Zara Project Fain Thesis

Role of international trade in economic growth of pakistan

By:

M.com

MC8204

To: Professor Muhammad Farooq

Superior University Lahore

Superior UniversityLahore

Table of contents

Serial No.Areas Page No.

1 Preface 3

2 Acknowledgment 4

3 Introduction 5

4 Literature Review 8

5 Data And Methodology 14

6 Hypothesis Development 14

7 Empirical Findings 15

8 Conclusion 21

9 References 22


Preface

This study was assigned to me to apply the basic concepts of business research and find out the result by using different methodology and finding results by applying different patterns of research which I choose to conduct the study to find out the impact of international trade in economic growth of Pakistan. I am very grateful to superior university & respectable Sir Muhammad Farooq who has given the opportunity to disclose my worth.


Acknowledgment

In the name of Allah the most merciful and most Gracious Lord of the Day of Judgment.Without his will this would not have been possible. I would especially like to give my thanks to Sir Muhammad Farooq who helped me hard and it is because of his guidance that get motivated and completed my research work in a very fine manner.But more especially I want to thank our parents and friends without whom i would not be able to complete thisprojec factly.


INTRODUCTION

International trade means import and export activities from all countries of the world.

trade exits difference in tastes or demand. If costs were increasing in two countries trade

might take place between the countries. Foreign trade signifies the inflow or out flow of

goods and services from one country to another country or countries of the world.

Economic growth has been main driver of poverty reduction.

Countries that have opened themselves up to trade and investment have grown much

faster than those which have not. There is little evidence to support the views that open

foreign trade policies boost economic growth. Foreign trade plays vital role in economic

development of any country especially in developing countries. Through foreign trade

developing countries can earn foreign exchange by exporting surplus and use this foreign

exchange for import of those goods which promote economic development. Foreign trade

not only produces import substitutes but also reduces deficit in balance of trade and

balance of payments of their country besides this countries can benefit from modern

technology through foreign trade. A country can specialize in the production of those

goods for which its resources are more suitable and there fore precious foreign exchange

can be earned. Foreign trade helps in agriculture and industrial development because in

developing countries like Pakistan where there is a need of modern technology and

industrial raw material .these can import these through foreign trade and can promote and

develop these sectors. Foreign trade helps to improve quality of local products and

extends market through changes in demand and supply. Foreign trade can create

competition with the rest of the world. Foreign trade helps to bring stability in price

level .All those things which are short and prices are increasing can be imported so there

by stopping fluctuation in price. Foreign trade provides incentives for foreign investors to

invest in foreign those countries where there is a shortage of investment. It also helps to

increase local investment.

Foreign trade helps to increase the production capacity and to produce on large scale and

therefore to reap economic of large scale. foreign trade helps in developing agricultural,

industrial mineral and services sectors and development of those sectors which increases


thee level of national income, per capita income, standard of living and employment

opportunities which in turn accelerate the rate of economic development. Through

international trade the productivity of labor and capital entrepreneur increases and makes

them mobile on national as well as international level which helps underdeveloped

countries to develop and maintain a high level of growth of developed countries. In 1948

to1950 the trend volume and value of trade of Pakistan was devaluation of pound sterling

in 1948, decrease in external value of Indian rupee a major exporter of Pakistan’s jute

non devaluation of Pakistani rupee, decrease in volume of trade open general license

scheme, Korean War. Pakistan just after the independence faced problem of shortage of

essential commodities.in1948, Government of Pakistan lifted ban on imports which

resulted in increase in volume of imports. In September 1949 British Government

devalued her currency by 30% to correct her balance of payments position. In response to

Devaluation common wealth member countries including India devalued their currency

but Pakistani did not devalue its currency because of greater demand of exports. India

who was the bigger importer of Pakistani jute and cotton ceased to import and also

restricted exports to Pakistan. Pakistan had to face a difficult situation because Pakistan’s

60% foreign trade was with India however Pakistan successfully faced this challenge and

efforts were made to divert its trade with other countries of the world. it reduces

dependence on India .in mid 1950 Korean war started .the demand for our exports

increased sharply. Pakistan earned a lot of foreign exchange due to increased quantity of

exports of jute and cotton in 1951 to 1955 import policy was liberalized. Reduction of

imports by advanced countries. The import policy was liberalized through open general

licence.therefore the balance of payments position again became unfavorable.

