Iran. Econ. Rev. Vol.18, No. 1, 2014. An Empirical Sudy of Expor and Economic Growh in India since 1960: A Co inegraion Analysis Seyed Mohammadreza Hosseini D.S.Leelavahi Received: 2013/05/31 Acceped: 2013/12/11 Absrac he curren sudy aims o explore he relaionship beween he wo Tmain macroeconomic variables, he expor and economic growh, based on he expor-led growh hypohesis (ELGH) in India for he period 1960 o 2010. The ELGH is an economic sraegy used in he inernaional rade policy of some developing counries for racing he impac of rade on heir economic growh. The ELGH is esed by he co-inegraion, error correcion modeling and Granger causaliy approach. The resuls of he sudy show ha here is evidence of unidirecional causaliy beween expor and economic growh for India. In fac, he economic growh causes expor growh. Keywords: Expor-Led Growh Hypohesis, Expor, Economic growh, co inegraion, Error correcion model. 1- Inroducion Since he las five decades, he developing counries manage o develop heir compeiive expor indusries wih asonishing growh raes, such as Taiwan and Souh Korea in he 1960 s; Malaysia, Thailand, and Singapore in he 1970 s; China in he 1980 s, and evenually India in he 1990 s. Some of developing counries emphasize indusrial, like India, and a few oher counries, such Asian counries, emphasize on secor of services. In fac, India implemened differen growh model when compare o ohers Asian counries wih concenraed on Manufacure han ohers secors. Research Scholar, Deparmen of Sudies in Economics, Universiy of Mysore, Mysore; (Corresponding Auhor). Professor of Economics DOS in Economics & Cooperaion Universiy of Mysore.
54/ An Empirical Sudy of Expor and Economic Growh in India since The invesigaors wan focus on India planning for showing he impac of i on macroeconomic variables and relaionship beween hem. In briefly, afer India independen (1947 AD), planning divided o four phases, ha sraegy a he firs phase, involve hree plans, beween 1951 o 1966, was building up huge consrucion and invesmen like iron, seel ha he growh rae of indusrial index go abou 7.3% ha i was good rae for firs phase bu he rae of expor decrease of 24.9 o 0.3 percen and he average of rae of economic growh in he firs plan was 4.4 percen and decrease o 2.6 percen. In he second phase, involve fourh and fifh plans, beween 1969 o 1979, he growh rae of indusrial index decreased sharply o 4.1% bu he rae of expor increased of 3.5 o 13.9 percen and he rae of growh increased of 3.1 o 4.9 percen.the governmen decided o change is policy in he hird phase, involve fifh and sixh plans (1980s), he sraegy aimed o indusry recovery and economic reform wih he purpose of giving suppor o privae secor and rade liberalizaion policy as well as a he end of his policy Indusrial index obained 7.4% bu in his period he rae of expor decreased of 13.9 o 6.8 percen and he rae of growh increased of 4.9 o 5.4 percen. The las phase, involve eighh o elevenh plans since 1991, was a new era of economic in India ha named rade liberalizaion. Economic reform in his period increased indusrial index o 8.9 % and in his phase he average rae of expor was 13.15 and he average rae of growh was abou 5.8.( Misra& Puri, 2011) Afer half a cenury, since mid 1960s, planning is following rade liberalizaion policy. So we come across his quesion wheher rade liberalizaion policy has posiive impac on macroeconomic variables by esing ELGH? This invesigaing is organized as following. Secion 2 explains abou ELG hypohesis. Secion 3 deal wih lieraure review and secion 4 gives deails abou mehodology and daa. In he 5 secion we sae objecive & hypohesis. Secion 6 involves empirical sudy and he las secion, secion 7, is conclusion. 2-Expor-led growh (ELG) hypohesis Ricardo s heory of compeiive advanage believes ha rade help o growh & developmen of counries bu differen sraegies were applied ha limied rade among counries. Abou five decades before, he expor
