Exports, Growth and Causality: An Application of Co-integration and Error-correction Modelling

The relationship between export expansion and economic growth has been examined extensively during the last two decades in the context of the suitability of the alternative development strategies. The decade of the 1970s witnessed an emerging consensus in favour of export promotion as development strategy. Such a consensus was based on the following facts. First, higher export earnings working through alleviating foreign exchange constraints may enhance the ability of a developing country to import more industrial raw materials and capital goods, which, in turn, may expand its productive capacity. Secondly, the competition in export markets abroad may lead to the exploitation of economies of scale, greater capacity utilisation, efficient resource allocation, and an acceleration of technical progress in production. Thirdly, given the theoretical arguments mentioned above, the observed strong correlation between exports and economic growth was interpreted as empirical evidence in favour of export promotion as a development strategy.

Dependency Ratio, Foreign Capital Inflows and the Rate of Savings in Pakistan

Domestic resource mobilization is one of the key determinants of sustained economic growth. The savings rate in Pakistan is sensitive to per capita income, dependency ratio, real interest rate and foreign capital inflows. Dependency ratio and foreign capital inflows exert a depressing effect on savings while income and real interest rate have a positive effect. Realistic interest rate policies in the context of liberalized financial markets are required to mobilize greater savings.National Savings, Foreign Capital Inflows

Financial Sector Reform and Its Impact on Investment and Economic Growth: An Econometric Approach

The financial sector is central to economic development as it serves the role of intermediary by mobilising savings and subsequently allocating credit for productive activities. However, in many developing countries including Pakistan, administered interest rate, domestic credit controls, high reserve requirements, use of captive banking system to finance large budgetary requirements of the government and controls on international capital inflows have remained the main features of the monetary policy. These repressive policies had their repercussions in the form of excess liquidity with the banking system, disintermediation of cash flows, segmentation of financial markets, underdeveloped money and capital markets, etc. [McKinnon (1973) and Shaw (1973)], therefore, argued that low interest rate ceilings unduly restrict the real flow of loanable funds, thus depressing the quantity of productive investment. Financial liberalisation, on the other hand, is defined as policy measures designed to deregulate certain operations of the financial system and transform its structure with a view to achieving a liberalised market oriented system with an appropriate regulatory framework. The financial sector reforms would lead to increase in loanable funds by attracting more household savings to bank deposits due to higher interest rates. This, in turn, would result in greater investment and faster economic growth.

Exports, Growth and Causality:An Application of Co-Integration and Error-correction Modelling

This paper investigates the direction of causation between exports growth and economic growth. This issue has been widely investigated in the past in the context of the suitability of export promotion versus import substitution as development strategies. The traditional practice has been to utilise the Granger causality test to examine the direction of causality. Recent developments in econometric techniques have highlighted at least two shortcomings in the application of the standard Granger causality test. These include the stationary properties of the series and the co-integration of variables included in the analysis. The present paper, while investigating the direction of causation between exports growth and economic growth and using the Granger causality test, has taken into account these two shortcomings. The paper finds a stable, long-run two-way relationship between exports (as well as manufactured exports) and output, but a one- way stable relationship between output and primary exports. Furthermore, the paper also finds a bi-directional causation between exports (both primary and manufactured) growth and economic growth. Based on these findings, it is recommended that export promotion policy with a major emphasis on manufactured exports must be vigorously pursued to achieve a higher rate of economic growth

Exports, Growth and Causality:An Application of Co-Integration and Error-correction Modelling

This paper investigates the direction of causation between exports growth and economic growth. This issue has been widely investigated in the past in the context of the suitability of export promotion versus import substitution as development strategies. The traditional practice has been to utilise the Granger causality test to examine the direction of causality. Recent developments in econometric techniques have highlighted at least two shortcomings in the application of the standard Granger causality test. These include the stationary properties of the series and the co-integration of variables included in the analysis. The present paper, while investigating the direction of causation between exports growth and economic growth and using the Granger causality test, has taken into account these two shortcomings. The paper finds a stable, long-run two-way relationship between exports (as well as manufactured exports) and output, but a one- way stable relationship between output and primary exports. Furthermore, the paper also finds a bi-directional causation between exports (both primary and manufactured) growth and economic growth. Based on these findings, it is recommended that export promotion policy with a major emphasis on manufactured exports must be vigorously pursued to achieve a higher rate of economic growth

What Explains the Current High Rate of Inflation in Pakistan?

One of the most significant developments in the current economic scene in Pakistan has been the sharp increase in the rate of inflation. The annual average rate of increase in the wholesale price index (WPI) during the first seven months (July-January 1994-95) of the current fiscal year has been about 19 percent as opposed to 11.3 percent during the same period last year. A similar increase was also witnessed in the consumer price index (CPI) which accelerated to 13 percent as opposed to 11.1 percent during the previous period. Such a sharp increase in prices in recent months has not only caused alarm in the academic circles but has equally disturbed the country’s chief executive, the Prime Minister. The recent surge of inflation is a matter of serious concern for a variety of reasons. First, Pakistan has been a low-inflation country as it has experienced price stability during the last three decades. The rate of inflation, as measured by an increase in the WPI, averaged 2.6 percent during the 1960s. The components of the WPI, i.e., food, raw materials, manufactures, and fuel and lubricants, also grew by an average rate ranging from 2.0 to 3.4 percent p.a. during then 1960s (see Table 1 for relevant statistics). The rate of inflation crossed the single-digit threshold during the 1970s. The WPI and its components increased at an annual average rate ranging from 12 to 18 percent. The double-digit inflation during the 1970s has been the result of two major oil shocks, a massive devaluation of currency, and devastating floods destroying agricultural crops. Pakistan returned to the fold of the single-digit inflation during the 1980s. The rate of inflation remained at the single-digit level during the first three years of the 1990s with the exception of 1990-91, when the rate of inflation increased to 11.7 percent as a result of the Gulf War. It is only during the outgoing fiscal year and in the current year that the rising inflation is posing a major threat to macroeconomic stability.

Financial Sector Reform and Its Impact on Investment and Economic Growth: An Econometric Approach

The financial sector is central to economic development as it serves the role of intermediary by mobilising savings and subsequently allocating credit for productive activities. However, in many developing countries including Pakistan, administered interest rate, domestic credit controls, high reserve requirements, use of captive banking system to finance large budgetary requirements of the government and controls on international capital inflows have remained the main features of the monetary policy. These repressive policies had their repercussions in the form of excess liquidity with the banking system, disintermediation of cash flows, segmentation of financial markets, underdeveloped money and capital markets, etc. [McKinnon (1973) and Shaw (1973)], therefore, argued that low interest rate ceilings unduly restrict the real flow of loanable funds, thus depressing the quantity of productive investment

Dependency Ratio, Foreign Capital Inflows and the Rate of Savings in Pakistan

Domestic resource mobilization is one of the key determinants of sustained economic growth. The savings rate in Pakistan is sensitive to per capita income, dependency ratio, real interest rate and foreign capital inflows. Dependency ratio and foreign capital inflows exert a depressing effect on savings while income and real interest rate have a positive effect. Realistic interest rate policies in the context of liberalized financial markets are required to mobilize greater savings