The causal relationship between exports and economic growth pertains to a

fundamental question in economics what factors determine economic growth? From the
viewpoint of economic policy, this is an important issue because if exports cause growth [export
led growth (ELG) hypothesis], export promotion through policies such as export subsidies or
exchange rate depreciation will increase growth. The substance of the neoclassical arguments
underlying the export led growth hypothesis is that competition in international markets
promotes scale economies and increases efficiency by concentrating resources in sectors in
which the country has a comparative advantage. These positive externalities promote economic
growth [see, for instance, Bhagwati (1978), Balassa (1978), Krueger (1978), Feder (1982)]. The
reverse side of this argument that economic growth promotes export growth relies on the notion
that gains in productivity give rise to comparative advantages in certain sectors that lead
naturally to export growth. Also, countries with high growth rates and relatively low absorption
rates must necessarily export the excess output.

India is an interesting case study of the export economic growth relationship. It is difficult from
the Indian experience to a priori assess the nature of this causal relationship. The trade sector
constitutes a small section of the Indian economy and this seems to indicate a minor role for
exports in economic development. However, it is important to recognize that the size of the
export sector in India does not by itself exclude the possibility of export-led growth. Little, et al.
(1993; p. 118) in a discussion of the development experience of LDCs point out that "The
relationship between export performance and growth does not arise merely because exports are
part of GDP. Except for a handful of countries, the value of exports was not a very high
proportion of GDP even in 1988.... In the main, it appears that rapid export growth relieves a
country in balance of payments difficulties from having to compress imports by import
restrictions or deflationary action. It permits a more liberal trade regime with all the benefits
associated with the exploitation of comparative advantage..... It also makes a country more
creditworthy, while relief from a dominating concern with debt and the balance of payments
permits authorities to pursue economic reforms outside the field of trade and payments".

Up to the 1960s, India had followed an import substitution policy. However, the failure of import
substitution as a viable industrial policy and the rapid escalation of import bills and balance of
payments deficits in the late 1960s forced India to shift to an export oriented strategy. Recent
economic reforms in India have largely accentuated this export orientation.

A large empirical literature has re-examined the ELG hypothesis with mixed findings [see, for
instance, Jung and Marshall (1985), Chow (1987), Hsiao (1987), Kwan and Cotsomitis (1991),
Ahmad and Kwan (1991), Marin (1992), Oxley (1993), Fung et aI. (1994), Shan and Sun (1998)
and Moosa (1999)]. The ELG hypothesis, as it pertains to India, has been examined by Nandi
and Biswas (1991), Sharma and Dhakal (1994), Mallick (1996), and more recently by Dhawan
and Biswal (1999)
Export and economic growth: further time series evidence
from less developed countries
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The purpose of this paper is to examine the role of export-growth linkage in India, Pakistan, the
Philippines, Malaysia, and Thailand on the basis of time series data from 1973 to 1993. The
empirical results indicate that exports have a positive and significant impact on economic growth
when a country has achieved some level of economic development. The result also signifies the
importance of liberal market policies by pursuing export expansion strategies and by attracting
foreign investments. (JEL F4)

Introduction

The debate on the relationship between export expansion and economic growth has exhibited
considerable interest in the field of development economics. Several empirical studies have been
conducted to assess the role of exports in the economic growth of developing countries from
various aspects (see Michaely [1977], Tyler [1981], Feder [1982], Balassa [19851, Chow [1987],
Krueger [1990], Ram [1985, 1987], and Sengupta and Espana [1994]). Most of the studies have
concluded beneficial effects of export performance on economic growth such as:

1) increasing specialization and the spillover effects of the export sector's growth;

2) greater capacity utilization;

3) the externality effect of exports in the diffusion of modern technology across other sectors and
industries; and

4) the increasing effects of economies of scale, industrialization, and import of capital goods.

