Classification of Exports, Human capital and Economic Growth: A Causality analysis for Pakistan, 1975-2014 by Muhammad Haseeb 1
Abstract The study empirically examines the effects of real primary commodity exports, real semi manufactures exports, real manufactured exports, real total exports and human capital on real GDP growth using time series data for the period 1975-2014 for Pakistan. ARDL bound testing approach is employed to investigate short run and long run relationship. The direction of causality is verified by using error correction model. The results show that real primary commodity exports, real semi manufactures exports, real manufactured exports and real total exports have a significant effect on real GDP growth in short run and long run that supports ELG hypothesis. Short run effect of human capital is not observed but in long run it does effect real GDP growth. The results also support Growth led export (GLE) hypothesis in long run while in short run it validates only for real semi manufactures exports. The significance of human capital proposes government and private enterprises to invest more on education to accelerate exports and economic growth. Government should encourage domestic and foreign direct investment in export sector to raise the output and the productive capacity of the economy. 2
Introduction • Neoclassical export led growth (ELG) theory postulates causation from exports growth to economic growth. ELG has been sponsored as a common approach of industrial development and a substitute to import substitution industrialization. • Evidence of export led growth hypothesis is helpful in making export promotion policy as a development strategy. 3
Introduction • The vital factor that contributes their exports and economic growth is investment in education which has positive externalities and is a critical input for innovation and R&D activity. Educated and trained labor force not only enhances economic growth but also attract foreign direct investment. Most of the studies have investigated the relationship between human capital and economic growth based on growth accounting framework (Barro, 1991, Barro and Lee 1993) or endogenous growth theory (Lucas 1988, Romer 1990; Grossman and Helpman, 1991). The growth accounting framework conceives that economic growth and productivity can be enhanced by raising human capital stock. The endogenous growth model of Romer (1990) postulates that human capital is directly related to creation of new ideas which is obvious in the form of scientific knowledge. Education which is the investment in human capital causes growth in physical capital and leads to accelerate economic growth. Accumulation of human capital possibly promotes economic growth via enabling technology adaption (Welch, 1970: Foster and Rosenweig, 1996). 4
REVIEW OF LITERATURE ARTICLE/AUTHOR COUNTRY/ METHEDOLOGY/ CONCLUSION DATA VARIABLES Co-integration and He finds empirical evidence Granger causality tests Denmark, Germany, between exports and economic Italy, Norway, growth in six European countries Real GNP and Real Sweden and the for the period around the mid- Exports United Kingdom 19th Century to the eve of First Exports and economic World War. The study reveals growth: Evidence from unidirectional causality from real 19th Century Europe Denmark: 1870-1913 exports to real GNP in Italy, Germany:1980-1913 Norway, and Sweden. John Thornton Italy: 1861-1913 Unidirectional causality runs Economics Letters, 1997, Sweden: 1861-1913 from real GNP to real exports in 55, 235–240 UK: 1850-1913 U.K while bidirectional causality Norway: 1865-1913 between real exports and GNP in Denmark and Germany. 5
REVIEW OF LITERATURE ARTICLE/AUTHOR COUNTRY/ METHEDOLOGY/ CONCLUSION DATA VARIABLES VAR and Granger Causality Unidirectional causality is Export-led growth evidenced from industrial hypothesis for Australia: an Australia production growth to exports with Real growth of empirical re-investigation Quarterly Data one year time lag and also manufacturing output, Period:1978Q3- Capital, Labor, Export consistent with other lag structures. Jordan Shan & Fiona Sun 1996Q3 and Import They reject export-led growth Applied Economics Letters, hypothesis but supports growth- 1998, 5, 423–428 driven exports hypothesis in Australia VAR framework and Granger no causality procedure developed by ELG hypothesis is rejected in On the export-led growth Toda & Yamamoto China because it is based on hypothesis: the econometric unidirectional causality from evidence from China China Exports , Industrial industrial output to exports. They Monthly Data output, Energy conclude that growth is an engine of Jordan Shan & Fiona Sun 1987-1996 Consumption, Labour exports in china despite positive Applied Economics, 1998, force, Imports and contribution of exports to real 30, 1055 – 1065 Capital expenditure output. 6