Iran. Econ. Rev. Vol.18, No. 1, 2014. /55 promoion sraegy acceped by majoriy of developing counries and some of hem have good experience in his way like Asian counries. This rade heory has given birh o a new direcion for economic policy, namely he expor-led growh [ELG] hypohesis (Zuniga, 2000). Based on heory, Counries hope o gain enough growh in economic. According o Taban and Akarr (2005), he expor-oriened policies conribue o economic growh from he differen ways summarized as follows: Keynesian argumen is ha an increase in expors leads hrough he foreign rade muliplier o oupu expansion. Expor relaxes he binding foreign exchange consrain o allow increases in impors of capial and inermediae goods which lead, in urn, o economic growh. Expors increase efficiency via compeiion. Compeiion gives rise o he economies of scale and diffusion of he echnical. 3- Lieraure review The ELGH has been sudied by some researchers in differen counries ha we sudy some of hem as following: A. Taban and Akarr (2005) applied he ELGH in Turkey. They used ime series daa for period 1980:1-2007:4. Co inegraion and error correcion model were applied for hypoheses esing and hey find ou an evidence o suppor ELGH and long run relaionship beween expor growh and real GDP growh. B. Emilio J. Medina-Smih (2001) used Cob-Douglas funcion for hypoheses esing. They used series daa for period 1950-1997 in Cosa Rica. They applied co inegraion analyses for finding shor run as well as long run relaionship beween expor growh and economic growh. They showed ha expor has posiive effec on economic growh bu no very srong. They found ou ha he ELGH is probably beneficial only for a limied number of developing counries, and only o a cerain exen. C. A brief framework of he ohers researchers ha relaed economic lieraure on he expor-led growh hypohesis are as follows:
56/ An Empirical Sudy of Expor and Economic Growh in India since Sudy Sample Period of sudy Emery (1967) 50 Syron & Walsh (1968) 50 Source: Emilio J. Medina-Smih 1953-1963 Averages 1953-1963 Averages Mehodology Daa se Economic growh Expors Economeric echnique Conclusions Cross-secion GNP growh Expor growh OLS Suppor for he expor-led hypohesis. Cross-secion GNP growh Expor growh OLS Kravis (1970) 37 1835-1966 Cross-secion GNP Expor growh Heller & Porer (1978) Tyler (1981) 55&49 Ram (1985) 73 Fosu (1990) 28 Greenaway & Sapsford (1994) 41 1950-1973 Cross-secion 19 1960-1977 Middle-income LDCs 1960-1970 1970-1977 Low- and middle-income LDCs 1960-1970 1970-1980 African counries 1957-1985 1970-1985 1971-1985 Cross-secion Time series wo-sub periods Pooled cross-secional wo periods Time series Oupu growh rae GNP Real GNP growh and GNP per capia Real GDP growh GDP growh Real GDP growh Per capia expors Real expor growh Real expor growh Rae of growh of merchandise expors Real expor growh and expor change/oupu Spearman rank correlaion Spearman rank correlaion Pearson and Spearman rank correlaion, OLS, producion funcion OLS, Whie es for specificaion bias and heeroskedasiciy OLS, producion funcion OLS, 3 versions of producion funcion Suppor for he hypohesis bu he resuls are sensiive depending on he ype of counry under scruiny LDCs or developed counries. Suppors he expor-led hypohesis; however, indicaes ha LDCs ha have been capable of diversifying heir expors have been more successful in erms of growh. Lile suppor for expor growh causing growh. Suppors he expor growh hypohesis and sugges he exisence of a hreshold effec. Suppors he expor growh hypohesis and suggess he exisence of an hreshold effec. Suppors he expor -led hypohesis. Lile suppor for he expor-led growh hypohesis and for he posiive liberalizaion effecs on growh.
