In the modern age globalization, trade liberalization emerges as one of the most serious policy apprehension for governments all over the world, particularly for rising countries. Trade liberalization is believed to improve economic growth and development through technological advances (Hoque and Yusop, 2010).
The relationship between trade liberalization and economic growth has been well documented in the economic literature. It has been suggested a strong and positive link between trade liberalization and economic growth. It has been argued that trade and financial liberalization policies reduce the inefficiency in the production process and positively influence economic growth.
At the time of the independency of Pakistan, there were several policies implemented to develop its economic growth .At the beginning Pakistan has made tremendous progress and its per Capita GNP remains the highest in South Asia .But the period of 1970 is not good because in this era the partition of east and West Pakistan occur. The separation of East Pakistan became a big loss for the economical situation of West Pakistan. Moreover, Oil price hike of 1973 become the reason to increase the poverty ratio. In this time period the import bill increased. In1977 during the government of General Zia ul-Haq, the socialist experiment was halted. Pakistan's poverty decline during the 1980s was the rise of small industrial activities borne out of a more liberal import policy for steel and other raw materials. In 1980-81openness of the economy has increased as share of trade in GDP. The impressive growth was accompanied by reduction in income inequalities. Government more liberalized trade during the time period of 2000 in this time period. Government promoted such policies by which services of export better flourished. Over all trade liberalization has positively affect the economic growth.
Theoretical and empirical research indicates a strong and positive correlation between trade liberalization and economic growth over long period of time. (Sachs & Warner, Vol.1, pp.1-118.) has pointed out that open economies has grown about 2.5 per cent faster than closed economies and the difference is larger among developing countries.
(Barro, May, 1991) provided evidence that increasing openness had a positive effect on GDP growth per capita.
Trade liberalization is a policy in which government does not differentiate against import or interfere in trade policy by apply tariff to imports and subsidies to export. There are different researches which explained that the developing countries should get an approach of substituting imports by domestic production of the goods. It also decreases the restrictions on the trade between nations. Yanikkaya (2003) found a positive relationship between openness and economic growth.
This research empirically analyses the relation between trade liberalization and economic growth in Pakistan during the period 1970-2008 using the framework of an augmented Cobbâ€"Douglas production function.
1.2: OBJECTIVES OF STUDY:
The present study aims to analyze the role of trade liberalization on economic development. Following are the objectives of this study.
To analyze the affect of trade liberalization on the economic position of Pakistan.
To show the present scenario of economic development in Pakistan.
To give a few suggestions to enhance economic growth.
1.3: SCHEME OF STUDY:
This empirical study is organized into seven chapters; after the first chapter, the second chapter reviews literature. Third chapter shows the model of determinant ,data source and methodology.Estimation of model and results are provided in chapter four. Conclusion the affect of trade liberalization on economic growth in Pakistan is given in chapter five. At the end references are provided.
2 LITERATURE REVIEW:
The correlation between trade and development remains contentious among researchers in spite of different political statement. Some r reviews are given below,
Khattak R M et al (2012) examined the contribution of education to economic growth .they used time series data from 1971-2008. The variable which used were gross fixed capital formation, real GDP per capita, secondary and elementary school enrollments and labor force participation rate.. Ordinary least squares (OLS) and johansen cointegration techniques were used. The results suggested keeping education on top priority in public policies. (Khattak & Khan, 2012)
Chani I M et al (2012) examined the human capital formation and economic development in Pakistan. The study contained gross domestic product (GDP) per capita as a dependent variable and human capital formation, investment in physical capital and labor force as independent variables. There was time series data ranging from 1972 to 2009.Auto Regressive Distributive Lag (ARDL) bound testing approach to co integration was used to check the long run relationship between the variables in the model. The results showed that there is bidirectional causal relationship between economic development and human capital formation. (Chani, Hassan, & Shahid, 2012)
Talukder.D (2011) studied the agricultural trade liberalization and economic growth in Bangladesh. By using secondary data, it regarded as the reasons for policy shift of Bangladesh economy from agricultural fortification to trade liberalization. It was found that large and medium farmers gained from productivity improvement but lost from decrease in manufacturer price. His study recommended that agricultural trade policy reform positively impacted on growth. (Talukder, December 2011,)
Asongu A.S (2010) studied law, economic growth and human development. He examined a sample of 38 African countries with British. The data used from 1996 to 2008. He applied Two-Stage-Least Squares (TSLS) and hausman test. The dependent variable was rule of law and independent were Inflation, population growth, government expenditure, GDP per capita growth. IHDI [1] . He fined that rule of law policies play a vital role in economic growth and allocation of human sources.
Herath P M, examined the impact of trade liberalization on economic growth of Sri Lanka. The time series data was used from 1960 to 2007. The variable which used were economic growth, trade liberalization, GDP, investment, total exports, total imports, intermediate goods imports, And investment goods imports. Ordinary least square method was used. The finding of the study showed a positive relationship between trade liberalization and economic growth of Sri Lanka. (Herath)
3 MODEL SPECEFICATION, DATA SOURCE AND METHODOLOGY:
This study specifies the construction of variables. GDP is taken as a dependent variable while trade liberalization and labor force participation are considered as independent variable.
3.1: VARIABLE COSTRUCTION AND DATA SOURCES:
We use time series data for the period1970 to 2008. The data is collected from Economic survey of Pakistan and from the site of state bank of Pakistan.
