2022
Export led Growth in Pakistan:
A Time Series Analysis
Name and ID Percent
Number Contribution Signature
A 40
B 30
C 30
Contents
Abstract..........................................................................................................................................................2
1. Introduction................................................................................................................................................2
1.1 Background..........................................................................................................................................4
1.2 Objective of Analysis...........................................................................................................................4
2. Literature Review.......................................................................................................................................5
3. Data and Methodology...............................................................................................................................7
3.2 Co-integration Test............................................................................................................................10
4. Conclusion and Policy Implications........................................................................................................15
References....................................................................................................................................................16
Annexure
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Abstract
The following article studies the export-led growth hypothesis in the case of Pakistan using the
time series analysis. The paper is divided into four main sections; Introduction, Literature
Review, Data and Methodology, and Conclusion and Policy Implications. The third section is
further divided into seven sections; time-series plots, unit root tests, co-integration test, vector
error correction model, Granger causality test, impulse response analysis, and the forecasts for
the next three years.
1. Introduction
Exports are very important in today's working of the economies because they introduce the goods
and services of industries and firms to various old and new economies. This aids production,
investment, consumption, and much more. On a political level, the basis of many cross-border
relations and diplomatic policies is the restoration and growth of trade; encouraging exports to
benefit all trading companies involved. According to research, in 2020 China, the USA,
Germany, Netherlands, and Japan were the top five exporters in the world; with exports worth $
2591 billion,
$1431 billion, $1380 billion, $674 billion, and $641 billion respectively (Szmigiera, 2021).
Exports have contributed greatly to the GDP of the economies of many countries over the years
and have helped the countries in allocating their resources to the most optimum use.
Economists explain how exports can expand any economy through a trickle-down effect
throughout the country (Pettinger, 2017). Exporting goods and services is like selling your
products in one place with access to the buyers of all nations, regions, countries, and demand.
The world is shrunken into a small corner shopping place through international trade which aids
the countries to buy the best buyers for their products to make ample profit to benefit from. This
revenue generation acts as a long-term source of income e.g. Saudi Arabia has secured the world
market dominance for oil and oil products and can earn billions each year from various buyers
across the world. The revenue that is generated helps in setting up more competitive industries
back in your home country allowing the creation of jobs in every sector and raising the living
standards. Industries of not only directly exportable goods are created, but due to the rise in
demand for composite goods and linkage products other industries are also set up; creating not
only a vertical economic expansion but a horizontal expansion as well. Investments,
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consumption, savings, government revenues, and spending also rise collectively leading to a
rise in the Gross
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Domestic Product (GDP) per capita of the entire country. The rise in exports also allows foreign
revenue generation leading to an appreciation in the exchange rate of an economy.
If we take an example of our own country and its policies, we can see clearly that the US$ 2.2
billion worth of exports has been a crucial source of revenue generation for the country.
However, this has yet to be increased to match up with the US$ 5.2 billion imports coming into
the country (Group, 2021). Our government's focus on the 'Import substitution scheme' (ISS) has
not been able to ripe the needed results. By curbing down the import demand to stimulate local
production and become self-sufficient, the government seeks to decrease the current account
deficit and turn it into a surplus. However, this scheme was not successful in solving our
problems. It has been proven through research that the promotion of exports is a dire need of the
moment. We need to introduce our locally produced goods into the international market by
becoming more efficient and competitive not only in prices but through quality.
Despite using the ISS method, India has been able to secure US$306 billion worth of exports till
April 2021. This is because of the diversified range of export items mainly finished goods. India
specializes in exports of mineral fuels, gems (especially diamonds), pharmaceuticals, machinery,
chemicals, vehicles, and many other high valued products. In comparison, Pakistan specializes in
the export of rice, cotton, mangoes, textile goods (mainly grey yarn), and surgical items, and
sports goods. These are agricultural goods in their raw forms that do not earn a high deal and
have many other substitutes easily available in the international market. We need to focus on
developing our exports to the level of becoming self-sufficient but fulfilling the demands of the
innovative new markets out there. Information technology, capital goods production, research
and development, and the latest Artificial Intelligence are some of the high earning, competitive
and latest markets that have high demand and with investment, right allocation of resources, and
innovation we can develop our highest exports of human capital into something that the world
needs.
Recently, in an interview our finance minister Mr. Shaukat Tareen replied to a question by
saying, "…exports, exports, and exports are the only answer to Pakistan's economic growth and
stability." This is true. In our report, we analyze how exports can statistically uplift our economy
and are the first and foremost need to rectify our economically hazardous situation. Despite the
fact, that employment, education, infrastructure, foreign investment, loans, and import of capital
equipment can be some of the driving factors of economic growth. But export enhancement is
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the first step
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that we need to take. After Covid-19 pandemic regeneration of markets and increasing trends of
demand have been seen. These new opportunities can be tapped and expansion of the economy
can be made possible. Positive growth in all sectors leading to higher employments can help to
uplift our previously shut down economy.