Government of Pakistan again adopted the import control policy and abolished open

general licence scheme. Under stringent conditions all imports were made licensable

from 1952.in 1983 to 1991 sugar and food grain shortage appeared. Foreign remittances

started declining and foreign debt was short up to 16 billion dollars so in 1990

Government announced foreign exchange reforms free out flow and inflow of foreign

exchange, opening of foreign currency accounts without deduction of Zakat and income

tax and deposits are unquestionable.in1992 to 2006 many political changes appeared in

the country. There was a fall of Government by Nawaz sharief, their Benzir Bhutto and


again nawaz sharief government in 1999 and General Muusharraf took over the

government there were economic sanctions in1999 because of nuclear explosion test.

Total exports which are 17 billion dollars reached in 2005-6006. % age share of exports

of primary commodities .total imports in are 20.7 billion dollars in 2005-6.the % share of

imports of capital declined to 19.2 in 2005 -6, while % age of import of raw material for

capital goods is 22.7%.after Korean war there was a sharp decline in exports.

Government of Pakistan in order to increase exports set up a committee to suggest

measures to promote exports besides this Government of Pakistan has undertaken various

measures to promote exports from time to time such as export bonus scheume,export

credit guarantee scheme ,the export promotion bureau ,export market development

found ,trading corporation of Pakistan, compulsory grading of exports, design centers,

international trade fair and exhibitions, trade delegations and agreements ,cotton export

corporation. These measures have played a very important role in increasing the exports

of Pakistan.

The first objective of this study is to explore the effect of international trade in economic

growth in respect of panel of developed and developing countries .the study would also

use the sub samples of developed and developing countries for sensitivity analysis .the

second objective of this study is to test the absolute and conditional convergence

hypothesis of volume of imports on economic growth.

This research analyzes the impact of trade in economic growth of Pakistan for the period

ranging from1976 to2005.this research consists of five sections. The next section reviews

the literature role of international trade in economic growth. Section 3 describes the data

and methodology .section 4 reports the empirical findings. Final section 5 concludes the

paper.


. Literature Review

Mckinnon and Shaw (1973) that steps related to financial and trade

liberalization were taken by many developing countries including Pakistan

to achieve a higher level of growtr.this is an empirical search is needed to

determine the effectiveness of financial and trade liberalization policies

with regard to growth in a developing country like Pakistan which followed

restrictive policies till early 1990.the costs of these restrictive policies

have been enormous and reflected in a low level of financial savings

investment and economic growth.

Aziz and Duenwaald (2002) explored that financial development can

affect growth through three main channels. It can increase the marginal

productivity of capital by collecting information to evaluate alternative

investment projects. It can raise the proportion of savings channeled to

investment which results from financial development means by reducing

the resources absorbed by the financial intermediary and this increasing

the efficiency of financial intermediation. It can raise the private saving

rate .when savings are high there will be economic development in the

country.

Ansari (2002) explored that financial development contribute to economic

growth in the following ways. When there are savings in the banks the

funds are available to small investors through which they start business

which results from economic growth. He explored that efficient allocation

of capital is achieved as the proportion of saving in total wealth raises.

More wealth is created as financial intermediaries redirect savings and

slow growing sectors to fast growing sectors. He also explored that

economic development can be achieved when financial markets

encourages specialization in production, development of entrepreneurship

and adopting new technology. He explored that if trade restrictions are

removed the development process is stabilize by improving efficiency. if


trade is open no restrictions are imposed there will be improve in

domestic technology production process will be more efficient increase in

productivity.

Jin (2002) explored that trade liberalization and growth relations may

occur through investment and trade openness provide greater access to

investment goods. By trade openness we get the necessities of life easily.

people do not face any difficulty such as all the underdeveloped countries

get the medicines which saves human life import from developed

countries through trade openness. We get the large scale production

which results economic development besides this through trade openness

the overproduction export to another country and then earn foreign

exchange.Barro et:,al explored that joint impact of financial and economic

growth jointly increase economic growth. Their testable hypothesis says

that both financial development and trade liberalizations jointly increase

economic growth. Through reducing inefficiency in investment by

providing better means of investment.

Andersen et:, al explored that economic growth of developing countries is

based on credit allocation. They explored the more is credit allocation in

the country the more is economic development in the country. When

financial sector of any country is strong means more loans are available

for entrepreneur to start their business the rate of investment increases in

the country because financial sector has greater impact on economic

growth.Fase et::,al explored that trade and financial policies started

Government for rapid economic growth. In Pakistan the banking sector

reforms was started in early 1990.through these reforms the Government

of Pakistan has been able to make financial industry more effective

competitive means to face problems of other competitors by privatizing

the commercial banks reasonable interest rates and by standardized

accounting and auditing.

