Article

On the Causal Dynamics Global Business Review

20(3) 795–812, 2019
Between Economic Growth, © 2019 IMI
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DOI: 10.1177/0972150919837079
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from BRICS Countries

Ritu Rani1
Naresh Kumar2

Abstract
The present study investigates the long-run association and direction of causality among economic
growth, trade openness and gross capital formation in Brazil, Russia, India, China and South Africa
(BRICS) nations. This article applied autoregressive distributed lag (ARDL) and vector error correction
model to examine the long-run association and casual relationship among the competing variable. The
ARDL bound test results indicate long-run relationship among economic growth, trade openness and
gross capital formation. Granger causality results reveal unidirectional causality from trade openness
to economic growth in India and that Brazil supports trade-led growth hypothesis while bidirectional
causality is found between trade openness and economic growth in China supporting feedback hypoth-
esis. In addition, the empirical evidence of unidirectional causality moving from economic growth to
trade openness is found in South Africa validating growth-led trade hypothesis. As trade openness is
a significant determinant of economic growth in BRICS, the member countries should adopt policies
towards trade liberalization to sustain economic growth. Moreover, these emerging markets offer a
pool of investment opportunities for the global managers.

Keywords
Trade openness, BRICS, gross capital formation, economic growth, ARDL, cointegration, Granger
causality

Introduction
High economic growth is the ultimate objective of all the developing and developed countries as it
improves the quality of life. Achieving fast and sustained economic growth is a major challenge in the

1
Government College for Women, Sampla, Rohtak, Haryana, India.
2
Institute of Management Studies and Research, Maharshi Dayanand University, Rohtak, Haryana, India.

Corresponding author:
Naresh Kumar, Institute of Management Studies and Research, Maharshi Dayanand University, Rohtak 124001, Haryana, India.
E-mail: nkimsar@gmail.com
796 Global Business Review 20(3)

developing world (Pradhan, Arvin, & Norman, 2015). Trade openness has recently been considered as a
significant determinant of economic growth and has become a key element for policymaking in
developing countries. It has been witnessed that international trade openness has played an important
role in the development process of a country. World Bank, International Monetary Fund and World Trade
Organization recommend trade openness to achieve high economic growth. Trade liberalization has
become an important part of structural adjustment programme in many developing countries. The
potential benefit of outward-oriented trade policy for economic growth has been the subject of empirical
investigation in both developed and developing economies. According to classical economists, trade
liberalization will increase the economic growth. Against the liberal understanding of some classical
economists, some argued that trade openness negatively affects economic growth and defended that
import substitution is important for protection of domestic industry (Bahmani-Oskooee & Niroomand,
1999; Galindo, Micco, & Ordonez, 2002; Odekon, 2002). However, some economists argued that it is
not always necessary that free trade would contribute to economic growth, as development levels are
different in different countries, and suggested import substitution (Chang, 2004). Many researchers
found that trade openness leads to economic growth of the country (Anderson & Babula, 2009; Tahir &
Norulazidah, 2014). Most of the earlier studies have only focused on the effect of export expansion on
economic growth while ignoring the significant contribution of imports. In the literature, empirical
studies on international trade explained the significance of trade openness in economic growth with the
help of export-led growth hypothesis and import-led growth hypothesis (Balassa, 1978, 1985; Bhagwati,
1978; Feder, 1982; Michaely, 1977; Mishra et al., 2010; Ram, 1987; Shahbaz, Azim, & Ahmad, 2011;
Tyler, 1981).
The relationship between exports and economic growth has been attributed to the potential positive
benefits derived from trade with foreign markets. Export is considered as an engine of growth due to
three reasons. First reason is that increase in foreign demand for domestic products can lead to overall
growth in output via decrease in unemployment and increase in income of exportable sector. Second,
export can affect growth indirectly through different routes like greater capacity utilization, economies
of scale and quality improvement due to foreign market competition (Helpman & Krugman, 1985).
Third, increased exports can provide foreign exchange that helps in payment of import which further
increases capital formation and thus speed up economic growth (Balassa, 1978). Banik (2012) explained
that exports is an important determinant of GDP and affects the economic growth through the multiplier
process. In most of the studies, trade openness has been investigated focusing on exports (Esfahani,
1991; Riezman, Summers, & Whiteman, 1996; Thangavelu & Rajaguru, 2004).
Although imports and import competition play key roles for economic growth, yet relatively little
attention has been devoted to the causal relationship between import and economic growth. Imports have
the potential to play an important role in stimulating overall economic growth. But, the effect of import on
economic growth is quite different from that of exports. Endogenous growth models showed that imports
provide access to foreign technology and knowledge, thus stimulating long-run economic growth, and help
in capital formation. According to Lawrence and Lawrence (1999), technological development enhances
the productivity of trading nations. In addition, Grossman and Helpman (1991), Rivera-Batiz and Romer
(1991) and Romer (1990) stated that trade openness increases the number of specialized inputs, cutting-
edge technologies and advanced machines, equipments, tools and capital goods in developing countries.
Consequently, technology transfer via imports enhances the economic growth.
Rani and Kumar 797

