The Export-Led Growth Hypothesis. New Evidence and Implications


Scientific Study, 2015
29 Pages

Excerpt

Table of Contents

Abstract

Introduction

Literature Review

Research Hypotheses

Data Description

Methodology

Cointegration Analysis

Causality Analysis

Hypotheses Test Results

Trace Test Results

Maximum Eigenvalue Test Results

Causality Test Results

Discussion

Conclusion

References

The Export-Led Growth Hypothesis: New Evidence and Implications

Abstract

Previous studies on economic growth have shown that countries that relied on exports to propel their economies have been successful in achieving robust economic growth. This study considers Botswana’s mineral exports production from 2003Q1 to 2012Q4 and relates each export commodity with the GDP. This study applies the Johansen cointegration test and the Granger causality test to determine the applicability of the export-led growth hypothesis for the Botswana economy. The cointegration test shows that there is long run comovement between GDP and four of Botswana’s mineral exports namely: matte; diamonds; copper; nickel and soda ash. In addition, the Granger causality test shows that Botswana’s economy propels exports production. From these results, the study nullifies the export-led growth hypothesis and postulates that the Botswana economy rather follows the growth-driven exports hypothesis (GDE). The study further postulates recommendations and also potential areas of research.

Keywords: export-led growth; growth-driven exports; mineral exports.

JEL Classification: F41; F43; F14; E23

Introduction

According to Tang et al. (2015), for decades economies that relied on exports to drive their economies have achieved considerable success in accelerating their economic growth. Thus in Asia, several countries have deployed this idea to achieve impressive economic growth since the 1960’s. Such economies include South Korea, Taiwan, Hong Kong, Malaysia, Thailand and notably China and India. The success of these exports oriented Asian economies has thus made a breakthrough in empirical research that investigated the function of exports on economic growth (Tang et al., 2015). Studies on economic growth generally propose 2 hypotheses to explain economic growth. The extant literature postulates the export-led growth hypothesis, in which exports propel economic growth. The World Bank (1987) study showed that exports–promotion strategy may flourish economies of the Less Developing Countries (LDC’s) in their attempt to industrialize and transform into robust economies. Nonetheless, the relationship between exports and economic growth can reverse hence affirming the growth-driven exports hypothesis (GDE). Following Konya (2006), the GDE hypothesis is focused on the fundamental that economic growth itself induces trade flows. Thus according to Konya (2006), this can create comparative advantage in some sectors of the economy which will later propel specialization and facilitation of exports production.

While China has generally been termed as an export-led economy, a study conducted by He & Zhang (2010) showed that China’s exports dependency is comparatively lower than implied by the headline–exports to GDP ratio. In fact, the total factor productivity effects have been found to have significant impact on the Chinese economy. Relatively, previous studies focused on exports variety while not focusing intently on a single export commodity and its trade patterns. Limaei et al. (2011) attempted to fill this void by focusing on Iran’s wood import and exports and its relations with a number of macroeconomic factors. Conclusively, the study found out that there were notable relations between wood production and domestic economic growth. However, in the examination between exports and GDP growth, exchange rates have to be brought into this analysis. Chaudhry & Bukhari (2013) have thus suggested that exchange rate depreciations are associated with an expansion of a country’s exports.

This paper is a contribution to the extant literature by focusing on the production quantities of Botswana’s mineral exports and their contribution to economic growth instead of focusing on exports revenue. The extant literature uses varying techniques in the examination of the relationship between exports and economic growth but fails to account for production quantities especially in mineral exporting economies like Botswana. This paper attempts to fill this gap by focusing on production quantities rather than sales revenue of Botswana’s mineral resources and relates it with the country’s economic growth. Botswana has started as one of the poorest economies in the world and today is an upper middle income economy. Generally, Botswana has been known well for her diamonds. However, there are other significant mineral exports such as copper, copper nickel, soda ash, gold, coal, and salt.