Limi (2004) explored in 1990 the financial sector in Pakistan was not

controlled. Interest rates were poor or negative. Monetary policy was also

not good. And money market was underdeveloped and commercial banks


have little share in firms profitability and status of financial institutions

were precious overstaffing increasing in banks and these banks incur

losses means low quality banking services and accommodation of none

performing loans. These inefficiencies cause macroeconomic difficulties at

the late 1970 and 1980.to remove these difficulties the government of

Pakistan taken a big action in the early 1990 to provide strength to its

financial system. The objective of these reforms to prepare their industry

in such a way that it faces the problems of their competitors adopting a

market based indirect system. in these reforms all banks were privatized

reducing corporate burden and by providing means opening up provision

of credit for agriculture small and medium enterprises and promoting

technology in banking.

Bhagwati and Krueger (1978) explored that trade policy import

substitution and export promotion plays a big role in economic growth of

Pakistan. in 1950 and 1960 most of developing countries followed import

substitution policies for their economic growth. This policy stress upon the

need for developing countries to evaluate their own style of development.

Tardo and Smith (2003) explored that in most developing countries the

export promotion strategy is very high means most developing countries

have high economic growth because their exports are in high level. And

high export promotion strategy particularly in globalization level. Export

promotion strategy leads to efficient resources allocation economies of

large scale production and efficiency in technological development.

Capital formation provides opportunities of employment which increase

economic growth. He explored that due to export growth the four

countries Hong Kong Taiwan Singapore and republic of Korea the four

tigers means the countries have been successful with high economic

growth because of their free market outward oriented economics and this

is possible to carefully planned intervention by the Government.

Balassa (1980) explored that the countries which followed inward oriented

policies under import substitution strategy have poor economic growth.

Therefore many LCD,S were focused to stimulate their exported oriented


orientation because most of them rely on multilateral or organization to

adjust their economic in balances because promotion of exports helps

LCD,S in balances in external sector and also helps them in their recovery.

Riveria-Batiz and Romer (1991) explored that three potential effects op

openness upon rates of producing growth in an economy the

technological frontier. They explored firstly an increase in the degree if

international openness may affect rates of domestic innovation in the less

developed economy. Secondly an increase in the openness may mean a

greater amount of technological knowledge in the frontier economy may

be transferred to its less advanced counter part. Thirdly an increase n the

openness may change the rates oat which knowledge may be transferred

between the two economies. He explored the greater openness may

reduce costs of technology adoption.

Bernard and Jones (1996) explored that openness increase the

productivity and productivity increases the economic growth.. He explored

productivity in a manufacturing sector may rise as a result of either

innovation or technology transfer from the leading economy. They

explored that openness may affect domestic rates of innovation, the

quality of technological know how, in the leading economy that may be

transferred to its more backward counterpart the rate at which this

technology transfer occurs. They estimated the economic relationship

between international openness and rates of productivity growth .they

consider a variety of measures of international openness, the import

output ratio, trade weighted stock and ratios of both inward and outward

foreign direct investment, flows to output and test the hypothesis that

openness affects the rate of productivity convergence against th

alternative that it affects either the domestic rate of innovation or the

quality of technological know how. they explored that certain type of

openness in particular the ratios of either exports imports to output are

found to be specially important others .particularly the flows of inward and

outward FDI less so. They found that it is the rate of productivity

convergence that is primary affected by international openness. by raising


the rate at which knowledge from a leading economy openness increases

both rates of productivity growth.

Marshal (1890) pointed out the causes which determine the economic

progress of nations belong to study of international trade. Expansion of

market leads to increase of global production and this increase of internal

and external economies which resulted in increasing income for the

economy means when trade is open material or machinery are available

to factories. When things are produced and trade is open atomically

expansion of market occurs which leads to global production internal or

external economies developed which results increase of income for the

economy which has a positive effect on economic growth. Young (1928)

explored that technological progress leads to economic growth when new

machines are imported from abroad productivity automatically increases.

he explored dimensions of market limited the labor division and therefore

the productivity means when no things are produced and market is not

efficient then unemployment increases which results poor economic

growth. He also examined the inter relation between industries in the

process of economic growth. The creation of new industries due to

specialization and standardization in a vast market and the influence of

this market on the technological process.

