Trade Liberalization, Financial Liberalization and Economic Growth: A Case Study of Pakistan

Transcription

1 Trade Liberalization, Financial Liberalization and Economic Growth: A Case Study of Pakistan Hina Ali *Fozia Shaheen Abstract: The study emphasis to explore the Trade Liberalization, Financial Liberalization and Economic Growth: A case study of Pakistan. Annual time series data is used for the period This study employed Dynamic Ordinary Least Square method and Unit root test is used to determine results. In this study Gross Domestic Product is using as dependent variable and Financial Liberalization, Trade Openness, Inflation Rate, Exchange Rate, Gross Fixed Capital Formation. In this study all variables is using in logarithm form. The financial liberalization and trade liberalization is main variables of this study.. Keywords: Exchange Rate, Financial Liberalization, Gross Domestic Product, Gross Fixed Capital Formation, Inflation Rate, Trade Openness, Introduction During the 1950s Pakistan`s economy followed Is strategy to achieve good environment for industrialization Pakistan consisted very little industry but more agricultural resources. Exports were ignored in 1950s and as registered average decline 5.7 percent per annum. The tax and other incentives structure that included was shows that revenue depend heavily on agricultural products, import duties on imported affected goods. In 1960`s the government promoted export. Firstly, Government presented export bonus scheme. Secondly, Industries used export capability for promote foreign exchange. Thirdly, import liberalization policy used for the purpose of renew of license for industrial raw materials and consumer goods. The total export increased from 43 percent in 1960 to 67 percent in1970. In 1950`s and 1960`s Pakistanis rupee was overvaulted but in 1970`s devaluation was 57 percent against the nominal devaluation of 25 percent. The trade regime become biased in preference of import substitution productions in In 1993 the tariff committee was introduced. By this the 80 percent to 50 percent tariff was reduced. But now the significant reduce in tariff Pakistani rupee is gained good level in trade regime. Pakistan`s economy performance was not so effective in In first decades many different policies was used for sustain GDP level at 56% with unique downturns of Pakistan was facing difficulties. Pakistan couldn`t gain high growth rate in first four decades. *Assistant Professor, Department of Economics, The Women University Multan, Pakistan M.phil Student, Department of Economics, The Women University Multan, Pakistan

2 During 1990`s to remove lawlessness, political instability, terrorism etc. the government introduced structural adjustment programs (SAP). SAP also liberalize financial sector. For this SAP introduced some reforms. The financial liberalization take large move toward giving markets a great role in economic growth. Trade Liberalization means that liberalizes or extend trade in country or out of country. Financial Liberalization is defined as freedom of finance in any country. Figure 1: Trade Liberalization, Financial Liberalization and Economic growth in Pakistan: Trend and size Source: Author`s Calculation Microsoft world 2007 The figure shows that the gross domestic product was in 1973 and in The figure also shows that financial liberalization and trade openness was and in 1973 and respectively in 2014 according to WDI. The INF is in The exchange rate and gross fixed capital formation was respectively and in 1973 but exchange rate become in The gross fixed capital formation is in Literature Review Zaman et al. (2010) estimated trade liberalization, financial development and economic growth: Evidence from Pakistan ( ). Time series data used for the period The study took the variables GDP, trade openness and financial liberalization. All variable were taken in natural logarithm form. The study took bound approach. The empirical results showed that openness and financial development both develop economy in long run. The result also showed direct relation among trade openness granger because economic development and M2 granger cause economic development. Tash and Sheidaei (2012) analyzed trade liberalization, financial development and economic growth in long term: The case of Iran. The study took time series data for The study used the GDP as dependent variable