Most of the existing empirical studies are based on cross-section data across countries except for
Ram [1987], which, as Ram pointed out, may result in loss of important parametric differences
between countries. The purpose of this paper is to investigate the relationship between export
expansion and economic performance and to provide additional statistical evidence for five
Asian countries, namely, India, Malaysia, Pakistan, the Philippines, and Thailand, on the basis of
time series data from 1973 to 1993. [1] These countries can be divided into two groups: India
and Pakistan are low-income economies based on the gross national product per capita of $695
(U.S. dollars) or less in 1993, whereas Malaysia, the Philippines, and Thailand are middle-
income economies with a gross national product per capita of more than $695 but less than
$8,626 in 1993 [World Bank, 1995]. Over the past two decades, the middle-income countries
have shown impressive economic growth, placing them in a group of fast-growing economie s,
especially since the early 1980s. These countries have made impressive advances by relying on
export-led growth strategy. They favor outward-oriented policies as the economies of the so-
called newly industrialized countries of the Asian Pacific Rim, such as Hong Kong, Singapore,
South Korea, Taiwan, and Japan, whereas India and Pakistan have favored inward-oriented
policies during a great part of their economic histories. Recently, however, these two countries
have shown signs of pursuing liberal market policies. For example, in 1993, the ratios of exports
to gross domestic product in these five countries were 80 percent (Malaysia), 40.81 percent
(Thailand), 33.70 percent (Philippines), 16.95 percent (Pakistan), and 8.76 percent (India).
Although the record of these countries (specifically India and Pakistan) is not as successful as the
growth record of newly industrialized countries, still the success of outward-oriented policies in
East Asia has revived the debate on increased openness and export promoti on strategies in less-
developed countries. This paper is interested in reporting the experiences of other successful
(less successful) countries in Asia. The findings indicate that exports have a positive impact on
economic growth when a country has achieved some level of economic development. The results
also signify the importance of liberal market policies by pursuing export expansion strategies and
by attracting foreign investments.

This paper is organized as follows. The second section describes the basic theoretical models to
explain the role of exports in the economic growth, the third section reports the empirical results,
and the fourth section concludes the paper with a summary of the findings.

Theoretical Framework

To investigate the association between the growth of exports and economic performance, this
paper uses two models from existing literature. The first model is the aggregate production
function type specification in which the level of exports along with labor and capital enters as
inputs in the general production function as:

Y = f(N, K, X) , (10)

where Y is aggregate real output and N, K, and X represent labor, capital, and exports,
respectively. By taking total differentials of(l), dividing through by Y, and manipulating the
expression slightly, the growth equation is obtained as:

y = [[beta].sub.1]n + [[beta].sub.2]k + [[beta].sub.3]x. (2)

Since the rate of growth of capital is not known for the countries in this analysis, it can be
replaced by dK/Y, which approximates the investment-income ratio. By adding a constant and
stochastic term, (2) can be written as: [2]

y = [[beta].sub.0] + [[beta].sub.1]n + [[beta].sub.2](I/Y) + [[beta].sub.3]x + [epsilon], (3)

where [[beta].sub.1] and [[beta].sub.3] are elasticities of output with respect to labor and export
and [[beta].sub.2] is the marginal product of capital. A positive and significant coefficient of the
growth rate of export would indicate the positive effect of export expansion on economic growth.

The second model is in the framework of Feder [1982] in which the economy consists of two
sectors: export and nonexport. Also, the two sectors have different production functions. [3]
Output in both sectors is produced with labor and capital. However, output in the export sector
generates an externality effect in the nonexport sector, such as efficient management and
competitive environment, improved production techniques, better quality management and
workers, and continuous flow of imported inputs. With these assumptions, Feder's model of
economic growth can be shown as:

y = [[beta].sub.0] + [[beta].sub.1]n + [[beta].sub.2](I/Y) + [[beta].sub.3]x(X/Y) + [micro]. (4)

The parameter [[beta].sub.3] captures two effects: higher input productivity in the export sector
and positive externality effect of the export sector output on the nonexport sectors of the
economy.