Schumpeter (1912, 1942 and 1954) explored that economic growth and

profit depends on capital accumulation. He also explored that

advancement of useful knowledge to production from innovation means

technological staff for production process increase productivity which

increase economic growth. He explored economic activity exploring new

knowledge and adopting new challenges. He also considered useful

knowledge to producing and exploring knowledge for economic growth.

Feder (1982) explored that economic growth produced from the affects of

traditional sources and from the exporter sector performance. We

considered that economies have two distinct productive sectors exporter

and non exporter. Differing in the final destination of productions and in

the superiority of the productivity of the traditional factors in the exporter


sector. He also explored that the rate of economic growth was explained

by the rates of investment, labour growth and exporter growth. he also

presents a way of comparing the relative benefits of allocation of

resources to the both sectors.

Little et al:,(1970) explored that the strategy of substitution of imports to

be responsible for the existence of firms with high costs charging, high

prices for their products which can only be purchased by high income

customer means under developed countries import material or machinery

from other countries which have high costs due to which firms carry their

business .the firms who made products charging high costs for their

products which can only be purchased by high income consumers .He also

explored that entrepreneurs are bound to compromise with Government

policies or decisions .Therefore they defend the promotion of exports.

Balasa (1978) compared the strategies of promotion of exports with

substitution of imports. He considered a sample of 10 LCD,S with different

grades of use of those strategies .He use the neoclassical production

function. He also uses different exporting performances. From the results

means when results are found it was appear the countries which have

higher export growth the economic growth will be higher mean if exports

are higher in any country there will be higher the economic growth

because due to exports the countries earn the foreign exchange and this

foreign exchange helps in purchasing the machinery and raw material

from countries. So the cost purchasing this raw material is cheaper. when

material is provided to firms in less prices .the things which can be

produced are made available to consumers on less prices so necessities of

life are made available to every person and there will be employment in

the country when necessities of life are available there will be economic

development in the country. Kruger (1985) explored that many LCD,S

reduced commercial barriers and other controls of economic activity. They

obtained a significant increase in rate of economic growth. He explored

that technological factors of economic behavior and political and

economic consideration that involved dynamic effects can helped to


explain the differences of performance among economies .He explored if

political if political condition of the country is effective there will be

economic growth in such a way the traders have no any fear to deal in

goods or services. if political conditions are not good the traders or

entrepreneurs fear to deal because they have a fear to lost their money

due to poor political conditions. so we decided if political conditions are

good there will be economic growth in the economy.Rajatirana (1987)

explored that technology allowed for dynamic gains’ is co responsible for

the world development. report 1987 claimed again kurger aruguments

and explain that information technology allowed for dynamic gains when

subjecting to internal production to international competition and also

made it possible for countries to specialize in different branches of

industry and production stages. He explored that if internal production

can be achieved then you compete with international market and internal

production can be achieved through specialize in different branches of

industry and production stages. He also explored if the countries access to

the DCS technology along with expansion of exports it stimulated internal

Lucas (1988) explored relation between IT and economic growth In this

study he considered the function of aggregate production with two

consumption goods and only one production function. He explored that

human capital means labour workforce whose rate of accumulation

depend on the quantity of labour connected with production .he explored

that with the help of IT country would specialize in the goods for which the

human capital gives a positive result. he explored that IT specialization

tended to be reinforced because the learning took place in specialized

sector. he explored if the rate of learning differ from sector to sector the

rate of economic growth would be differ from country to country.(1989)

analyzed the consequences of the big market of 1992 in the European

union taking the endogenous mechanisms of economic growth into

account. he explored that it lead to an increase of global rate of economic

growth .in view of the midterm effects it had on savings and investment

or in long term on rates and consumption growth. And on determinants of


innovation profitability.Feche (1992) explored that the activity of

innovation or abilities to imitate technologies of leader countries be vital

factors for productivity growth. He analyzed this situation in eight

industrial sectors of OECD countries. In the period 1970-1986 in order to

undertake this task he divided the total factor production in to technical

progress and increase of technical efficiency. He noted the explanatory

power with positive influence on technical efficiency and rand with

positive influence on technical progress in relation to total factor

production as well as the benefit deriving from the separation of its

elements in to technical progress and increase of technical efficiency. he

also consider the hypothesis relate to international atmosphere stressing

that rand sectors can efficiency prevent others national and foreign

sectors from taking advantage of their projects .He includes a measure of

international and intra sector that would have a positive and significant

effect on technical progress. he also consider two additional variable that

reflect changes in terms of trade and in growth of world demand. which

had a positive statistically significant impact on technical efficiency.