3 and capital, financial development, trade liberalization, economic liberalization as independent variables. The study used johansen cointegration approach. The study employed result that trade and financial development is positively related with economic development. Khan et al. (2012) attempted the impact of trade liberalization on economic growth in Pakistan. The annual series data used for The study used ARDL approach. In the study GDP is dependent variable used for economic growth and others six are as independent variables to describe financial liberalization. The empirical result of this study showed positive association between economic development and financial liberalization. Olaifa et al (2013) analyzed trade liberalization an d economic growth in Nigeria. A cointegration analysis. The study took time series data during The study used gross domestic product as dependent variable and openness, foreign direct investment, export, import and used cointegration analysis. The study concluded the result, explanatory variable suggested that openness, FDI, export, import could be took to increase growth in Nigeria in the long run. Ramzan et al (2013) attempted impact of trade openness and macroeconomic variables GDP growth of Pakistan. The study took annual time series data. The study applied ADF, johansen cointegration methods, ordinary least square method and result determined that all variables were significant and long run relationship between independent variables and dependent variable. Shaheen et al. (2013) exa mined impact of trade liberalization on economic growth in Pakistan. Time series data used for The study took gross domestic product as dependent variable and also took real trade openness, real gross fixed capital formation, real foreign direct investment, inflation as independent variables. The study used johansen cointegration approach and residual test is worn to found out the goodness of the model. The result of this study indicate that trade liberalization and GFCF had positive effect on economic development. FDI and inflation showed negative affect on economic development. Jawaid (2014) attempted trade openness and economic growth: A lesson from Pakistan. The study took annual data during The study worn GDP as dependent variable and employed labour force, real gross fixed capital formation, trade openness are the independent variables. The study applied ordinary least square method and autoregressive distributed lag.. Saeed and Huussain (2015) investigated the causal relat ionship among trade openness, financial development and economic growth evidence from Kuwait. Annual data employed during the period The study used the variables gross domestic product, financial development, trade openness and also used johansen cointegration, augmented dickey fuller and PP tests. The conclusion of the study showed support for growthled financial development and also showed support for trade opennessled growth. Money supply is the important component of financial development.

4 Data and Methodology This section used annual time series data for period All variables are in logarithm form. Table 1: Description of variables Variables Description of variables Unit of measurement Expected sign Sources GDP Gross domestic product Annual growth % WDI FL Financial Liberalization M2 as % of GDP Negative WDI TOP Trade Openness As % of GDP Negative WDI INF Inflation CPI Positive WDI ER Exchange rate Million Rupees Positive WDI GFCF Gross Fixed Capital Formation As % of GDP Positive SBP. Model Specification The model is specified with one dependent variable and five independent variables are given below. Linear model is followed in present study. Y= f (X i ) (1) Y= GDP X i= FL, TOP, INF, ER, GFCF Equation 2: GDP= β 0+ β 1 (FL)+β 2 (TOP)+β 3 (INF)+β 4 (ER)+β 5 (GFCF)+µ FL=Financial Liberalization TOP= Trade Openness INF= Inflation ER= Exchange Rate GFCF= Gross fixed Capital Formation µ= Error term Figure 1

5 Description of the variables Gross Domestic Product: GDP is described as currently produced goods and services in a country. In GDP includes earnings of goods and services of the peoples which lives in boundary of a country. GDP is used as dependent variable. Financial Liberalization: Financial Liberalization is defined as freedom of finance. FL is also defined as M 2 as percentage of GDP. Trade Openness Trade openness is defined as the sum of import and export to GDP. Trade openness is used as proxy of trade liberalization. It is computed as: TO =EXPORT+IMPORT GDP 100 Inflation Inflation means the rise in the prices. In Pakistan the inflation is prominent problem. The inflation shows both positive and negative relationship with GDP. But in te present study inflation shows positive relation with GDP. Exchange Rate Exchange of currency`s rate between two countries. In this study ER is taken in the form of million rupees. Gross Fixed Capital Formation It includes the entire expenditure beard on fixed assets, replacement cost of fixed capital (land, building, machinery, transport equipment s and engineering work). It is a major part of GDP expenditure. Econometric Techniques

6 Dynamic Ordinary Least Square Method: Carl Friedrich Gause, a German mathematician. He explained the method of Ordinary Least Square in1974. OLS method is one of the most attractive, famous methods of regression analysis. OLS method is used to find out linked between variables. Table 2: Regression Analysis This table is used for regression analysis. Dependent Variable: LNGDP Method: Least Squares Sample: Included observations: 42 Variable Coefficient Std. Error tstatistic Prob. C LNFL LNTOP LNINF LNER LNGFCF Rsquared Mean dependent var Adjusted Rsquared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood HannanQuinn criter Fstatistic DurbinWatson stat Prob(Fstatistic) This table showed negative relation of financial liberalization and trade openness with dependent variable GDP. Financial liberalization is statistically insignificant but TOP is significant. The standard error of FL and TOP is respectively and The inflation rate shows positive and insignificant relationship. The standard error is The ER and GFCF shows positive relationship with GDP and both shows significant relationship. The standard error of ER is The standard error of GFCF is The Rsquared is which fulfill

