impact of trade on economic growth.docx
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SUPERIOR UNIVERSITY LAHORE
Impact of trade on
Economic GrowthCase study of Pakistan
Shamsher Khan M.Tanzeel-e-Rahman khan Zaeem munawar Arslan KhalilRiasat Ali Nayab saleem
10/2/2013
M.Tanzeel-e-Rahman khan 13125
Zaeem munawar 13118
Arslan Khalil 13127
Riasat Ali 13110
Nayab saleem 13124
Shamsher KhanAdditional Director
National School of Public PolicyNMC Lahore.
Assignment topic: Impact of economic indicators on growth and development.Presented to: Miss Zahra
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Impact of trade on Economic GrowthAbstract: The article illustrates that d uring 1960’s came in a wave for
developing theories, models, strategies and plans for economic development.Trade was considered as engine of growth. Pakistan also experienceddevelopment strategies based upon trade promotion. In later part of itseconomic history econometric analysis proved insignificance of role of trade
and development but it was not so simple to defend so since there had comeup multiple other factors which lead to depress the economic growth, hencethe importance of trade does not get mitigated. There are various policyoptions to implement for correcting the economic imbalances that will insureeffectiveness of trade contribution towards growth.
Introduction
Theoretical FrameworkAfter the World War II there was need for rehabilitation, reconstruction and development so
International bank for reconstruction and development IBRD was found .Economic growth
became the most desired pursuit of all developing economies which aspired to match up with the
developed world for their survival, so the economists are interested in finding the causality
pattern (models) of growth determinants in order to design the growth strategy for their
economies. The thesis that the trade is an engine of growth is true for most of the economies.
Pakistan‘s experience supported this thesis especially in its early development phase. Now the
country has started experiencing the otherwise lower GDP growth rates consistently. This should
not be taken as reversal of the thesis. In fact this situation should be viewed in the emerging
scenario of multiple new factors which exert their depressing influence upon the growth rate.
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It is well known that economically developed countries have the capacity increase national
income, to reduce poverty level, improve their living standards, strengthen their socio -economic
institutions, preserve natural environment and achieve political stability. After the World War II,
many countries adopted very aggressive pattern of growth, while some of the most recently
emancipated countries still strive to cope up with the modern standards of development so they
are working to improve their real GDP.
Since 1960, development studies have identified significant determinants of economic growth.
There is a large part of economic theory that analyzes the causal relationship between trade and
economic growth. The relationship between trade openness and growth is a highly debated topic.
Generally the expansion in trade assumes the role as the main determinant of economic growth,
so an increase in exports &/or imports leads to an increase in economic growth.
However, the trade and growth relationship is influenced by some other indirect factors which
have to be kept in view in drawing conclusions on case to case bases.
I-Trade Promotes Growth
The effects of trade on economic GrowthTrade can be a key factor in economic development. The prudent use of trade can boost a
country's development and create absolute gains for the trading partners involved. Trade has
been touted as an important tool in the path to development by prominent economists. However
trade may not be a panacea for development as important questions surrounding how free trade
really is and the harm trade can cause to domestic infant industries come into play.
The empirical literature shows that trade openness or liberalization affects output growth. Most
of the studies have concluded that the openness of the trade regime has positive relation with
GDP growth Most of the studies have concluded that the openness of the trade regime has
positive relation with GDP growth. E dwards (1998) used comparative data for 93 countries to
analyze the robustness of the relationship between openness and total factor productivity (TFP)
growth for the period1980 to 1990. This relationship suggests that more open countries will tend
to experience faster productivity growth than more protectionist countries.
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Trade effecting economic growth in PakistanCase of Pakistan: At the time of independence Pakistan inherited almost little industrial base.
Export of agriculture commodities mainly cotton and jute played dominant role in earning
foreign exchange hence importing capital goods for raising the industrial base in the economy.
