Does the trade‐led growth hypothesis exist for South Asia? A pooled mean group estimation

Abstract

AbstractThe study investigates the validity of the trade‐led growth (TLG) hypothesis for South Asia, with gross fixed capital formation and the labor force as control variables. In the presence of cross‐sectional dependency, it applies the cross‐sectional dependency test, second‐generation panel cointegration test, pooled mean group (PMG) estimation, and Dumitrescu–Hurlin (D‐H) panel causality test. The findings demonstrate that the variables have a long‐run cointegration. The PMG estimation reveals a positive contribution of trade to economic growth and supports the TLG hypothesis for South Asia. The contribution of capital formation to economic growth is also encouraging; an increase in gross fixed capital formation brings an increase in economic growth. The labor force significantly improves long‐run economic growth. The D‐H panel causality provides a bidirectional causality between trade and economic growth, and thus validates the TLG hypothesis for South Asia. The findings have implications for the policymakers to promote trade to gain further from it and accelerate economic growth. Capital formation is also needed to increase the share of high‐technology and manufactured exports, employ and absorb the growing labor force, and boost economic growth in the region. South Asia should focus on regional integration and enhance its regional trade among member countries.