Trade Openness and Growth: An Analysis of Transmission Mechanism in Pakistan

Abstract

This paper investigates the linkages between trade policy openness and economic growth for Pakistan for the period 1973 to 2008. The paper tests the hypothesis that trade policy does not affect economic growth directly rather it affects through some growth determining economic variables, which then effect economic growth. For this purpose a simultaneous system of equations is estimated through the Three Stage Least Squares. The results suggest a positive impact of trade policy openness on Black Market Premium, Domestic Investment and Foreign Direct Investment (FDI) and negative impact on Macro Policy Index. However, Black Market Premium and FDI show negative and Domestic Investment shows positive impact on economic growth