Iran. Econ. Rev. Vol.18, No. 1, 2014. /57 4- Mehodology and Daa A firs, we need o discern he saionary of he series in order o avoid spurious regression. Saionary could be achieved by appropriae differencing and his appropriae number of differencing is called order of inegraion. In his sudy, we use Augmened Dickey Fuller (ADF) es ha wheher he variables are saionary. (Gujarai, Porer and Gunasekar, 2012) Y 1 2 Y 1 iy i (1) There is H 0 : 0, H1 : 0 ha base on criical value if null hypohesis canno be rejeced hen he Y series is non saionary. If he absolue value of he compued -saisics for exceeds he absolue criical value, hen he null hypohesis ha he log level of y series is no saionary mus be rejeced agains is alernaive. If, on he oher hand, i is less han he criical value, i is concluded ha he log level of y is non saionary. In his case, he same regression mus be repeaed for he firs difference of he logarihmic value of he series. The appropriae lag order of k in equaion 1 was chosen on he basis of he crieria of Schwarz. If all variables are found o be I (1), he second sep is o es for he exisence of a coinegraion relaionship beween hem. We follow he Engle and Granger (1987) wo sep procedure o search for coinegraion among he variables. In he firs sep, non saionary series (For example, X and Y) are esimaed by using Ordinary Leas Squares mehod: Y X u (2) Afer he esimaion, again he ADF uni roo process is applied for he residual of equaion 3 o deermine wheher he residual erm (u) is saionary. u k 1 i i u 1 i u (3) If he residual erm is found saionary, his case, in equaion 3, indicaes ha ime series are co inegraed in he long erm. Oherwise, i is undersood ha
58/ An Empirical Sudy of Expor and Economic Growh in India since hese series are no co inegraed, in oher words, we conclude ha ime series do no share he same sochasic rend in he long- run. However, he Engle-Granger approach is criicized for several shorcomings, which include he following: (a) he arbirary normalizaion of he coinegraion vecor, (b) he assumpion of one co inegraing vecor in sysems wih more han wo variables and (c) biased OLS esimaors. Furhermore, due o non-normaliy of he disribuion of he esimaors, no final judgemen can be passed on he significance of he esimaed coefficien (Taban and Akarr 2005).Therefore, we use he maximum likelihood approach of Johansen and Johansen and Juselius in addiion o he Engle- Granger mehod. If he series are found co inegraed by eiher Engle-Granger approach or Johansen- Juselius approach or boh, here will exis an error correcion model (ECM) including an error correcion erm (ECT) obained from he relevan coinegraion regressions. ECT is used for correcing disequilibrium and esing for long run and shor run causaliy among co inegraed variables. The error correcion models are defined as in equaions (4) and (5). Y X m n r iy 1i X 1 1i ECT e (4) 1 i1 1 1 i 1 i 1 1 m n r iy 2i X 1 2iECT e (5) 2 i1 2 i i 1 i 1 1 In his sudy uses annual real daa of GDP (2000 base year) and expor daa for he 1960-2010 period of India. All daa come from World Bank via inerne. All variables are also ransformed o naural logs denoed as LGDP and LEX. 6-Behavior of Major Variables I is very much imporan o ge a clear picure on general behavior of major variables concerned in he sudy. Basically long erm rend and oscillaions of variables mainly in economic growh and expor growh variables are essenial o sudy during 1960-2010 period. - Economic Growh in India Economic growh raes over he las five decades show regular paern due o inernal and exernal shocks faced by he counry. According o figure 1, India has experienced a low average economic growh rae during he period from 1961-1980. Of which, period from 1981-1990 counry has shown a sabiliy good
Iran. Econ. Rev. Vol.18, No. 1, 2014. /59 economic performance. This period is especially well known as policy makers decided o decrease resricion on inernaional rade bu inerval 1988 ill 1991 ha rade liberalizaion was no acceped compleely by governmen and he economic growh experienced sharp decrease of abou 5.5% o 1%. In 1991, rade liberalizaion was acceped and i has posiive effec on economic growh. Source: World Bank Figure1: Economic growh in India - Expor Growh in India Expor growh rae over he las five decades show quie irregular paern. According o he figure 2, India has experienced a low average expor growh rae, 7 percen, during he period pre rade liberalizaion from 1970 1990. Afer rade liberalizaion (1991) expor growh rae has shown more han before rade liberalizaion abou 13 and 14 percen respecively. This period is especially well known as policy makers decided decrease resricion on rade inernaional In fac, rade liberalizaion, 1991, was acceped and i has posiive effec on expor growh rae of course wih high flucuaion.