Trade Openness and Economic Growth

The openness of the country is usually calculated as the proportion of foreign trade volume to GDP
besides the usage of the individual proportion of export or import to GDP (Anoruo & Ahmad, 2000;
Awokuse, 2011; Burange et al., 2013; Chow, 1987; Hye & Lau, 2015; Kakar 2015; Khilji, 2011; Kwan
& Cotsomities,1991; Mercan, Gocer, Bulut, & Dam, 2013; Okuyan, 2012; Pilinkiene, 2016; Romer,
1993). Openness also indicates the dependence of the country on foreign trade. The size of openness
rates indicates the significance level of foreign trade for the development of the economy through capital
formation. In addition, openness increases the foreign exchange reserve as a result of export expansion
which is further used for import. In addition, removal of trade restrictions is important because it gives
an opportunity for the economies to take advantage of visible benefits (Banik, 2014).
Besides the individual relationship of export or import with economic growth, there are four main
competing hypotheses regarding trade openness. First proposition is trade-led growth (TLG) hypothesis
which asserts that the causality runs from trade openness to economic growth (Bojanic, 2012; Kumar &
Pacheco, 2012; Muhammad, Hussain, & Ali, 2012; Yavari & Mohseni, 2012). The second is growth-led
trade (GLT) hypothesis that suggests unidirectional causality runs from economic growth to trade openness
(Harrison 1996; Levine & Renelt, 1992; Rodrigez & Rodrik, 1999). The third perspective is known as
feedback hypothesis which advocates that economic growth and trade openness can complement and
mutually cause each other (Chow, 1987a, 1987b; Liu, Song, & Romilly, 1997; Pradhan, 2013; Pradhan
& Gunashekar, 2013). The fourth view is neutrality hypothesis which advocates that trade openness and
economic growth are independent of each other (Chang, Simo-Kengne & Gupta, 2013; Din, 2004;
Sarkar, 2007). Furthermore, Table 1 encapsulates some recent empirical studies on causal relationship
among economic growth, trade openness and gross capital formation.

BRICS Current Scenario

At present, Brazil, Russia, India, China and South Africa (BRICS) encompass 40 per cent of the world’s
population and account for nearly 30 per cent of total global GDP in terms of purchasing power parity.
Further, with the total foreign exchange reserves of member countries estimated at US$ 4.3 trillion,
BRICS accounts for approximately 40 per cent of global reserves. China has the largest share (17.08%)
in world’s GDP and is the first largest growing economy in the world, whereas India’s share in world
GDP is 7.1 per cent and secured third fastest growing economy in the world. Each of the BRICS countries
has multiple and different attributes and thus each has a huge potential to develop. This is the reason that
the balance of global economic power is now shifting from the United States and Europe to a number of
fast growing and large developing countries. The total population of BRICS is about 3 billion people.
China is the most populous country in the world with its 1.4 billion people, followed by India with 1.25
billion people. The population of Brazil is 205 million people. Russia, the world’s largest country by
area, is home to about 120 million people. South Africa is home to 53 million inhabitants. BRICS are
also enjoying demographic dividend in comparison with rapidly ageing countries, and longer life
expectancy is likely to benefit the group in future. The population in the age group of 0 to 14 is highest
in India (32.1%), followed by Brazil (27.9%), China (21.4%) and Russia (15.3%). The share of urban
798 Global Business Review 20(3)

