The validity of the export-led growth hypothesis: some evidence from the GCC

ABSTRACT

This study investigates the validity of the export-led growth hypothesis (ELG) in five GCC countries, namely, Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates. The study uses an augmented production function and annual time series data over the period 1975-2016. For the estimation of the models, the Johansen cointegration test is employed to test the existence of a long-run relationship between growth and exports. In addition, the multivariate Granger causality test in a vector autoregressive model framework and a modified version of the Wald test are applied to examine the direction of the short-run and long-run causality respectively. The empirical results provide evidence to support the validity of the ELG hypothesis in the short-run for the UAE, while the converse is true for Bahrain. In addition, a bi-directional causality exists between exports and growth in the case of Kuwait. In the long-run, the validity of the ELG is confirmed in the case of Bahrain, while economic growth causes exports in the case of Kuwait and Saudi Arabia.

KEYWORDS:

• exports
• economic growth
• GCC
• causality

JEL CLASSIFICATIONS:

• C32
• C3
• F43
• F4
• O47
• O4

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See studies by Chenery and Strout (1966), Balassa (1978), Feder (1982), Al-Yousif (1997), Vohra (2001), and Kalaitzi and Chamberlain (2020a).

2 See studies by Myrdal (1957), Meier (1970), Sachs and Warner (1995), Lee and Huang (2002), and Kim and Lin (2009).

3 See studies by Herzer, Nowak-Lehmann, and Siliverstovs (2006), Kalaitzi and Cleeve (2018), and Kalaitzi and Chamberlain (2020b).

4 During the examined period, the economies of all countries, except Saudi Arabia, have also grown faster than those of the MENA region (3.2%) and of high income countries (2.6%). Nevertheless, GCC growth rates have fluctuated significantly between sub-periods, in concert with oil price fluctuations. For further details, see Table A1 in the Appendix.

5 El-Sakka and Al-Mutairi (2000) also include in their sample, Libya, Tunisia, Sudan, Algeria, Egypt, Jordan, Mauritania, Iraq, Morocco and Syria.

6 El-Sakka and Al-Mutairi (2000) provide evidence in support of the existence of a bi-directional causal relationship between exports and growth in the case of Jordan (1970–1997).

7 All data series are taken from World Bank sources, expect for the following, which are taken from IMF sources: Bahrain: GDP, K and IMP (1975–1979); Kuwait: K (2010–2016), HC (1992–1994); Oman: K (1982–1990), IMP (1989); UAE: IMP and K (1975–1998 and 2001–2016).

8 The Kwiatkowski-Phillips-Schmidt-Shin (KPSS) (Kwiatkowski et al. 1992) unit root test is also applied in the case where the ADF and PP tests provide conflicting results.

9 The diagnostic tests include the Jarque-Bera normality test (Jarque and Bera 1980, 1987), the Breusch-Godfrey LM test (Johansen 1995) for the existence of autocorrelation, the White heteroskedasticity test (White 1980) and the AR roots stability test (Lütkepohl 1991).

10 In the case of bi-directional causality between exports and economic growth, the wavelet method can be used to re-examine the direction of the causality in time and frequency domains, indicating which one is exact (Kołtuniak 2016a, 2016b; Aguiar-Conraria and Soares 2011a, 2011b; Ciesielska and Kołtuniak 2017). According to Kołtuniak (2016a), traditional econometric methods, including Granger causality tests, ‘are not adequate to analyse data in terms of recurring structural changes, which may cause temporal reversals of causality directions between economic phenomena’ (p.253). In the present study the CUSUM test is applied to detect systematic structural changes in the parameters. However, the wavelet analysis could check instability both in the time and frequency domains (Koltuniak 2016b).

11 For Kuwait, the ELG and GLE hypotheses are valid (p < 0.10 and p < 0.05 respectively), indicating that a bi-directional causality exists between exports and economic growth. In this case, the wavelet method can be used to re-examine the direction of the causality in time and frequency domains, indicating which one is exact (Kołtuniak 2016a, 2016b; Aguiar-Conraria and Soares 2011a, 2011b; Ciesielska and Kołtuniak 2017).

12 Our analysis also finds that the null hypothesis of joint non-causality from physical capital, human capital, exports and imports to economic growth is rejected at the five percent and one percent levels for Bahrain and Kuwait, respectively. At the same time, the null hypothesis of joint non-causality from LY_t, LK_t, LHC_t and LIMP_t to exports is rejected at the one percent level for Kuwait.

13 The diagnostic tests reveal that the residuals are multivariate normal and homoscedastic and that there is no evidence of serial correlation. Diagnostic tests are available upon request.

14 Our analysis also finds that the null hypothesis of joint non-causality from LK_t, LHC_t, LX_t and LIMP_t to economic growth is rejected at the five percent level for Bahrain, and at one per cent for Kuwait and UAE. At the same time, the null hypothesis of the joint non-causality from LY_t, LK_t, LHC_t and LIMP_t to exports is rejected at conventional levels for all countries except Oman.

15 The VECM for Saudi Arabia is estimated with the inclusion of a step dummy variable for the year 1985, as the CUSUM plot of the initially estimated ECM for economic growth shows evidence of structural instability. In addition, the visual inspection of the plot of the economic growth variable confirms the inclusion of the step dummy variable. The estimated ECM without the inclusion of the dummy variable and the plot of the economic growth variable are not reported here, but are available upon request.