Export bonus scheme was introduced as incentive to promote the trade. Pakistan Industrial
Development Corporation (PIDC) played its pivotal role in financing capital goods ’ imports for
setting of industrial units. The country grew in terms of GDP and experienced as high growth
rate as 10.20% (1953-54) and 9.8% (1969-70) .The economic development got consolidated
through Imports Substitution Scheme; resultantly the industrial base of the country underwent
visible transformation. The role of agriculture which used to be the mainstream of the economy
started diminishing and giving way to the industry and services in the GDP structure.
Policy of Trade Liberalization : The past decade has witnessed an unparallel opening and
modernism of the economies in all regions, encompassing deregulation, demonpolisation,
privatization and private participation in the provision of infrastructure, and the reduction and
simplification of tariffs. An integral part of the process there has been the liberalization of
foreign investment (FDI) regime.
Pakistan has gradually liberalized its trade regime especially after 1988, when the government
accepted the first IMF Structural Adjustment Program. After 1995, this policy gained greater
momentum and WTO related compliances have induced Pakistan to reduce import duties and
eliminate various subsidies. In case of Pakistan it has been found that the growth impact of FDI
tends to be greater under an export promotion (EP) trade regime compared to an import-
substitution (IS) regime over the period 1970-2001. The effect of FDI in import substitution
industries may be different from those of export oriented industries since former target mostly
the limited domestic market, while the latter target the larger international market. Moreover, it
is more likely to generate more employment and, therefore spillover due to the expected larger
production capacity associated with larger market. FDI can stimulate human resources
development through investment in education and training. This enhances the stock of human
capital, and increases productivity of labour and other factors of production. In short, these
finding suggest that Pakistan’s capacity to progress on economic development will depend on
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her performance in attracting FDI. Pakistan’s outward looking development strategy must
include FDI as an essential part in addition to export promotion strategy.
II- Declining Significance of Trade
Relationship of Trade and Growth
In case of Pakistan for the period ranging from 1972 to 2002, however the Engle Granger
Causality tests showed insignificant relationship between trade growth and GDP growth, while
investment growth was found to have a significant relationship with GDP growth. Johansan co-
integration test identifies one co-integration equation which follows. YG = b0 + b1TG + b2IG +
b3PG + e ; where YG refers to GDP growth, TG to trade growth – proxy for openness.Regression: LGDP95 = - 0.198LT + 0.235LRINV + 2.045LPPO - 1.29; given the statistics
value (-3.23) (4.32) (8.45)
Equation shows that all the independent variables are significant. There is negative long run
relationship between GDP and trade liberalization, the coefficient defined that a 1% increase in
trade volume would decrease the GDP by 0.198%. The relationship between GDP and
investment is found to be positive and indicates that a 1% increase in investment would increase
the GDP by 0.235%. The population variable was also found to be positive.
However the above conclusion is obviously based upon the limited model, while we live in the
practical world involving simultaneous causality of multifarious factors, which must not be
ignored too.
We have used the model of Sinha (2000) which states that the GDP growth has three growth
components, namely; trade growth, population growth and investment growth. The volume of
trade (import plus export) is used as proxy of openness. He derived the following equation.
YG = b0 + b1TG + b2IG + b3PG + e ——————
(1)where YG refers to GDP growth, TG to trade growth – proxy for openness – , IG to Fixed
Investment growth and PG to population growth, while e is the error term.
The studies referred above estimated the effect of trade openness on GDP growth for several
Asian countries including Pakistan. The data for Pakistan was from 1952 to 1992. During these
years the Pakistani economy was not very open and in 1971-72 a major change occurred when
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Pakistan’s east wing was separated. To overcome these problems we have collected the data
from 1972 to 2002. The results are shown in next section, are quite different from Sinha’s study.
The main objective of our study is to find the causality between trade growth and GDP growth. Iqbal,
Baig and Tahir (2002) found that policy liberalization leading to an increase in imports may lead to a
growth of output. Moreover, Iqbal, Tahir and Baig (2001) argued that import of Pakistan is mostly
consisting of intermediate goods (petroleum, machinery, chemicals etc.) which are conducive to
output growth, so the impact of import growth on output is positive.