population is also growing. The increasing working population shows the huge demand and supply
potential in BRICS economies (The BRICS Report, 2014).
Brazil is the fifth largest country in the world with 8.5 million sq. km land size. The share of Brazil in
world GDP was 2.81 per cent (2015). India’s share in the total world capitalization is 2.5 per cent. India
is the second largest participant among BRICS after China with 7.01 per cent share in world GDP.
Russia’s relative strength is high labour work participation, very low public debt, a larger proportion of
high-school students going on to tertiary education, strong position in higher education, with a powerful
scientific system, particularly dedicated to space and defence activities and growing R&D expenditures.
China is the biggest exporter, second biggest importer and second best destination for foreign direct
investment. Chinese manufacturing sector captures the unskilled labour of the country and puts the
unemployment rate low. Although South Africa is a small country, it showed its visibility in world with
0.5 per cent share in global trade. In total world GDP, the share of South Africa is 0.69 per cent.
The participation of the BRICS countries in world GDP is expected to rise sharply in the years to
come. Economic and demographic trends are creating profound social and political transformations
within the BRICS nations. The share of BRICS in merchandise exports was 17.48 per cent in 2012 in
world’s export that increased to 19.01 per cent in 2015, whereas import constitutes 16.13 per cent share
(2012) in total world imports (World Trade Organization, 2015). In 1990, BRICS accounted for only
3 per cent of global trade. This share doubled by the turn of the century. The share of member countries
in world export increased from 8 per cent in 2002 to 19 per cent in 2014. In addition, BRICS accounted
for 16 per cent of global imports of goods and services. Considering the increasing share of BRICS in
world trade, it became important to investigate impact of trade on economic growth of BRICS. These
emerging markets offer a pool of investment opportunities for the global managers. So, global investors
can take the advantage of doing trade with BRICS nations.

Literature Review

Objectives and Rationale of the Study

The theoretical literature shows that trade openness affects the economic growth by different channels
(capital accumulation, factor price equalization and more employment). Considering the benefits and
vast opportunities of trade openness, the present study investigated the link between trade openness and
economic growth of member countries of BRICS. Specifically, the first objective of the present study is
to investigate the long-run relationship among trade openness, gross capital formation and economic
growth. The second objective is to examine the direction of causality among competing variables.
Nonetheless, we hope to make a contribution to a better understanding of the links between both trade
openness and economic growth.

Methodology and Data Analysis

This article applied autoregressive distributed lag (ARDL) model and vector error correction model
(VECM) to examine the long-run association and casual relationship among the competing variable.
The study uses annual time series data of Brazil (1966–2015), Russia (1989–2015), India (1966–2015),
China (1982–2015) and South Africa (1966–2015). The variables taken for analysis are GDP per capita,
Table 1. Empirical Evidence on Relationship between Economic Growth, Trade Openness and Gross Capital Formation

Single/Multi-
Authors Country Study Sample Period Methodology Main Variables Main Findings
Harrison (1996) Multi-country 1960–1987 Panel data analysis GDP, capital stock, Openness is associated
education, population with economic growth
and trade openness
Bahmani-Oskooee and Multi-country (59 1960–1992 Johansen cointegration Trade openness Positive relationship
Niroomand (1999) countries) and GDP between trade growth
openness and economic in
19 countries
Ahmad and Anoruo Multi-country 1960–1997 Johansen cointegration Trade openness Openness and growth
(2000) (5 countries) and ECM and GDP variables are cointegrated,
GDP trade openness