7 condition that R 2 must be lies between 0 to 1. The DurbinWatson stat is The regression analysis is spurious because R 2 greater than Durbin Watson. Table 3: Descriptive Analysis Mean Maximum Minimum Skewness Kurtosis JB Prob. LnGDP LnFL LnTOP LnINF LnER LnGFCF Source: Author`s Calculation Eviews 7.0 This shows that the mean of Lngdp is The maximum and minimum values is and The gdp is positive skewed and platy kurtic. The gdp is normally distributed. The mean of LnFL and LnTOP is respectively and The maximum and minimum value of LnFL is respectively , The maximum and minimum value of LnTOP is and Both variables are negative skewed, platy kurtic and normally distributed. The mean, maximum and minimum values of LnER are respectively , and The LnER is negative skewed and platy kurtic. The value of Prob.Is also shows that it is normally distributed. The LnGFCF mean and maximum values are and The LnGFCF is negative skewed, leptokurtic and normally distributed. Table 4: Correlation Analysis LnGDP LnFL LnTOP LnInf LnER LnGFCF LnGDP LnFL LnTOP LnINF LnER

8 LnGFCF Source: Author`s Calculation Eviews 7.0 This able show that weekly correlated with all variables but highly correlation between GDP and exchange rate. Unit Root Test: The unit root test consist many methods but in this study three method of unit root test is used these are ADF, DF GLS and Phillips perron test. ADF is the modern form of DF test. These methods give the information about stationarity and nonstationary of all variables Table: ADF and PP Tests Variables ADF Test Results PP Test Results Conclusion 1 st Difference 1 st Difference GDP FL TOP INF ER GFCF 3.28* 3.60* 0.39 Source: Author`s Calculation 7.0 NOTE (* shows stationary at 1%) 6.35* 6.28* * 10.6* 10.8* 6.88* 6.90* 6.90* 5.0* 4.97* 3.29* 4.5* 4.96* 4.64* 3.28* 3.84* * * 10.6* 10.8* 6.88* 6.90* 6.92* 5.0* 4.97* 3.17* 4.5* 4.96* 4.64* This can be observed by the tables of ADF and PP that results of all variables are same. The GDP is stationay at 1 st difference in both tables. The tables also shows that just financial liberalization is stationary at level but others variables like trade openness, inflation, exchange rate, gross fixed capital formation is stationay at 1 st difference. I(1) I(0) I(1) I(1) I(1) I(1)

9 Conclusion This study show that the in early decades trade liberalization and financial liberalization was not develop that s why Pakistan used different policies of economic growth to promote these two variables. The study also showed that financial liberalization and trade liberalization. By Ordinary least square FL and TOP is negative on economic growth. The others variables INF, ER, GFCF is positive related with dependent variables. The unit root test is used to check the stationary and nonstationary of all variables. The study conclude now the Pakistan`s economic performance is become better. Suggestions 1To support the liberalization process, the monetary authorities should create for stable financial environment and stabilize economy. 2There is a need to control inflation to provide favorable environment. 3 The Government should create different policies in economic sectors which is useful for development of a country. 4 Exchange rate system is promote because it is necessary for stable trade liberalization.

10 References: Jawaid, S. T. (2014). Trade Openness and Economic Growth A Lesson from Pakistan. Review, 49(2), Foreign Trade Khan A. H, Khan. M., Khan M. T.,(2012). The Impact of Trade Liberalization on Economic Growth in Pakistan.Journal of Contemporary Research in Business, 3(3). Olaifa, F. G., Subair, K., &Biala, M. I. (2013). Trade Liberalization and Economic Growth In Nigeria; A Cointegration Analysis. Journal of Business Economics and Finance, 2(3), Ramzan M., Asif M., Mustafa M., (2013) Impact of Trade Openness and Macroeconomic Variables on Growth of Pakistan. Journal of Commerce, Economics and Social Sciences, 7(1). GDP Saaed, A. A. J., &Hussain, M. A. (2015) The Causal Relationship among Trade Openness, Financial Development and Economic Growth: Evidence from Kuwait. Shaheen, S., Ali, M. M., Kauser, A., & Bashir, F. (2013).Impact of trade liberalization on economic growth in Pakistan. Interdisciplinary Journal of Contemporary Research in Business, 5(5). ShahikiTash, M. N., &Sheidaei, Z. (2012). Trade liberalization, financial development and economic in the long term: The case of Iran. Business and Economic Horizons, (08), Zaman, K. (2010). Trade liberalization, financial development and economic growth: Evidence from ( ). Journal of International Academic Research, 10(2). growth Pakistan

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