We have derived the model for estimation from the following augmented form of Cobb Douglas Production Function.
ð'Å’= (ð´,ð¾,ð¿) (1)
So, the empirical form of the model for estimation becomes
ð'™ð'›ð'Å’=ð›¼0+ð›¼1ð'™ð'›ð¾+ð›¼2ð'™ð'›ð¿ +ð'ˆð'- (2)
Y is denoting Real GDP Per capita; Real GDP has been used as measure for economic growth. Capital is introduced as trade liberalization (TL). Trade is measured as an trade openness. Trade Liberalization (TL) is constructed by expressing sum of total real exports and real imports as ratio of GDP. Labor is taken as a labor force participation in an economy.
The final equation of economic growth for estimation is given as below
ð'™ð'›ð'Å’=ð›¼0+ð'Ž1ð'™ð'›TL+ð'Ž2ð'™ð'›ð¿+ð'ˆð'- (3)
Augmented Dickey Fuller (ADF) test has been used to find the stationarity of data. The ADF test results show that all variables of study are stationary at level .we used the method of Ordinary Least Squares (OLS) technique for data analysis.
4. ESTIMATION OF MODEL AND RESULTS
In this section we perform econometric tests to find out the impact of Trade Liberalization on Economic Growth of Pakistan.
RESULT OF UNIT ROOT TEST
At the first step of the investigation the relationship between variables, the unit root test is applied to all the variables to test stationary of these variables. Test is applied to the original series and at 1st differences
H0=There is unit root
H1=Series is stationary
The result of unite root test are given below,
TABLE NO 1
Variables
level
1st difference
Stationary
Lrgdp
-0.164848(-2.943427)
-4.980369(-2.945842)
I(0)
Lrtl
-1.75647(-2.943427)
-5.201721(-2.945842)
I(0)
Lrl
-2.315630(-2.94327)
-9.274570(-2.945842)
I(0)
Table no 1 of unit root indicate that real GDP, trade liberalization and labor force are stationary at level. The result suggests using ols technique.
Table No.2
Regression Results for Economic Growth Model
Variables
Coefficient
Std. Error
t-Statistic
Prob.
C
1.768068
0.105674
16.73134
0.0000
LRTL
0.195709
0.011517
16.99234
0.0000
LRL
-1.206816
0.058368
-20.67598
0.0000
In table no.2 the value of t-statistic tells about the significant of the variable, it shows the relationship of independent variables with dependent variable. F-statistic shows that overall model is significant
The result of the estimation indicates that the labor force (LNL) has significant but negitivly affected the economy of Pakistan. In results, Trade liberalization has significant and positively impact on economy.
Table No.3
R-squared
0.985416
Mean dependent var
5.831214
Adjusted R-squared
0.984582
S.D. dependent var
0.498694
S.E. of regression
0.061922
Akaike info criterion
-2.650219
Sum squared resid
0.134203
Schwarz criterion
-2.520936
Log likelihood
53.35416
F-statistic
1182.406
Durbin-Watson stat
1.642378
Prob(F-statistic)
0.000000
In table2 the value of f -statistic shows that overall model is significant, while the value of R-square shows that model is normal. Here D.W. test showing that there is no problem of autocorrelation in the data
5. CONCLUSION:
By using a Cobbâ€"Douglas production function and the OLS approach with annual time series data from 1970 to 2008, the study has estimated and analyzed the impacts of trade liberalization on the economic growth in Pakistan economy. It has found that the variables in the economic growth function are cointegrated. Trade liberalization has significantly influence on GDP. On the whole, the extant literature on trade liberalization and economic growth has found that trade liberalization has contributed to economic growth, and results shows that trade liberalization has positively and significantly impact on the economic growth. There is still also need to promote initial trade liberalization policies to more develop the GDP.
REFERENCES
Asongu, A. (2010). “Law, Economic Growth and Human Developmentâ€. Liège, Belgium: HEC-Management School.
Barro, R. J. (May, 1991). Economic Growth in a Cross Section of Countries. The Quarterly Journal of Economics, , Vol. 106 , pp. 407-443.
Chani, M. I., Hassan, M. U., & Shahid, M. (2012). Human Capital Formation and Economic Development in Pakistan: An Empirical Analysis. Munich Personal RePEc Archive , Paper No. 38925.
Herath, H. (n.d.). IMPACT OF TRDE LIBERALIZATION ON ECONOMIC GROWTH OF SRI LANKA: AN ECONOMETRIC INVESTIGATION. Kuliyapitiya, , Sri Lanka.
Khattak, N. U., & Khan, J. (2012). THE CONTRIBUTION OF EDUCATION TO ECONOMIC GROWTH: EVIDENCE FROM PAKISTAN. International Journal of Business and Social Science , Vol. 3 No. 4.
Malik, S., Chaudhry, I. S., & Javed, H. I. (2 December 2011). Globalization and Employment: Evidence from Pakistan. Pakistan Journal of Social Sciences , 215-226.
Sachs, J. D., & Warner, A. (Vol.1, pp.1-118.). Economic Reforms and the Process of Global. Brooking Papers on Economic Activity, , 1995.
Talukder, D. (December 2011,). Agricultural Trade Liberalisation and Economic Growth in Bangladesh: Analysis of Technological Transformation and Distributional Consequences. History Research, ISSN , Vol. 1, No. 1, 1-18 .