Yaprakli (2007) Single (Turkey) 1960-2006 Johansen cointegration Trade openness Economic growth
and Granger and GDP positively affected from
causality test trade openness in long
run and GDP trade
openness in short run
Omisakin, Oluwatosin, Single (Nigeria) 1970–2006 Toda and Yamamoto FDI, trade openness Positive relationship was
and Ayoola (2009) causality and ARDL and economic growth found between trade
method openness and economic
growth
Awokuse (2011) Multi-country 1993–2002, Cointegartion, GDP, real gross capital, Import lead hypothesis
(Argentina, Colombia 1994–2002 ECM, Vector labour, real exports and was supported in three
and Peru) and Autoregressive Model real imports countries
1990–2002 (VAR), Granger causality
Bajwa and Siddiqi SAARC 1972–1985 and Panel conitegration GDP and openness Short run (openesss
(2011) 1986–2007 GDP) during 1986–2007;
in long run, GDP and
openness are positively
related during 1986–2007
Table 1 (continued)
Table 1. (continued)
Single/Multi-
Authors Country Study Sample Period Methodology Main Variables Main Findings
Kakar (2011) Pakistan and Malaysia 1980–2010 Johansen cointegration FDI, trade openness Trade openness positively
and Granger causality and economic effects economic growth
test growth (GDP) in both the countries in
the long run
Hye and Lau (2012) India 1971–2009 ARDL, Rolling Real GDP, real gross Human capital and
Window Regression capital formation, physical capital are
secondary school positively related to
enrollment and trade economic growth, trade
openness openness index negatively
impact economic growth
in long run, but in short
run, trade openness
affects economic growth
Okuyan, Ozun, and 17 developing 1960–2003, Cointegration, bound GDP and trade Cointegration relationship
Erbaykal (2012) countries 1952–2004, test, Toda openness was found in six
1950–2003, and Yamamoto countries, and in four
etc. countries (Algeria, China,
Mexico and Thailand),
direction of causality is
from trade openness
to economic growth,
and vice versa in Brazil,
Indonesia, India and the
Philippines
Burange (2013) Multi-country 1981–2012 VAR, VECM GDP, merchandise Openness GDP
(BRICS) and Johansen exports, imports, growth (Brazil), export
cointegration service exports and GDP (China), GDP
service imports export (South
Africa) and openness
GDP (Russia and India)
Awojobi (2013) Single (Greece) 1960–2009 VECM and Granger Trade openness Financial development has
Causality Test and GDP no causal impact on trade
, but causal relationship
was found between
financial development and
economic growth
 Single/Multi-
Authors Country Study Sample Period Methodology Main Variables Main Findings
Meraj (2013) Single (Bangladesh) 1971–2005 ARDL, ECM, Granger Export of goods and GDP export and
causality services, import of GDP import
goods and services
Mercan et al. (2013) Multi-country 1989–2010 Panel data analysis GDP and trade Effect of trade openness
(BRIC-T) openness on economic growth is
positive and significant
Azid (2015) Multi-country (50 1990–2009 Pooled least squared Trade openness Trade openness positively
developing Countries) estimation (industrial output/ affects GDP and Domestic
GDP), GDP, inflation investment has significant
and education impact on GDP
Pardhan (2015) Single (India) 1994–2011 ARDL bound testing GDP, broad money Trade openness, GDP and
approach and VECM supply (% of GDP), financial sector Granger-
export, import and cause each other
trade openness
(sum of export and
import as percentage of
GDP)
Pilinkiene (2016) Multi-country (central 2000–2014 Granger causality and Trade openness GDP trade openness,
and eastern European; VAR (export + imports)/ competitiveness GDP
11 countries) GDP, GDP and
competitiveness
Dritsakis (2016) 13 newest European 1995–2013 Panel cointegration Trade openness Trade openness
Union members and causality approaches (exports and GDP, in both the
and ECM imports)/GDP short run and
and GDP per long run
capita (GDP)
Source: The authors.
Note: means unidirectional, and means bidirectional causality.
802 Global Business Review 20(3)

trade openness and gross capital formation. All the variables are taken from online world development
indicators database of World Bank. GDP per capita is measured at constant local currency unit of each
country. Trade openness is measured as ratio sum of exports of goods and services and imports of goods
and services to GDP at constant price (Meraj, 2013; Mercan et al. 2013; Okuyan et al., 2012; Ohlan,
2010, 2015; Pardhan, 2015). The relationship among variables is expressed through the following
specification:

GDPPC = f (TOPEN, GCF)(1)

Here, GDPPC is gross domestic product per capita, TOPEN is trade openness and GCF is gross capital
formation.
Using log-linear transformation of the variables Equation (1) can be rewritten in a time-series
econometric specification as follows:

LGDPC = b 0 + b 1 LTOPEN + b 2 LGCF + { t (2)

Here, L is natural log, β1 and β2 are elasticities of economic growth with respect to trade openness and
gross capital formation, β0 is intercept parameter and φ is the error term.
Investigation of the cointegration between the variables using teh ARDL approach does not formally
require pretesting of variables for unit root. Testing of stationarity of the variables is carried out to ensure
that variables are not I(2). To determine the order of integration of series, we applied the augmented
Dickey–Fuller (Dickey & Fuller, 1981) unit root test. The results of unit root test presented in Table 2
shows that all the variables under study are stationary at first difference except GDP per capita of Brazil
that is stationary at level i.e. I(0) (the null hypothesis of the presence of unit root is rejected once the
series are in the first difference).
The autoregressive distributive lag model has the advantage that it does not require all variables to be
I(1) as in Johansen cointegration and applicable even if variables are I(0) and I(1). To investigate the
presence of long-run relationships among the GDP per capita, trade openness and gross capital formation
in BRICS, bound testing under Pesaran, Shin and Smith (2001) procedure is used. The bound test is
based on the joint significance of F-statistic and the chi-square statistic of Wald test. If the computed

