Trade Openness and Economic Growth

Abstract

This article is an attempt to examine the comparative effect of three different measures of trade openness on the economic growth in Pakistan by using more rigorous econometric techniques. Autoregressive distributed lag (ARDL) method, JJ COintegration and ordinary least square (OLS) results suggest significant positive long run relationship between export and economic growth. In contrast, total volume of trade and imports have significant negative effect on the economic growth. The addition of variables and results of fully modified ordinary least square (FMOLS) suggest that the results are robust. The Granger causality and variance decomposition analysis indicate the unidirectional causality between trade openness and economic growth. In export model, causality runs from export to growth. Whereas, in the model with total volume of trade and import, causality runs from growth to total volume of trade, and imports in Pakistan. From the findings it is concluded that the policy makers should focus on export promotion strategy to enhance the economic growth in Pakistan. Besides, efficient utilization of capital goods should be ensured and reliance on non-capital goods should be less in order to ensure high domestic production in the country.