An overview of Botswana’s exports shows that the country’s principal merchandise is mostly mineral exports. An analysis of the country’s data on exports shows that between 2006 and 2013 diamonds contributed about 80% to Botswana’s total exports revenue. Thus this study aims to explore the significance of variations of mineral exports production on economic growth. In addition, this paper attempts to find out if Botswana may also be suffering from the natural resource curse handicap. From this premise, this study is structured as follows. Next is a detailed review of previous multiple studies. This will be followed by research hypotheses, data description and research methodology. Next will be hypothesis test results and a discussion of the findings. Finally, a conclusion of the study follows with recommendations.

Literature Review

In general terms, the extant literature provides evidence of the positive relationship between exports commodities and economic growth (He & Zhang, 2010; Balassa, 1978; Edwards, 1993; and Crespo-Cuaresma & Worz, 2005). Even so, there are potential factors that can inhibit the exportability of commodities such as exchange rates and energy consumption (Mishra et al., 2009; and Chaudhry & Bukhari, 2013). From this foundation, this study considers 3 perspectives which will explain in detail the current stand of the extant literature on the relations between exports and GDP. The perspectives are: the GDP and exports relationship standpoint; the dynamics of exchange rates and energy consumption viewpoint, and exports specialization and repercussions of the natural resource curse perspective. Next is an analysis on the relationship between exports and GDP.

GDP and Exports Relationship- Economic Growth Implications

He & Zhang (2010) noted that after 30 years of economic transformation, China has emerged as one of major economies to date and also a robust trading nation globally. While there has been a plethora of literature pertaining to China’s exponential economic growth, He & Zhang (2010) noted that there is quite an insignificant examination of the relationship between foreign trade and China’s domestic economy. He & Zhang (2010) on this backdrop, aimed to fill this void by determining the linkages between foreign trade and the domestic economy in China’s remarkable story of reform and economic breakthrough. While several debates arose on the basis of China’s economic growth, it has been argued that although the role of economic growth in China has been high, the growth pattern has been unbalanced. The Chinese economy has been suggested to be too export dependent and thus vulnerable to business cycle fluctuation and hence the need to switch to a domestic demand-led growth model (He & Zhang, 2010). Lardy (2007) claimed that excessive reliance on net exports has been an important factor prompting the Chinese economy to such a more consumption-driven growth pattern. From this argument, He & Zhang (2010) took a different approach by conducting econometric analysis of provincial level data to examine causality between the growth of foreign trade and components of domestic demand and also causality between the growth of foreign trade and total factor productivity. The results showed that China’s export dependency is significantly lower than implied by the headline-exports to GDP ratio. Furthermore, He & Zhang (2010) noted that the contribution of exports to economic growth in China came mainly from its total factor productivity rather than the multiplier effect from a demand perspective. However, the relationship was found to be stronger in more developed Chinese coastal areas than in less developed inland provinces.

Konya (2006) added to the extant literature by investigating the possibility of Granger causality between the logarithms of real exports and real GDP in 24 OECD economies from 1960-1997. It was noted that since the early 1960’s policy makers have sparked great interest in the possible relationship between exports and economic growth. Conclusively, exports promotion was found to push further specialization in order to reach economies of scale and comparative advantage drawing from Konya (2006). Nonetheless, increased exports may allow the importation of high quality products and technologies which in turn may have positive impacts on technological changes, labor productivity, capital efficiency and eventually the nation’s overall productivity (Konya, 2006). However, the growth-driven hypothesis postulates a reverse relationship since it is founded on the assumption that economic growth itself induces trade flows (Konya, 2006). On this backdrop, Konya (2006) examined Granger causality between exports and GDP in 24 OECD countries. The study applied a bivariate model (GDP-exports) and a trivariate model (GDP-exports-openness) model with a linear time trend. The results indicate one-way causality from exports to GDP in Belgium, Denmark, Iceland, Ireland, Italy, New Zealand, Italy, Spain and Sweden and one-way causality running from GDP to exports in Austria, France, Greece, Japan, Mexico, Norway and Portugal. Furthermore, a two-way causality between exports and economic growth was registered in Canada, Finland, and Netherlands. In the case of Australia, Korea, Luxembourg, Switzerland, the UK and US, there was no evidence of causality in either direction.