REVIEW OF LITERATURE (ELG AND HK) ARTICLE/AUTHOR COUNTRY/ METHEDOLOGY/ CONCLUSION DATA VARIABLES Cointegration and The study finds positive Granger Causality long run relationship among human capital, Human Capital, Exports, exports, and economic Real GDP, Real and Economic Growth: growth. Bidirectional Exports, Higher A Causality Analysis for education attainment causality is evidenced Taiwan, 1952–1995 Taiwan ratio between export growth Annual Data: 1952-1995 Chuang, Yih-chyi and higher education Review of International accumulation and Economics, 2000, 8(4), unidirectional causality 712–720 runs from higher education accumulation to economic growth. 7
REVIEW OF LITERATURE ARTICLE/AUTHOR COUNTRY/ METHEDOLOGY/ CONCLUSION DATA VARIABLES OLS The finding does not support export-led development. In middle GDP growth rate, Export Does Export Promotion income countries weak positive promotion policy index; Increase Economic correlation between export Exports, Investment, Growth? Some Cross- 35 high income, 35 promotion policy index and growth Initial GDP per capita, Section Evidence middle income and is observed and no evidence for the Government Share in 35 lower income benefits of promoting exports in low GDP, Social Unrest, Turan Subasat countries and high income countries. Population, Primary Development Policy Review, Promotion of exports may not hurt enrolment and Political 2002, 20 (3): 333-349 the economy but heavily system dependence on exports to accelerate growth may be misleading. VAR,Co-integration, Are Exports the Engine of The study confirms the evidence of and Granger causality Economic Growth? export led growth hypothesis. test An Application of Shocks to exports lead to a Cointegration and significant response in GDP while Real GDP, Real Causality Egypt shocks to exports have a small Exports, Real Imports, Analysis for Egypt, 1977- Annual Data response on capital formation. Real GFCF 2003 Period: 1977-2003 Economic reforms and the shift Fouad Abou-Stait towards a free market economy Economic Research raises exports which accelerate Working Paper economic growth. 8 No 76 (July 2005)
REVIEW OF LITERATURE ARTICLE/AUTHOR COUNTRY/ METHEDOLOGY/ CONCLUSION DATA VARIABLES The study reveals bidirectional causality between exports and VAR, Granger Testing the Export-Led economic growth which supports Causality Growth Hypothesis for both export-led growth and Botswana: A Causality growth-driven export hypothesis in Analysis Botswana Botswana. The finding of results GDP, Exports of goods Quarterly Data suggest that to enhance economic and services André C. Jordaan1 & Joel growth, export promotion policies Period: 1996-2007 Hinaunye Eita should be adopted and by the allocation of resources for BOJE: Botswana Journal productive purpose, economic of Economics (2009) growth can accelerate to raise exports. Co-integration, ECM Export-Led Growth Hypothesis: A Multivariate GDP, Total Exports, Cointegration and The study reveals bidirectional Net Barter TOT Causality Evidence for causality between real exports Jordan Jordon and real GDP in long run which Annual Data validates ELG as well as Growth Jamal Husein 1969-2005 driven export hypothesis. In The Journal of Developing short run causality runs from Areas, Volume 42, Number exports to economic growth. 2, Spring 2009, pp. 253-266 9
REVIEW OF LITERATURE ARTICLE/AUTHOR COUNTRY/ METHEDOLOGY/ CONCLUSION DATA VARIABLES Co-integration and The Dynamics of VECM Relationship between The study confirms the existence of exports long run equilibrium relationship Total Exports (oil + non and economic growth in between exports and economic oil), Economic Growth India growth but rejects the Export-led India growth hypothesis based on Annual data Granger causality test. The P.K. Mishra Period: 1970-2009 direction of causality runs from real GDP to exports and the data International Journal of supports for growth-driven exports Economic Sciences and in India. Applied Research, 2011, 4 (2): 53-70 10
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