60/ An Empirical Sudy of Expor and Economic Growh in India since Source: World Bank Figure 2: Expor Growh in India 7- Empirical Resuls The uni roo es resuls are repored as follows: Table 1: Augmened Dickey-Fuller Saionary Tes Resuls Variable Consan Criical Value Consan Criical Value No Trend 1% 5% Trend 1% 5% LGDP 1.567 (2) -3.56-2.92-0.20 (2) -4.15-3.50 LEX 1.109 (2) -3.56-2.92-1.06 (2) -4.15-3.50 ΔLGDP -7.13* (2) -3.57-2.92-7.42*(3) -4.15-3.50 ΔLEX -7.12* (2) -3.57-2.92-7.23*(3) -4.15-3.50 The number inside brackes denoes he appropriae lag lenghs which are chosen using Schwarz Crierion. * Denoes for 1% significance level. Table 1 repors he resuls of he ADF es on he inegraion properies of real GDP and expor for India. Resuls of he ADF es indicae ha he wo series are found o be non saionary. Bu he saionary of hese series a firs differences
Iran. Econ. Rev. Vol.18, No. 1, 2014. /61 lead o saionary. These indicae ha he inegraion of real GDP and real expor for India is of order one (1), namely I (1). Given ha inegraion of he wo series are of he same order, we coninued o es wheher he wo series are co inegraed over he sample period. A firs, Engle-Granger coinegraion es procedure is applied. The coinegraion resuls based on his procedure are presened as follows: Table 2: Engle-Granger Coinegraion Tes Dependen Independen ADF Saisics Criical Value Resul Variable Variable 1% 5% LGDP LEX -8.51 (3) -3.58-2.92 Co inegraed LEX LGDP -8.32 (3) -3.57-2.92 Co inegraed The opimum lag-lenghs are indicaed wihin parenheses and hey are deermined by he Schwarz crierion. As seen from he Table 2, he enire ADF es saisics are bigger han he criical values (absolue amouns). This shows ha he variables are co inegraed. This expresses ha here is a long-run relaionship beween real GDP and expor series over he period 1960-2010 in erms of Engle-Granger approach. To overcome any confusion abou he coinegraion relaion, he Johansen- Juselius Procedure is applied nex. Table 3 shows he resuls of Johansen es. Series: LGDP, LEX Table 3: Johansen Coinegraion Tes r Eigenvalue Trace Criical Value Max-Eigen Criical Value Resul Saisic 5% Saisic 5% Null: r=0 0.501 41.332*(3) 20.261 32.748*(3) 15.892 co inegraion Aler r=1 0.166 8.584 (3) 9.164 8.584 (3) 9.164 Normalized coinegraion equaion: LGDP =-71.091 + 3.011LEX * Denoes for 5% significance level. The opimum lag-lenghs are indicaed wihin parenheses and hey are deermined by he Schwarz crierion. Trace and maximum eigenvalue ess indicae one co inegraing equaion a he 5% level of significance. In oher words, he hypohesis of no co inegraing vecor is rejeced by boh race and maximum eigenvalue ess. Finding a co
62/ An Empirical Sudy of Expor and Economic Growh in India since inegraing vecor beween real GDP and expor series indicae ha here is a long-run equilibrium relaionship beween hese series for India. The normalized co inegraing coefficiens are shown in he las row of Table 3, and he signs of he variables conform o he heory in he lieraure (i.e. here is posiive relaionship beween economic growh and expor). Following he deecion of he co inegraing relaionship beween real GDP and expor in erms of he Johansen mehod, he error correcion models (7) and (8) were se up o invesigae shor and long-run causaliy. The resuls are repored as follows: Table 4: Granger Causaliy Tes Dependen Causal Lag Orders Shor-run causaliy