While several studies focused on a variety of exports, Limaei et al. (2011) took a different approach by investigating wood tradeability in Iran and also its relations with major macroeconomic variables such as population, GDP, world oil price, and the amount of domestic wood production using multivariable regression analysis (MRA). Limaei et al. (2011) evidenced that there were significant relations between wood exportation and population; GDP and the amount of domestic wood production and world oil prices. Extensively, time series analysis and autoregression procedure were then used to predict wood exports via a first order autoregression model. However, Tang et al. (2015) has notably challenged the impact of exports on economic growth. Drawing from the study, it was noted that nations that relied on exports to drive their economies achieved considerable success in propelling their economic growth. Thus in Asia, several countries have taken this channel to generate considerable economic progress since the early 1960’s (Tang et al., 2015). Such countries include South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand, and more recently China and India. The notable success of these economies has made a breakthrough in empirical research that examines the role of exports in generating economic growth. Accordingly, the World Bank (1987) showed that exports- promotion strategy is the best option for Less Developing Countries (LDCs) attempting to industrialize and transform into economic giants. Therefore Tang et al. (2015) investigated the export-led growth hypothesis for Asia’s Four Little Dragons (Hong Kong, South Korea, Taiwan and Singapore) using cointegration and rolling causality analysis. Employing both bivariate and trivariate models, the study revealed that exports and GDP were cointegrated for all the economies examined implying that there is a long run relationship between the variables (Tang et al., 2015). Still, Tang et al. (2015) noted that the MWALD tests supported the export-led growth hypothesis. Policy makers were further advised to search for alternative catalysts of economic growth in their efforts to promote long term economic growth rather than focusing intently on exports.

In extension to the literature, Chakrabarty & Chakravartry (2012) recently noted a plunge in India’s export earnings since 1970. The authors noted that for a few years, a rising trend was observed but from 1973/74 this was followed by dramatic upward plunge. This gravitation continued up to 1985 but it was further followed by a sharp decline. However, periods after liberalization were marked by an impulsive increase in exports value (Chakrabarty & Chakravartry, 2012). The growth in the value of imports however in the last 40 years was more intense as its increase was much acute than exports during the same period. Thus Chakrabarty & Chakravartry (2012) attempted to analyze the export and import of Indian black gold (oil). The study extensively captured the trends in the last 4 decades and focused on the real GDP, exports, imports and the share of exports. On this notation Chakrabarty & Chakravartry (2012) considered three variables- oil exports, importation of oil and GDP at constant prices. The results showed that all three time series were integrated. In this regard, cointegration analysis was done to show that the bivariate relations between exports and imports of oil were however negative (Chakrabarty & Chakravartry, 2012).

It is clear that exports have positive implications on economic growth, but there is still a gap in the extant literature in terms of why developing countries still rely on primary exports as their main source of export income, despite the fact that several studies argue that countries that emphasize manufacturing exports grow faster than those that emphasize primary exports (Sheridan, 2014; Hausmann et al., 2007; Jarreau & Poncet, 2012; Crespo-Cuaresma & Worz, 2005; and Berg et al., 2012). Sheridan (2014) noted that the underlying idea is that countries that export products particularly with relatively high technological content benefit from positive externalities that help their economies grow in ways that would otherwise not take place. The positive externalities are derived from knowledge spillovers and economies of scale (Sheridan, 2014). Thus by participating in the international market, a country may learn more efficient production techniques and benefit from increased specialization in production (Sheridan, 2014). Nonetheless, many economists have argued that a country needs to be relatively developed before it can fully reap the benefits of increasing its manufacturing exports. However, economic development is a multifaceted issue that also infringes on socio-economic sectors like education, domestic income, and human capital investment.