III- Ignorance of the Role of Other FactorsThe net role of trade in economic growth given the interplay of other factors in the development
scenarios has to be studied in its true perspective. It strengthens the fact that just trade is not the
only factor behind economic development but the very composition of trade and theirdeterminants in the socio economic and political fabric play very significant and critically
dynamic role in shaping the pattern of development as well as the overall growth behavior of the
economy. It can be safely concluded that the model of trade growth relationship must not be
unilaterally depended upon just the few direct variables but it have to consider the complex
interplay of the other significant factors like policy decisions too, in order to arrive at the truly
pertinent and holistic view of the prevalent phenomenon under review.
Problems in Trade structure of Pakistan.Case of Pakistan: Recently the slant of the political government has noticeably favored the
strengthening of agricultural community at the cost of industrial community. Terrorism, political
instability, deteriorating law and order situation in Sindh and Baluchistan provinces and energy
shortfall in the country has contributed towards curtailment of development finance hence
investment and the economic growth. These factors have resulted in closure of industry,
disturbance in the trade pattern, increasing weight of export of commodities and imports of
consumer goods. Not to speak of promotion of capital goods, these circumstances have
hampered the export of traditional manufacturing sector too. Nowadays Pakistan ’s economy is
trapped in low investment and low income growth equilibrium and revolves around the rate of
3% GDP growth.
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IV- Conclusion and SuggestionsIf Pakistan adopts the policy of stabilizing the fiscal imbalance and get rid of foreign
indebtedness, promote investment in manufacturing sector attract FDI, promote technology and
training, export of manufactured goods and import of capital goods the thesis ‘trade is engine of
growth’ would prove true for the country. The agriculture is high ly susceptible to vagaries of the
nature so experience setting in of the law of diminishing returns very soon so the growth is more
confidently expected from the contribution of manufacturing sector that feed to the export
promotion and import substitution. The next potent sector is that of services that accounts for
more than 50% of the GDP structure. In the context of emerging trade pattern of globalization
Pakistan can benefit profusely from the trade of financial, transport, defense, communication and
other services too.
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References:
1- Ministry of Finance ,Government of Pakistan. PAKISTAN ECONOMIC SURVEYS:
2- GDPinflation.com
http://www.gdpinflation.com/2013/06/pakistan-gdp-and-gdp-growth-rate-from.html
3- Siddiqui. A.H, The Federation of Pakistan Chambers of Commerce & Industryand Iqbal. J, Department of Statistics,University of Karachi IMPACT OF TRADE OPENNESS ON OUTPUT GROWTH FOR PAKISTAN: AN EMPIRICAL INVESTIGAT Market Forces April 2005
