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: [email protected]


mailto:[email protected]







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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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