Table 2. Unit Root Test (Augmented Dickey–Fuller Test)

Variables Brazil Russia India China South Africa

(Levels)
LGDPPC 0.00370*** 0.61850 1.00000 0.96360 0.64720
LTOPEN 0.91290 0.76780 0.98380 0.94360 0.88820
LGCF 0.22410 0.17050 0.99810 0.68420 0.75960
(1st difference)
LGDPPC 0.00370*** 0.00000*** 0.00000*** 0.00290*** 0.00050***
LTOPEN 0.00000*** 0.00050*** 0.00000*** 0.00500*** 0.00010***
LGCF 0.00000*** 0.00132*** 0.00000*** 0.01560** 0.00000***
Source: The authors.
Note: *** and ** indicate rejection of null hypothesis of non-stationary at 1 per cent and 5 per cent levels of significance.
Rani and Kumar 803

F-statistic is greater than the upper bound critical value (bound test), then empirical results confirmed the
long-run relationship among underlying variable, and if the calculated F-statistic falls below the lower
critical value, then we found the evidence of no cointegration among variables. The ARDL model is
specified in Equation (3):
k k
TLGDPPC t = b 0 + | b 1 TLGDPPC t - i + | b 2 TLTOPEN t - i
i=1 i=0
k
+ | b 3 TLGCFt - i + a 1 LGDPPC t - 1 (3)
i=0
+a 2 LTOPEN t - 1 + a 3 LGCFt - 1 + e t

On the right-hand side, a1, a2, a3 represent the coefficient of long-run relationship. The remaining
expressions with the summation sign (b1 to b3) represent the short-run dynamics of the model. In
addition, the long-run stability of the parameters is tested by applying the cumulative sum (CUSUM) and
the cumulative sum of squares (CUSUMSQ) tests suggested by Pesaran and Shin (1999). CUSUM and
CUSUM square confirm the stability of model in long run.
The long-run elasticity of economic growth with respect to trade openness and gross domestic capital
formation estimated using the underlying ARDL model is shown in Table 3. The critical value of
F-statistics of the bound test at 5 per cent level is greater than upper bound, confirming the long-run
relationship among competing variables of the study. The result of Brazil indicates that in long run, trade
openness has a statistically significant positive impact on economic growth at 10 per cent level of
significance. Specifically, the magnitude of 0.09 implies that a 1 per cent increase in trade openness leads
to increase GDP per capita by 0.09 per cent. It means that trade openness enhance the growth in Brazil
in long run. Not surprisingly, gross domestic capital formation also has a positive impact on economic

Table 3. Testing Cointegration: ARDL Bound Testing Procedure

Variables Brazil Russia India China South Africa

LGDPPC 0.96255 0.810620 0.8078 0.4210 1.040
(0.0000)*** (0.0001)*** (0.000)*** (0.0236)** (0.000)***
LTOPEN 0.096189 0.2294 0.105 0.0875 0.0436
(0.0968)* (0.0451)** (0.002)*** (0.0108)** (0.0364)**
LGCF 0.207166 0.186175 0.099 0.37791 0.1232
(0.0000)*** (0.000)*** (0.007)*** (0.0000)*** (0.000)***
Constant 1.261 2.7505 −0.882 −7.34 −0.05
(0.06)* (0.0001)*** (0.02)** (0.003)*** (0.0683)*
R2 0.99401 0.99073 0.99780 0.99956 0.97440
Adjusted R2 0.99331 0.99830 0.99760 0.99940 0.97130
Durbin Watson 2.20000 2.23000 2.08000 1.68000 1.98000
Prob. (F-statistics) 0.00000 0.00000 0.00000 0.00000 0.00000
Serial Correlation (LM) 0.40860 0.08100 0.85480 0.08440 0.74700
Heteroskedasticity Test 0.18150 1.00000 0.41610 0.18200 0.07610
Bound Test (F-statistics) 9.42460 17.48600 26.29920 12.59000 4.23600
Source: The authors.
Notes: Critical values for upper and lower bounds at 5 per cent level are 3.87 and 3.1, respectively. Figures in parenthesis
are p-value. *, **and *** indicate significance at 10 per cent, 5 per cent and 1 per cent levels, respectively.
804 Global Business Review 20(3)