4- Chaudhary. M. AQaisrani. A.A.
TRADE INSTABILITY, INVESTMENT AND ECONOMIC GROWTH IN PAKISTAN Pakistan Economic and Social Review ,Volume XL, No. 1 (Summer 2002), pp. 57-73
5-Atique. A Ahmad. M.H and Azhar. UTHE IMPACT OF FDI ON ECONOMIC GROWTH UNDER FOREIGN TRADE REGIMES: A CASE STUD PAKISTAN Date: Unknown
6- Óscar AfonsoTHE IMPACT OF INTERNATIONAL TRADE ON ECONOMIC GROWTH
Investigação - Trabalhos em curso -CEMPRE Faculdade de Economia do Porto,Rua Dr. Roberto Frias 4200-464
Porto, Portugal, email: oafonso@fep.up.pt
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Annexure
Full Year
Agriculture Industry Services
RealGDP
GrowthRate
2013 3.3%-P 3.5%-P 3.7%-P 3.60% -P
2012 3.5% 2.7% 5.3% 4.40%
2011 2.4% 0.7% 4.4% 3.00%
2010 0.6% 8.3% 2.90% 3.80%
2009 4.0% -10.6% 1.7% -1.6%
2008 1.0% 1.4% 6.0% 7.2%
2007 4.1% 8.8% 7.0% 6.8%
2006 6.3% 4.1% 6.5% 5.8%
2005 6.5% 12.1% 8.5% 9.0%
2004 2.4% 16.3% 5.8% 7.5%
2003 4.1% 4.2% 5.2% 4.7%
2002 0.1% 2.7% 4.8% 3.1%
2001 -2.2% 4.1% 3.1% 2.0%
2000 6.1% 1.3% 4.2% 3.9%
1999 1.9% 4.9% 5.0% 4.2%
1998 4.5% 6.1% 1.6% 3.5%
1997 0.1% -0.3% 3.6% 1.7%
1996 11.7% 4.7% 5.0%
6.6%
1995 6.6% 0.7% 4.8% 4.1%
1994 5.2% 4.5% 4.2% 4.5%
1993 -5.3% 5.5% 4.6% 2.3%
1992 9.5% 7.7% 6.8% 7.7%
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1991 5.0% 6.9% 5.2% 5.6%
1990 3.0% 6.4% 4.5% 4.6%
1989 6.9% 4.7% 3.8% 4.8%
1988 2.7% 9.8% 6.8% 6.4%
1987 3.3% 8.6% 5.9% 5.8%
1986 5.9% 8.1% 5.8% 6.4%
1985 10.9% 7.8% 7.9% 8.7%
1984 -4.8% 7.1% 7.9% 4.0%
1983 4.4% 4.9% 9.2% 6.8%
1982 4.7% 10.7% 7.9% 7.6%
1981 3.7% 9.4% 6.6% 6.4%
1980 6.6% 10.8% 5.9% 7.3%
1979 3.1% 7.6% 6.1% 5.5%
1978 2.8% 9.5% 10.5% 7.7%
1977 2.5% 2.9% 3.0% 2.8%
1976 4.5% 4.9% 1.5% 3.3%
1975 -2.1% 2.0% 10.0% 3.9%
1974 4.2% 8.4% 9.8% 7.5%
1973 1.7% 10.3% 9.6% 6.8%
1972 3.5% -1.5% 3.5% 2.3%
1971 -3.1% 6.4% 2.6% 1.2%
1970 9.5% 15.3% 7.0% 9.8%
1969 4.5% 12.0% 5.6% 6.5%
1968 11.7% 5.1% 3.1% 6.8%
1967 5.5% 3.6% 0.7% 3.1%
1966 0.5% 8.0% 14.4% 7.6%
1965 5.3% 11.2% 12.8% 9.4%
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1964 2.5% 14.8% 6.8% 6.5%
1963 5.2% 12.7% 6.9% 7.2%
1962 6.2% 9.5% 4.3% 6.0%
1961 -0.2% 18% 5.7% 4.9%
1960 0.3% 1.8% 1.2% 0.9%
1959 4.0% 6.7% 6.8% 5.5%
1958 1.9% 5.6% 2.1% 2.5%
1957 2.3% 5.9% 2.8% 3.0%
1956 2.1% 10.5% 2.9% 3.5%
1955 -2.2% 10.3% 5.0% 2.0%
1954 15.2% 12.1% 3.6% 10.2%
1953 0.2% 8.8% 1.6% 1.7%
1952 -9.1% 11.4% 4.8% -1.8%
1951 2.6% 8.5% 4.5% 3.9%
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14.1 Value of Foreign Trade
(Million Rupees)
Year Exports Re-Exports Imports Re-Imports Balance ofTrade
2007-08 1,270,597.31,196,637.6 45,527.6 2,512,071.7 690.8
2008-09 -1,319,568.0 1,383,717.5 21,927.3 2,723,569.9 1,642.9
2009-10 -1,270,061.9 1,617,457.6 23,470.1 2,910,975.3 14.3
2010-11 -1,305,935.2 2,120,846.7 30,576.3 3,455,285.6 2,072.6
2011-12 -1,883,049.0 2,110,605.5 18,570.2 4,009,093.0 3,131.7
-
2013 Jan 197,186.6 15.1 366,822.6 -169,620.9
Feb 179,747.0 70.3 331,464.7 -51,647.4
Mar 209,240.8 32.8 361,585.0 -152,311.4 Apr 209,142.2 298.8 384,277.1 -174,836.1
*
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