Export-Led Growth Hypothesis in Pakistan

Abstract

Trade is presumed to act as a catalyst to economic growth. This paper reinvestigates the export-led growth hypothesis in Pakistan by using annual time series data on exports, imports, terms of trade, and the labor force participation rate as explanatory variables and gross domestic product (GDP) as the dependent variable for the period 1971-2005. The study uses the more comprehensive and recent bounds test or autoregressive distributed lag model (ARDL) proposed by Pesaran et al (2001) to examine the existence of short-run and long-run relationships between exports and economic growth, which is crucial in designing policy to enhance trade-related potential in Pakistan. The results indicate that exports, labor force, and imports have a positive effect on growth, while the terms of trade has a negative effect. The proxy for trade liberalization has a positive impact on economic growth. Finally, the chief finding of this study is that the hypothesis of export-led growth in the Pakistan economy is supported in both the short and long run. Economic growth in Pakistan is accompanied by fluctuations in exports and imports both in the short and long run, but the labor force participation rate has a negative effect only in the short run. The terms of trade has the same effect in the short and long run.