growth in Brazil. It means that 1 per cent increase in gross domestic investment will increase the GDP
per capita by 0.2 per cent. In case of Russia, trade openness is found to have a significant impact on GDP
per capita in long run and significant at 5 per cent level. It could further mean that 1 per cent increase in
trade openness increase the GDP per capita by 0.22 per cent. In addition, gross domestic capital formation
is also found positive and statistically significant at 5 per cent level. A 1 per cent increase in capital
formation will lead to increase the GDP per capita by 0.18 per cent in Russia.
In India, trade openness and gross domestic capital formation have a positive and significant impact on
GDP per capita. A 1 per cent increase in trade openness will lead to increase the GDP per capita by 0.10 per
cent. Further, 1 per cent increase in gross domestic capital formation led to an increase in the GDP per
capita by 0.09 per cent in long run. Not surprisingly, trade openness has a positive and significant impact
on economic growth in China. The elasticity of economic growth with respect to trade openness is 0.08
per cent in China. Gross domestic capital formation has strong and positive impact on GDP per capita. The
result shows that 1 per cent increase in gross capital formation increases the GDP per capita by 0.37
per cent. In case of South Africa, trade openness has a positive and significant impact on GDP per capita
meaning that 1 per cent increase in trade openness will increase the GDP per capita by 0.04 per cent. While
1 per cent increases in gross capital formation increase the GDP per capita by 0.12 per cent.
Moreover, the estimated ARDL model passed the usual diagnostic tests. The value of R square is
above 99 per cent except South Africa (97%) indicating fitness of model. Further, Breusch–Godfrey
serial correlation LM test shows that there is no serial correlation. In addition, chi-square value of
heteroskedasticity test is also significant at 5 per cent level. The p-value of Durbin–Watson statistics
indicates no autocorrelation among residuals.
In brief, BRICS nation validates the TLG hypothesis in long run. This could further mean that not
only export but also import plays a significant role in economic growth of these nations. The results
show that trade openness is significantly related with economic growth at 5 per cent level except Brazil
(10%). It follows that the countries belonging to the BRICS have benefitted significantly from the
process of trade liberalization. The BRICS nations are, therefore, suggested to speed up the process of
trade liberalization to accelerate the long-run economic growth. The results have also provided strong
evidence in favour of a positive long-run relationship between domestic capital investment and economic
growth. The developing countries (like Brazil, India and South Africa) in general are facing the problem
of scarcity of capital formation. Domestic investment plays a vital role in the growth process. It implies
that the BRICS countries should invest more in the domestic economy if they want to grow faster.
Further, increase in exports will provide foreign reserves which can be used to import new technology
and capital goods. These altogether increase the domestic investment, hence stimulate economic growth.
We implemented the cumulative sum (CUSUM) and cumulative sum of square (CUSUMQ) stability
test based on residuals of ARDL model. According to Figure 1, there is no stability issue in Brazil, Russia
and South Africa. However, for India, CUSUM test indicates that there is structural break in the GDP
during 1990s but CUSUM square shows stability in long run. While, in China, CUSUM square indicates
instability but CUSUM test shows the stability in long run.

VCEM for Granger Causality

After analysing long-run association, the Granger causality test is used to check the causality relationships
between the variables with the application of VECM. It must be noted that the estimations of both ARDL
and VECM are very sensitive to lag length (Granger & Lee, 1989; Ma, 2007). Akaike Information
Criterion is used to choose the optimum lag length following Burnham and Anderson (2004).
Rani and Kumar 805

Figure 1. Plots of CUSUM and CUSUM Square Test

Source: The authors.
Note: The straight line represents critical bound test at 5 per cent level of significance.
806 Global Business Review 20(3)