saisics of Variable Variable ΣΔLY ΣΔLX he coefficien ECT-1 ΔLGDP ΔLEX n = 2, m =2-2.06-1.613 ΔLEX ΔLGDP n = 2, m =4 3.473* - 2.37* Lag orders are seleced based on he Schwarz crierion, m = lag lengh of dependen variable, n= lag lengh of causal variable. Σ shows he lagged coefficiens of he concerned variable are all joinly esed. *Denoes for 5% significance level As can be seen from he able 4, F saisics, which are applied he lagged coefficiens of ΔLEX and ΔLGDP is joinly significan a he 5% bu ΔLGDP and ΔLEX is no joinly significan a he 5%. We conclude ha here is a shor run causal relaionship beween ΔLEX and ΔLGDP. In summary, Granger causaliy es resuls indicae ha here is unidirecional causaliy from growh o expor in India for he period 1960-2010. Conclusion This sudy researched he expor-led growh hypohesis using he annual ime series daa running from 1960 o 2010 for India. This sudy has applied he error correcion model o invesigae he causaliy beween he real expor growh and real GDP growh. Before esing causaliy, boh Engle-Granger and Johansen approaches were used o invesigae he coinegraion. Even hough Engle- Granger es resuls indicaed ha here is long-run relaionship beween he expor and real GDP series, also a long-run relaionship beween hese series was
Iran. Econ. Rev. Vol.18, No. 1, 2014. /63 found by applying Johansen s coinegraion mehod. Following he deecion of he co inegraing relaionship beween expor and real GDP in erms of Johansen approach, an error correcion model was se up o invesigae shor and long-run causaliy. The resuls of he sudy show ha here is evidence of unidirecional causaliy beween expor and economic growh for India. Base on in his sudy, we canno say ha he expor-led growh policies conribue o economic growh bu inverse he resuls show ha he economic growh conribue o growh in expor in India. References 1- Amelia, U. & Paulino, S. (2003). Trade liberalisaion and rade performance in he Dominican Republic. IDS Working Paper 209. 2- Bhagwai, J.N, & Chakravary, S. (1969). Conribuions o Indian Economic Analysis: A Survey. The American Economis Review,59 (4),1-73 3- Dua, D. & Ahmed, N. (2004). 'Trade liberalizaion and indusrial growh in Pakisan A coinegraion analysis', Applied Economics, vol.36:13, pp. 1421-1429 4- Dickey, D.A and W.A. Fuller. 1979. Disribuion of he Esimaors for Auoregressive Time 5- Series wih a Uni Roo, Journal of he American Saisical Associaion, 74:427-431. 6- Engle, R.F and C.W.J. Granger. 1987. Coinegraion and Error Correcion: Represenaion, 7- Esimaion and Tesing, Economerica, 55:251-76. 8- Emilio J. Medina-Smih.(2001). Is The Expor-Led Growh Hypohesis Valid for Developing Counries?A Case Sudy of Cosarica. Unied Naions Publicaion, ISSN1607-8291 9- Jin, J. C. (1995). Expor-led growh and he Four Lile Dragons, Journal of Inerna ional Trade and Economic Developmen, 4, 2 (July): 203-15. 10- Gujarai,Gujarai,D.N.,Poer,D.C.,& Gunasekar,S.(2012).Basic Economerics. New Delhi:Taa Mcrawhill Educaion Privae Limied 11- Emery, R. F. (1967). The relaion of expors and economic growh, Kyklos, 20, 2 (May): 470-86. 12- Emery, R. F. (1968). The relaion of expors and economic growh: A Reply, Kyklos, 21, 4(November): 757-60 13- Hosseini,S.M & Leelavahi,D.S.(2012). Ninh convenion of eacher s councils of commerce and managemen in Karnaaka. Universiy of Mysore.
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