1.1 Background
Export-led growth strategy is what our government needs to adopt as it has been in practice for
the last 40 years. Germany, Japan, Malaysia, Indonesia, Thailand, and other South-East Asian
countries had benefitted from it over the years and are living examples of export lead growth.
The North American Free Trade Agreement (NAFTA) is another huge example of collective
growth between Mexico, America, and Canada. They opened their borders for one another to be
able to sell their most produced goods with the least cost and to grow as a regional economy.
This has been in practice since January 1, 1994. After the Great Recession of 2008, international
trade had almost come to a halt as countries seek to protect their local economies rather than
being dependent upon other countries for their earnings. However, soon after this, the economies
restored their focus on developing their exports to become the highest market shareholders and
have been successful in growing multifold.
1.2 Objective of Analysis
The objective of the analysis and the data we are hoping to infer from this research are the
following:
1) Is the economic growth of Pakistan influenced by exports?
2) Does the long-run relationship exist between exports and growth?
3) What is the direction of causality?
4) Should the government aid export zones within the country to expand the export base?
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2. Literature Review
(Muhammad A. Quddus, 2005) examined the export led growth of Pakistan (ELG) in the given
time period. The paper used analytical tools such as Unit Root Test, Co-integration Johansen
Test and Engle Granger Test, to answer whether the economic growth (measured by per capita
GDP growth rate) and the exports are co-integrated, exports cause growth and exports Granger
cause investment. The authors argued that the economic growth is export led and not the other
way round. Authors have tried making their point by using the above tests and furthermore,
tested the data for stationarity using the ADF or Augmented Dickey-Fuller. The final relationship
between GDP Growth Rate and GDP other variables was found out using OLS with AR (1).
(Gabriele, 2006) examined the nexus between the GDP growth and components of exports, with
the main focus on the service exports in the developing economies. The econometric analysis in
the paper showed that the export services do have an impact on GDP growth in the long run. But
in developing economies it is not the case, as the nexus was weaker between the two variables as
compared to the one in developed economies. The author claimed that “previously many inward-
developing countries, invested the resources in exports, instead of diverting resources in the
long- term output maximizing strategy, this decision was taken under financial duress. Such
decisions end up in diminishing returns.
The authors do not talk much about the export of goods or investing resources in the particular
kind of exports. Moreover, the study constantly tells that developing or transitioning economies
do not do great when it comes to services-exports led GDP Growth, but not discussing export of
goods, ultimately makes the idea and result concluded from the paper look biased. In addition to
this, the authors vaguely addressed once in the entire paper that the service exports declined in
1990, however, if it were merchandise exports, this would not have been the case and things had
been the other way round.
(Maneschiöld, 2008) focused on export-led growth hypotheses using co-integration and
causality techniques. Co-integration is found in pre and post-break duration, where the break is
related at the start of NAFTA. Moreover, the causal relationship is either bi-directional or
unidirectional from export to GDP revealing support to the hypothesis and an outward-oriented
policy. The paper further examined the economic growth process using the error correction
framework. The author believes that Argentina and Mexico have a co-integration relationship,
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whereas, Brazil doesn’t.
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The results showed that export caused growth provides support to the export-led growth
hypothesis in comparison with the previous research on transitioning and industrial economies.
All in all, the support of the authors lies with growth-led export, avoiding the use of regulatory
and restrictive policy measures.
(Nath, 2005) shed light on the time-series evidence to explore the relationship between
economic growth and exports in Bangladesh. The data from 1976-2003 was used and the article
evaluated that industrial production and exports are co-integrated. Further results for Bangladesh
stated that the Error Correction Model or ECM proved a long-run unidirectional causality from
exports to growth.
All in all, the time series analysis for Bangladesh suggested that there is a long-run equilibrium
relationship between exports and industrialization, whereas, there is no short-run causal positive
relationship between the two variables. Furthermore, the short-run causality seemed to run from
exports to industrial production. The author stated that industrial production and exports are
correlated and co-integrated. Moreover, the exports have been observed to increase by 5% and
substantially accelerating the economy of Bangladesh. The authors believe that the government
observing this growth should start working on industrialization and exporting heavily, along with
focusing on the other variables of growth.
