006-07 through 2013-14 are available at
http://www.finance.gov.pk.
Volume 13 (2014) Economic Growth in Pakistan 40
Pakistan. Love and Chandra (2005) show both short and long-run
unidirectional causality from income to exports in Bangladesh.
Dodaro (1993) shows mixed results. Nandi and Basuded
(1991), working on India, find evidence of unidirectional causality
from export growth to economic growth. Bhat (1995) re-examines
the export-economic growth nexus for India and finds evidence of
bi-directional causality between export growth and economic
growth.
Ghatak and Price (1997) test the ELG hypothesis for India
for the period 1960-1992, using exports as regressors and measure
of GDP that nets out exports, along with exports and imports as
additional variables. Their cointegration tests confirm the long-run
nature of this relationship. However, imports do not appear to be
important for the case of India.
Asafu-Adjaye et al. (1999) consider three variables:
exports, real output and imports (for the period 1960-1994). They
do not find any evidence of the existence of a causal relationship
between these variables for the case of India and no support for the
ELG hypothesis, which is not too surprising given India’s
economic history and trade policies.
Ramos (2001) investigates the Granger-causality between
exports, imports, and economic growth in Portugal over the period
1865-1998. His empirical results do not confirm a unidirectional
causality between the variables considered. There is a feedback
effect between exports output growth and imports output growth.
Nidugala (2001) finds evidence in support of the ELG
hypothesis for the case of India, particularly in the 1980s. He finds
that export growth had a significant impact on GDP growth.
Further, his study reveals that growth of manufactured exports had
a significant positive relationship with GDP growth, while the
growth of primary exports had no such influence.
Volume 13 (2014) Economic Growth in Pakistan 42
stationarity. The test is conducted with and without trend (t) for
each of the series. The general form of ADF test is estimated by
the following regression:
n
t t 1 1 i t (1.1)
i 1
Hypothesis:
HN: Variable is not stationary or has a unit root (so here we
have to reject HN, and accept HA to be stationary)
HA: Variable is Stationary
a) When the p-value is < 0.05, then we reject HN, meaning that the
particular variable is stationary.
b) But if the p-value is > 0.05, then we accept HN, meaning that we
cannot reject HN; the variable is not stationary.
t t t 1 t p t (1.3 )
p 1
t t 1 1 t 1 t (1.4)
i 1
n n n
GDPt 1t GDPt 1 C1Exp t 1 d1t Im pt 1 2 t ...(1.5)
i 1 i 1 i 1
n n n
Exp t 3t GDPt 1 C3t Exp t 1 d 3t Im pt 1 3t ....(1.6)
i 1 i 1 i 1
n n n
Im pt 3t GDPt 1 C3 t Exp t 1 d 3t Im pt 1 3t ....(1.7)
i 1 i 1 i 1
GDP and exports and it is safe to conclude that the variables are
stationary except for Import. This implies that the variables are
integrated of order one, I(1).
ADF
ADF
First Difference with
Level with constant only
constant only
Variable C.V T-Statistic Probability C.V T-Statistic Probability
LGDP -3.788030 -3.808546
1% level -3.012363 -3.020686 3.772912
0.975492 0.9945 0.0108
5% level -2.646119 -2.650413
10% level
LEXP -3.788030 -3.808546
1% level -3.012363 -3.020686 -3.367188
-0.636991 0.8419 0.0251
5% level -2.646119 -2.650413
10% level
LIMP -3.808546
-3.808546
1% level -3.020686
0.758991 0.9904 -3.020686 -2.352593 0.1666
5% level -2.650413
-2.650413
10% level
Volume 13 (2014) Economic Growth in Pakistan 52
PP
PP
First Difference with
Level with constant only
constant only
Variable C.V T-Statistic Probability C.V T-Statistic Probability
LGDP
1% level -3.808546
5% level -3.788030 -3.020686 -3.75272 0.0107
0.955124 0.9942
10% level -3.012363 -2.650413
-2.646119
1.5 Conclusion
This study examines the Granger causality relationship
between exports, imports and economic growth in Pakistan over
the period 1976-2011. The relationship between exports and
economic growth has long been a subject of great interest in the
development literature. The theoretical consensus on export-led
growth emerged in the 1970s and 1980s, after the successful
performance of the East-Asian economies. Many studies have
found exports affecting economic growth favourably in different
countries and regions. This paper provides a Granger causality and
cointegration test employed in the empirical analysis using
Augmented Dickey Fuller (ADF) and Phillips Perron (PP)
stationarity test.
The variable proved to be integrated of the order one I(1) at
first difference. The Johansen and Juselius cointegration test was
used to determine the presence or otherwise of a cointegrating
vector in the variables. Both Trace and Maximum Eigenvalue
indicated no cointegration at 5% level of significance, pointing to
the fact that the variables do not have a long-run relationship.
To determine the direction of causality among the
variables, at least in the short run, the Pairwise Granger Causality
was carried out. Economic growth was found to Granger cause
Volume 13 (2014) Economic Growth in Pakistan 56
effort is unconditional and that we would not let even our national
interest and integrity come in the way of this cooperation. Quoting
the then President Musharraf’s own words, 9/11 “came as a
thunderbolt” (Musharraf, 2006, p. 15), presenting acute challenges
as well as opportunities.
It can be considered that Pakistan is the single Muslim
nation that is forced to have an ongoing military operation against
its own people. The nation has brought the anti-Taliban war into
Pakistan, which placed the armed forces on the wrong side of the
people. The sovereignty of the nation is being violated with
impunity. The freedom of action in the country’s interest is
questioned and undermined. A proxy war is being fought in the
nation itself. Pakistan has had to accept responsibility for crimes it
has not committed. Pakistan’s problems were further exacerbated
by the complex regional configuration, with American presence in
Afghanistan, the new Indo-US nexus and India’s increasing
influence in Afghanistan. The domestic failures have seriously
constricted the nation’s foreign policy options.
The study on a whole on the economic growth through
exports and imports in Pakistan leads to an understanding that the
problems faced are mainly domestic or internal and not specifically
external. The country is in need of domestic consolidation,
politically, economically and socially.
Volume 13 (2014) Economic Growth in Pakistan 58
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