In an empirical study conducted by Sheridan (2014) using data from 1970-2009 it was found out that although increasing manufacturing exports is important for sustained economic growth, this relationship only holds once a threshold level of development is reached. The results of the endogenous sample technique revealed that a country needs to achieve a minimum human capital threshold before its transition from reliance on primary exports to manufacturing exports. However, Feenstra & Kee (2008) provide evidence on monopolistic competition model with heterogeneous firms and endogenous production using a well-defined GDP function for over 48 countries from 1980-2000. It was shown that the average export variety of the United States increased by approximately 3.3% per year.

Comparatively, the economic performance of Switzerland over the long run has been paradoxical. Kohli (2004) noted that Switzerland’s growth rate is significantly lower than most industrialized nations, however in terms of average living standards the country ranks among the top nations. Conversely, Antipa et al. (2012) argued that governments and central banks need to have accurate and timely assessment of the Gross Domestic Product (GDP) growth rate for each quarter, as this is essential for providing an analysis of current economic situations. It will not be sagacious however to put emphasis on exports to drive the economic growth without venturing into economic diversification. Literature on the relationship between economic diversification and development established that diversification raises economic development only up to a point (Klinger & Lederman, 2011). Economists have postulated that market failures hamper private transitions that are necessary to find out whether a new product can be exported profitably, thus implying that the threat of entry can reduce exports discoveries and consequently cut off diversification. Evidence brought forth by Klinger & Lederman (2011) suggests that exports diversification and exports discoveries are correlated over the course of development. In caution, Klinger & Lederman (2011) held that barriers to entry should not be used to protect innovations from threats of imitation.

The Dynamics of Exchange Rates, Energy Consumption and Exports

Economists have generally noted that trade is a crucial component of any economy. Chaudhry & Bukhari (2013) have noted that trade as a percentage of Pakistan’s GDP has risen from approximately 26% in 1999-2000 to roughly 33% in 2010-2011. It has been stated that between 60 and 70% of Pakistan’s exports are accounted for by the textile and garment industry which also accounts for about 8.5% of the GDP and 38% of the employed labor force. In consequence, Chaudhry & Bukhari (2013) aimed to create a structural vector autoregression model which focuses on particular factors that impact the export of Pakistan’s textiles and to determine how textile exports react to changes in these factors. According to Chaudhry & Bukhari (2013) the reason for focusing on the textile industry is because over the past 3 decades, Pakistan’s exports have grown at an average of 12% per year which about 60% of the growth in exports being accounted for by the textile industry. On this backdrop, Chaudhry & Bukhari (2013) further aimed to determine how both high-value added finished and low-value unfinished textiles exports are affected by various macroeconomic factors. The study also focused on the effects of income shocks of Pakistan’s major trading partners; the impact of an increase in exports of Pakistani’s major competitors in the area of textile exports; and the impact of exchange rate depreciations. The results showed that unfinished or low-value added Pakistan textile exports were positively impacted by aggregate consumption of trading partners while finished or high- value added textiles were negatively affected by such shocks.

[...]

Excerpt out of 29 pages

Details

Title
The Export-Led Growth Hypothesis. New Evidence and Implications
College
University of Botswana
Course
Macroeconomics
Author
Year
2015
Pages
29
Catalog Number
V299464
ISBN (eBook)
9783656960393
ISBN (Book)
9783656960409
File size
554 KB
Language
English
Tags
export-led, growth, hypothesis, evidence, implications
Quote paper
Mpho Bosupeng (Author), 2015, The Export-Led Growth Hypothesis. New Evidence and Implications, Munich, GRIN Verlag, https://www.grin.com/document/299464

Comments

  • No comments yet.
Read the ebook
Title: The Export-Led Growth Hypothesis. New Evidence and Implications


Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free