Trade diversification and Economic Growth of Pakistan

Abstract

Objective: This paper examines Verdoorn hypothesis for Pakistan with its trading partners, Bangladesh, India, Indonesia and Malaysia. The another objective of this paper is to analyse shortrun and longrun association between intra-industry trade and its determinants, population growth, free trade agreement, term of trade and economic growth.

Research Gap: In Authors’ best knowledge, few research papers have analysed benefits of intra-industry trade and incorporate its determinants for four trading partners countries Bangladesh, India, Indonesia, and Malaysia.

Design/Methodology/Approach: Grubel and Lloyd Index employed to estimate Intra-Industry Trade. The paper also estimates ARDL cointegration test, with three estimators Pooled Mean Group (PMG), Mean Group (MG), and Dynamic Fixed Effect (DFE), and Error Correction Model to find out shortrun and long-run association between intra-industry trade and its factors for Pakistan with its trading Partners by using panel data from 2000 to 2002.

The Main Findings: Verdoorn Index has found positive for Pakistan and ARDL model also found long-run cointegration with speed of adjustment 1.6014. Population growth and terms of trade are positively associated with intra-industry Trade in the shortrun but these variables are insignificant with intra-industry trade in the long-run for Pakistan. The free trade agreement and real GDP, both, are positively associated long-run and shortrun with intra-industry trade.

Theoretical / Practical Implications of the Findings: The policymakers should diversify Pakistan international trade and improve infrastructure to reduce transport cost and other cost to expand economic growth.

Originality/Value: Some research papers have analysed IIT for Pakistan but these research papers do not consider impact of these determinants on Intra-industry trade for Pakistan and its trading partners.