Equations (3) and (4) will constitute the basis for the estimation reported for each of the five
Asian countries in this paper. However, before measuring the short-run relationship between
exports and economic growth in the five Asian countries, academic literature emphasizes
checking whether the two variables have a long-run relationship, that is, if the two series in
question are cointegrated. To do so, Engle and Granger's [1987] two-step procedure is applied. In
the first step, the cointegrated regression of the two variables in their nonstationary form is
estimated. In the second step, the estimated residuals from the cointegrated equation are retrieved
and tested for stationarity using the augmented Dickey-Fuller test (see Engle and Granger
[1987]). However, the results of this test suggest that there is no long-run relationship between
exports and economic growth. [4] Henceforth, we proceed to examine whether a reliable short-
run relationship exists between economic growth and the proposed explanatory variables in (3)
and (4).

Empirical Results

Tables 1 and 2 summarize major results with respect to the fit of the model and the signs and
significance of the export variable from ordinary least squares estimates. Although the regression
coefficient of exports varies across countries, they have the correct signs and are significant for
most of the sample. While India has negative coefficients, it is not statistically significant. The
significance of the export coefficient is stronger in the middle-income economies than in low-
income countries, which are comparable to those reported by Ram [1987]. The fit differs
between middle-income and low-income economies. However, the fit of the model is sufficiently
higher for middle-income than for low-income economies. The regression F-statistics are
significant at the 5 percent level in the middle-income group. It seems reasonable to conclude
that the export-growth connection holds in the middle-income group.

The Bruesch-Godfrey Lagrange multiplier test of autocorrelation is performed. The 5 percent

critical value for the [[chi].sup.2] distribution with 4 degrees of freedom is 9.488. Therefore, we
fail to reject the null hypothesis of no autocorrelation. Also, to check the validity of the results,
the White [1980] test has been used to test for both homoskedasticity and simultaneous equation
bias. With 20 observations, the values for (3) and (4) are as follows: India (8.82 and 8.81),
Pakistan (7.56 and 7.11), Thailand (14.15 and 10.87), Philippines (3.05 and 2.83), and Malaysia
(12.23 and 10.87). The critical [[chi].sup.2] value at the 5 percent level is 16.92. Therefore, we
fail to reject the null hypothesis of correct model specification. The model does not suffer from
the simultaneity problem, or more specifically, the export variable is not correlated with the error
term.
Conclusion

This paper has examined the role of export-growth linkage for India, Pakistan, the Philippines,
Malaysia, and Thailand on the basis of annual time series data for the 1973-93 period. This paper
provides estimates of two models to explain the role of exports in economic growth. The
empirical results indicate that exports have a positive and significant impact on economic
growth, more particularly so in the middle-income group when a country has achieved some
level of economic development. These results are comparable with previous research on
developing countries. The empirical result signifies the importance of pursuing liberal and free
market policies as in Malaysia, the Philippines, and Thailand by undertaking aggressive export
expansion strategies and by attracting foreign investments. It also provides a lesson to less-
developed countries such as India and Pakistan, namely, that they need to avoid employing
restrictive and regulatory policy measures, which are less beneficial to their economic growth.
Bot h of these countries are now aggressively trying to diversify their domestic economies and
open doors to foreign trade and foreign investments, but continuous, ongoing political
disturbances and a long history of inward-oriented policies have kept them less competitive
internationally.

(*.) New Jersey City University--U.S.A.

Footnotes

(1.) Data are from World Tables [World Bank, 1995].

(2.) For a detailed derivation and description of the model, see Ram [1987].

(3.) For a detailed description of the model, see Feder [1982].

(4.) The t-statistics for India, Pakistan, Thailand, the Philippines, and Malaysia are -2.03, -1.75,
-1.27, -1.39, and -2.12, respectively, which are smaller than the 5 percent critical value of -3.75.

IMPACT OF LIBERALIZATION ON EXPORTS AND IMPORTS OF INDIA

Subhadip Roy
The IUP Journal of Managerial Economics from IUP Publications

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