Data and Methodology

Annual data from to 1976 to 2005 on volume of imports and on volume of exports are

retrieved from IMF international Financial Statistics. two variables are used. Volume of

imports and volume of exports. Economic growth is dependent variable while imports

volume and exports volume are independent variables.


Hypothesis Development

After this we have set the following hypothesis to check the effect of independent

variable on the dependent variable

Hypothesis 1. .

Ho = Imports does not affect the economic growth.

H1 = Imports does affect the economic growth.

Hypothesis 2. .

Ho = Exports does not affect the economic growth.

H1 = Exports does affect economic growth.

Empirical Findings.

We have selected these variables for the study one is dependent variable and other is

independent variables. In order to find the relationship between economic growth and

volume of imports and volume of exports SPSS software is used. The tests applied by us


are the descriptive statistics correlation and regression .the findings of these tests

interpreted blew

Table 1.1:

Descriptive Statistics

Descriptive statistics

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

economic growth 31 111.18 6581.10 1.7029E3 1818.63245

volume of imports 31 30.81 164.98 80.9040 30.29492

volume of exports 31 19.85 109.92 66.0027 29.34430

Valid N (listwise) 31

The table 1.1 provides necessary information about the selected variables.i.e, mean

values maximum values, minimum values and standard deviation. In this table maximum

represents higher values and minimum represents lower values.

In this study number of cases is 30 and data for all these cases is valid and there are no

missing values.

The lowest value of economic growth is 111.18 and higher value is 6581.100 and average

value is 1.702 while its standard deviation is about 1818.6325 to which it can deviate.

similarly the lowest value of export 19.85 and highest value is 109.92and average is and


66.0027 its standard deviation is about 29.34430 and lowest value of import is 30.81 and

highest value is 80.9040 while its standard deviation 30.29492 to which it can deviate .

Graph


Correlations

Table no 1.2


Correlations

economic growth

volume of

imports

volume of

exports

economic growth Pearson Correlation 1 .950** .867**

Sig. (2-tailed) .000 .000

N 31 31 31

volume of imports Pearson Correlation .950** 1 .931**

Sig. (2-tailed) .000 .000

N 31 31 31

volume of exports Pearson Correlation .867** .931** 1

Sig. (2-tailed) .000 .000

N 31 31 31

**. Correlation is significant at the 0.01 level (2-tailed).

Table 1.2 presents the value of parsons correlation I e r = .950, r =.867 of value of

exports and value of imports respectively with economic growth and their level

significance are .000,.000 respectively.

Value of Pearson correlation is greater than 0.67 which means that relationship between

economic growth and volume of imports and volume of exports is strong. so we accepted

H1 and rejected Ho because level of significance of two variables is less than 0.05

Regression


Coefficientsa

Model

Unstandardized Coefficients

Standardized

Coefficients

t Sig.B Std. Error Beta

1 (Constant) -2979.585 316.091 -9.426 .000

volume of imports 64.118 9.642 1.068 6.650 .000

volume of exports -7.564 9.546 -.127 -.792 .435

a. Dependent Variable: economic growth

Volume of exports shows negative relationship because it shows negative effect on your

dependable variable and the level of significance is higher. So we reject H1and accept Ho

and volume of imports shows positive relationship on your dependable variable and level

of significance 0.05 is low so we accept H1and reject Ho

Regression Equation

Now we predict our dependable through the value of independent variable as like this

regression equation

Y= α + βx + β y

Where Y represents dependent variable economic growth α, represents constant value βx

and βy represents volume of exports and volume of imports.

:

By putting values, we have


. Y= α + βx + βy

-2979.585 + -7.564+64.118

=-2923.031

Conclusion

The study has investigated the impact of International trade on economic growth for the

period of 1976 to 2005 .for this purpose regression and regression and correlation are

used.

Economic growth is dependent variable the empirical results finds strong relationship

between exports volume imports volume and economic growth. Our results also find

feedback effect between exports volume imports volume and economic growth. Results

also show evidence of a strong feedback effects between volume of imports and volume


of exports and economic growth.. This study will be very fruitful for the future concerns

as it consists of valuable information regarding the economy of the Pakistan.

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Zara Project Fain Thesis

Documents

countries trade

balance of trade

value of trade

open foreign trade policies

role of international

foreign investors

impact of international

foreign trade plays