The common thing among the articles was the fact that exports all around the world lead to an
increase in the GDP growth rate. Almost all articles speak in favor of exports as the independent
variable of the total output, but factors like education, inflation, and exchange rate variation
cannot be ignored, although, they are beyond the scope of this study. Among the unique things
observed was the services considered as exports, increase the overall GDP at a steady speed, and
gives the overall increasing returns in long run to the developing countries, as compared to the
developed ones. Furthermore, it was observed that according to a paper the industry growth is
considered as the more effective variable in GDP growth, and exports are secondary. However, if
analyzed carefully, exports lead to industrialization as more exports demand more production,
and that require more industries to help the GDP increase, so it can be concluded that all the
variables are correlated in helping the economy grow, considering exports as the more dominant
variable.
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3. Data and Methodology
The following study estimated an OLS model using the exports as an explanatory variable and
per capita GDP growth rate as a dependent variable. The data for 30 years ranging from 1990 to
2019 is collected from the World Bank1. The approach of this analysis is adopted from
(Muhammad A. Quddus, 2005) which established a relationship between economic growth and
exports of Pakistan using the time series analysis.
The time series plots are constructed and tested for stationarity and order of integration using the
unit root test. Engle & Granger co-integration Test is conducted to interpret the long-run
equilibrium relationship between the linear combination of the system. The VECM is then
estimated to confirm the long-run relationship between the variables. The Granger Causality test
was carried out to detect the direction of causality and impulse response is used to examine the
effect of shocks on the variables. Lastly, the data for the next three years is forecasted.
Economic model: GDP=F(EXPORT)
Econometric Equation
𝒑𝒄𝑮𝑫𝑷𝒈 = 𝖰𝟏 + 𝖰𝟐𝑬𝑿𝑷𝑶𝑹𝑻𝑺 + 𝒆
Where pcGDPg is the per capita GDP growth rate and EXPORTS is the exports of goods and
services as a percentage of GDP.
3.1 Time Series Plot
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1
[Link]
The pcGDPg series seems to be stationary with no trend and constant mean and variance. Its first
difference seems to be non-stationary as the variance can be observed to be changing at different
times. Although, the above graphs can lead to misleading interpretations through observation.
The Exports series shows a random walk with no drift, thus, a non-stationary series. Its first
difference can be called a stationary series with constant mean and variance by ignoring the
temporary shock in the year, 2000.
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3.2 Co-integration Test
The Long-Run Relationship
The long-run relationship between the
variables is estimated using the OLS.
The results show that when the
exports of goods and services
increase by 1% of GDP, the per
capita GDP grows by 0.107%
however, the negative relation was
not expected.
The co-integration test is conducted to check whether the residual is stationary or not. Co-
integration exists when the residual is stationary. By using the nearest Engle-Granger critical
value at N = 2 and T = 50, we conclude that the null hypothesis is rejected (-5.209 < -3.67), and
co- integration is found among the variables of the model. Therefore, we will now estimate the
VECM.
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4. Conclusion and Policy Implications
The unit root tests used to check for stationarity of the two series showed that the order of
integration of both the series was ordered 2. The Engle-Granger Co-integration tests found a
long- run relationship between the variables which was also confirmed by the Vector Error
Correction Model (VECM). The VECM showed that exports have a positive impact on the per
capita GDP growth rate. This implies that increasing the export base and exploring new export
markets will help in the growth of the Pakistan economy.
The Granger Causality Test indicated that neither of the variable granger causes the other,
therefore, these series cannot be used to forecast each other. The impulse response analysis
showed that a 1 S.D positive shock in either of the variable will begin to subside after the second
period. It was also found that the positive shock in exports leads to a large decline in the per
capita growth rate. This implies that government should not only adopt policies to promote
exports but also to ensure enough supply of goods and services to the local population. Lastly,
the data for the years 2020, 2021, and, 2022 was forecasted using the estimated VECM but it is
not very useful in policy implications because it did not cater to the impact of COVID-19.
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References
Gabriele, A. (2006). Exports of Services, Exports of Goods, and Economic Growth in Developing
Countries. Journal of Economic Integration, Vol. 21, 294-317.
Group, I. E. (2021). Total Exports Growth. Retrieved from CEIC.
Maneschiöld, P.-O. (2008). A Note on the Export-Led Growth Hypothesis: A Time Series Approach.
Instituto de Economia, Pontificia Universidad Catolica de Chile, Vol. 45, 293-302.
Muhammad A. Quddus, I. S. (2005). An Analysis of Exports and Growth in Pakistan. The Pakistan
Development Review, Vol. 44, 921-937.
Nath, H. K. (2005). Export-led Growth in Bangladesh: A Time Series. Applied Econometrics Letters, Vol.
12, 361-364.
Pettinger, T. (2017). Importance of Exports to Economy. Retrieved from Economics Help.
Szmigiera, M. (2021, May 6). Leading Export Countries Worldwide 2020. Retrieved from Statista.
Annexure:
Here you guys need to attach all the screenshot of your result.
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