Trade liberalization and industrial growth in Pakistan: a cointegration analysis

Abstract

Using the framework of an endogenous growth model, this study empirically analyses the relationship between trade policies and industrial growth in Pakistan during the period 1973–1995. The cointegration and error correction modelling approaches have been applied. The empirical results suggest that there exists a unique long-run relationship among the aggregate growth function of industrial value added and its major determinants of the real capital stock, the labour force, real exports, the import tariff collection rate and the secondary school enrolment ratio. The short-term dynamic behaviour of Pakistan's growth function of industrial value added has been investigated by estimating an error correction model in which the error correction term has been found to be correctly signed and statistically significant.

Acknowledgements

While writing the paper, Nasiruddin Ahmed was a PhD student at the University of Sydney, Australia.

Notes

Of the recent policy reforms in Pakistan's foreign trade, major ones are: (i) system of export incentives strengthened through concessional tariff treatment of imported inputs and freight subsidy; (ii) import licensing system liberalized by reducing negative list; and (iii) tariffs reduced in stages: from 225% in 1988 to 70% in 1994 (Rana, 1997).

The empirical evidence provided by Nelson and Plosser (1982), Meese and Singleton (1983), DeJong and Whiteman (1991) and Senhadji (1998) have shown that in reality, aggregate economic time-series are not stationary in their levels and therefore contain variances that explode with time.

Some of the theoretical issues relating to tests for cointegration and formulation of error correction model etc., have been discussed by the authors in Dutta and Ahmed (1999).

Three models considered by Lucas are: (i) a model emphasizing physical capital accumulation and technological change, (ii) a model emphasizing human capital accumulation through schooling, and (iii) a model emphasizing specialized human capital accumulation through learning-by-doing.

Using an augmented Solow model that includes accumulation of human capital Mankiw et al., (1992) provide an excellent description of the international variation in income per capita.