Table 4. Granger Causality Test Results Based on Error Correction Model

Direction of Causality
Short Run (Wald Test Chi-square Statistic)
Dependent Variables ∑DLGDPPC(t–1) ∑DLTOPEN(t–1) ∑DLGCF(t–1) ECT(t–1)
Brazil
DLGDPPCt – 0.0214(0.0893)* 2.7237(0.2562) –0.2787(0.000)***
DLTOPENt 0.2558(0.8799) – 0.5465(0.7609) −0.057(0.6719)
DLGCFt 1.1297(0.5684) 3.5028(0.1735) – 0.37800(0.060)
Russia
DLGDPPCt – 0.3696(0.8313) 5.2456(0.0726)* 0.12883(0.5452)
DLTOPENt 1.1274(0.5691) – 1.1890(0.5518) 0.4852(0.0276)
DLGCFt 8.2614(0.0161)** 1.490(0.4747) – 1.17281(0.2748)
India
DLGDPPCt – 0.0623(0.0803)* 0.188041(0.66) –0.1247(0.000)***
DLTOPENt 0.544817(0.4604) – 4.4134(0.0357)** 0.0895(0.3215)
DLGCFt 4.4942(0.034)** 2.4116(0.1204) – 0.0021(0.981)
China
DLGDPPCt – 12.919(0.004)*** 4.28(0.2316) −0.1338(0.0522)*
DLTOPENt 9.3476(0.0231)** – 6.907(0.007)*** −1.739(0.1305)
DLGCFt 15.860(0.0012)*** 2.9690(0.3964) – 2.223(0.0014)
South Africa
DLGDPPCt – 1.755(0.4157) 8.177(0.001)*** −0.07(0.0006)***
DLTOPENt 4.872(0.008)*** – 1.099(0.5772) −0.086(0.1753)
DLGCFt 4.039(0.1325) 0.56(0.7556) – –0.3208(0.002)***
Source: The authors.
Notes: *, ** and *** indicate significance at 10 per cent, 5 per cent and 1 per cent levels, respectively. ( ) = probability.

The presence of cointegrated long-run relationships among economic growth, trade openness and gross
capital formation entitles us to apply the VECM Granger causality approach. The direction of causality
is essential, as it informs policymakers the relative significance of alternative approaches to stimulate
economic growth. The VECM model is specified in Equation (4), as follows:

RS V
RS V SR WV
W SSd 11, i d 12, i d 13, iWWW RS VW R V RSn VW
SS LGDPPC tW m
SS 1WW k SS WW SSLGDPPC t - 1WW SSSh 1 WWW SS 1WW
W
(1 - L) SSSLTOPEN tWWW = SSSm 2WWW + | (1 - L) SSSd 21, i d 22, i d 23, iWWW SSSLTOPEN t - 1WWW + SSh 2 WW (ECTt - 1) + SSn 2WW (4)
SS W S W i=1 SS WW SS W SS WW SS WW
SLGCFt WW SSm 3WW SSd W SLGCFt - 1 WW Sh 3W Sn 3W
T X T X 31, i d 32, i d 33, iW T X T X T X
T X
Here, (1−L) shows the difference operator, ECTt-1 is the one period lagged error correction term. m1, m2
and m3 are constant and d11,i to d33,i shows the short-run causality. h1, h2 and h3 show long-run causality.
n1, n2 and n3 are error terms. The statistical significance of ECTt-1 is checked by applying t-test statistic
and confirms the existence of long-run Granger-causality while that of Wald’s test chi-square statistic for
the combined significance of lagged values of variable exhibits short-run dynamics.
Rani and Kumar 807

The Granger causality results are reported in Table 4. Empirical evidence shows that in short run,
unidirectional causality is running from trade openness to GDP per capita in India and Brazil (supports
TLG hypothesis). In China, bidirectional causality is running between trade openness and GDP per
capita (supports Feedback hypothesis). While in South Africa, unidirectional causality is running from
GDP per capita to trade openness (validating GLT hypothesis). Moreover, bidirectional causality is
found between gross capital formation and GDP per capita in Russia while in case of India and China,
causality is unidirectional and running from GDP per capita to GCF. In South Africa, causality is running
from gross capital formation to GDP per capita. Regarding the long-run causality, ECT coefficient of
all the BRICS nations, except Russia, are negative and significant suggesting unidirectional causality
running from trade openness and GCF to GDP per capita. The causality from trade openness to GDP
confirms the validity of TLG hypothesis confined with the results of Bojanic (2012); Yavari and Mohseni
(2012); Kumar and Pacheco (2012) and Muhammad et al. (2012).

Figure 2. Cholesky Impulse Response Function

Source: The authors.
Notes: The impulse response function presented column wise (1,2,3,4,5) is for BRICS; panels 1,2,3 (Brazil), panels 4,5,6 (Russia),
panels 7,8, 9 (India), panels 10,11,12 (China) and panels 13,14,15 (South Africa).
808 Global Business Review 20(3)

Using the previously estimated VECM system, the causal analysis is extended by examining impulse
response function (IRF). An IRF capture the impact of one-time shock to one of the innovations on
current and future values of endogenous variables (Koop, Pesaran, & Potter, 1996). Thus, IRFs could
provide clear picture of shocks effect GDP per capita, trade openness and gross capital formation with
each other. Figure 2 provides results of Cholesky impulse response for BRICS. To trace the completeness,
impulse responses are provided for all the three competing variables in the system. However, focus is
placed only on the relationship between trade openness and GDP per capita. The simulation in the IRF
covers 10 years to capture adequate time for tracing the effect of the shocks to variable in the system. The
first column in the Figure 2 reveals the impulse responses of each variable to innovation from each of the
other variables for Brazil followed by Russia, India, China and South Africa. Panel 1 reflects the impulse
response of GDP per capita (a positive shock) to trade openness and gross capital formation in Brazil.
When the impulse is GDP per capita (positive shock), the every response of trade openness is all time
positive at each responsive period. In contrast, the response of GDP per capita to innovation in capital
formation is negative.
Further, the response of GDP per capita to a shock in trade openness is positive for other BRICS
nation except South Africa in which it is initially small and negative (became positive after three years).
In order to check for reverse causality from GDP per capita to trade openness in BRICS, the responses
of trade openness are reported in panels 2, 5, 8, 11 and 14. The response of positive shock of trade
openness on GDPPC is positive for Brazil and Russia while it is negative up to 1 year in India, then
becames positive. In China and South Africa, the impulse response of trade openness on economic
growth is negative after 2 and 3 years, respectively. There are feedback causal effects in Brazil and
Russia (Dufrenot, Mignon, & Tsangarides, 2010; Shahbaz, 2012; Shahbaz et al., 2011), while GLT
hypothesis is supported in India, China and South Africa.

Conclusion and Policy Recommendations

This article has tested the relationship between trade openness and economic growth in the context of
the BRICS countries as a whole. Over the past two decades, these economies have achieved remarkable
growth rate and could become the most dominant economies in the near future. The empirical analysis
is carried out with the help of ARDL model, VECM and Granger causality test. Using the ARDL bounds
testing approach in conjunction with the VECM approach, our study reaches the conclusion that there is
a long-run relationship among GDP per capita, trade openness and gross domestic capital formation in
BRICS countries. More interestingly, the result reveals that 1 per cent increase in trade openness will
increase the GDP per capita by 0.09 per cent in Brazil, 0.22 per cent in Russia, 0.10 per cent in India,
0.08 per cent in China and 0.04 per cent in South Africa. Thus, we can infer that trade openness stimulates
economic growth through capital formation in these economies. In addition, results of VECM granger
causality test show that ECT coefficient of all the BRICS nations except Russia are negative and
significant suggesting unidirectional causality running from trade openness and GCF to GDP per capita
in long run. This confirms the validity of TLG hypothesis in the short and long runs in BRICS nations
(Bojanic, 2012; Kumar & Pacheco, 2012; Muhammad et al., 2012; Yavari & Mohseni, 2012).Further,
empirical evidence from IRF supports the bidirectional causality between trade openness and GDP per
capita for Brazil and Russia. The results confirmed the validity of GLT hypothesis in India, China and
South Africa.
In brief, this article has found a positive and statistically significant relationship between trade
openness and economic growth in long run for BRICS nations. Therefore, speeding up the process of
trade liberalization would be a useful strategy for these countries. The analysis also finds that domestic
Rani and Kumar 809

investment is a key determinant of economic growth apart from trade openness. Based on the results, it
is recommended that BRICS countries should increase the volume of trade openness through reduction
in import duties, reciprocal trade liberalization, freeing quotas and other technical barriers of trade.
Further, export openness along with import openness is also very important to foster economic growth
and to increase capital formation these nations. Export promotion strategy to foster economic growth
will be partially effective if import restrictions are maintained. Import openness is equally very important
to stimulate economic growth, as it complements the exports by providing intermediate production
inputs to export sector. Moreover, developing countries of BRICS like India, Brazil and South Africa
have limited capital resources for technological innovation, so they should take the benefit of foreign
technology and knowledge via import from developed economies.

Acknowledgement
The authors are grateful to the anonymous referees of the journal for their useful comments and suggestions. The
usual disclaimer applies.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship, and/or publication of this article.

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