Exports and Economic Growth in Pakistan: An Empirical Analysis

Chapter 1

Introduction

Introduction

Global trade has increased manifold in the last 1520 years with countries such as China, India,

and Bangladesh having increased their exports significantly since 2000. The overall economic

contribution of a countrys export sector should not be underestimated: Pakistans exports, for

instance, are a major source of foreign exchange earnings and a key source of employment.

The opportunities arising from increased global trade are accompanied by numerous challenges

both for manufacturers and exporters. One of these is meeting strict quality and compliance

requirements, not only from a product-specific and technical perspective, but also from

regulatory, social, environmental, performance, and customer-specific standpoints. This paper

provides an overview of quality standards and certification with reference to Pakistans principal

export categories: textiles (specifically cotton cloth, knitwear, cotton yarn, readymade garments,

and towels) and rice. It assesses their level of compliance with global requirements, identifies

any gaps, and presents some policy recommendations for improving the situation. Chemicals

and pharmaceuticals are seen as a potential category of export growth and thus included in our

analysis in some cases.

Historically, the textiles sector has dominated Pakistans exports with respect to value as well as

volume. Rice represents the countrys important agriculture sector and has shown significant

export growth in recent years, increasing almost threefold from 2005/06 to 2011/12.

Pakistan is a developing country in the South East of 172.8 million inhabitants where the

economy is mainly based on agriculture. From 1947 to date, Pakistan has for most of the years

been experiencing a trade deficit. Globalization and competition with other developing countries
of the region pose a future challenge for the economy of Pakistan and the gap has consistently

increased between imports and exports. Though, Pakistan has made good progress in both

exports and imports but the imports has grown relatively more as compared to the exports. As a

result, Pakistan is now facing trade deficit, which has become more severe with the passage of

time. Generally, the balance of foreign trade has been negative throughout the history of

Pakistan.

The export contribution mainly comes from the manufacturing industries and raw material such

as food, fish and fish preparations, fruits, vegetables and spices, textile, cotton, clothing and

agricultural commodities. Other exports of Pakistan are floor coverings and tape stripes, sports

goods, jewellery, surgical instruments, cutlery, tobacco, furniture, chemicals and pharmaceutical

products. Pakistani government gave financial incentives to encourage the exports especially

for textiles (See Looney, 1997, p 86). In addition, export duties on agricultural commodities

were reduced. After 1977, the exports of the Pakistan increased sharply due to an increasing

trend in the world trade. Pakistan has made significant progress from primary commodities to

manufactured goods in the export sector; there is especially a good progress in non-traditional

exports in the period 1990 to 2000. On the import side, the consumer goods decreased from 40%

to 15% in between 1947 to 1996. (See Husain, 1998, p 296-300). On the other hand, the import

bills have increased rapidly which has had a negative effect on the economy of the Pakistan.

Sharp increases in crude oil prices, such as those of 1979-81 and 1990, raised the nation's

import bill significantly``. In addition, government tightened the import licenses and reversed

the policy for import liberalization in 1979. It affected foreign trade in a negative manner and

the imports continued to exceed the exports. The narrow base exports of the country remain

unchanged. Most of the decline of export commodities was in the beginning of the period 1988
due to the decrease of the prices of traditional commodities like rice, cotton and fish etc.

Pakistan is a big importer of the commodities such as minerals, fuels and lubricants, food and

live animals, crude materials, animals and vegetables oils, machinery and transport, chemicals

and manufactured goods. Other imports which are growing fastest nowadays are computer

accessories, telecommunication equipments, military equipments and civilian aircrafts etc.

These have a significant effect on the balance of trade and the import bills are growing faster

than export bills. As a result, the trade deficit of Pakistan is growing with the passage of time

due to increasing gap between imports and exports of the country. In sum, although the exports

of the country have increased but the imports also grew relatively more, especially in last two

decades. The trade deficit is growing every year. This is an alarming rate for an emerging

market.

History of Pakistans Imports and Exports

Pakistan as a new born country handled lots of problems it does not have industries to manufacture

and export goods. Pakistan had surgical industry at that time which was the basis of the major

income. Agriculture was also assistant to Pakistan's international trade because East Pakistan was

producing 75% of worlds Jute and cotton was also producing in country so there was no as such

problem in trade and it was looked that Pakistan could do well in future but Pakistan instead of

going up just went down year by year.

To improve industrial sector and to draw manufacturers, government decided to make plans for the

industrial expansion. Till then Pakistan's trade balance persist negative. Then in 1950's all the other

countries devalued their currency but Pakistan did not devalued its currency as it supposed that the

demand for its product in foreign countries is inelastic but it was a dream gurgle which was burst

when all the other countries break doing trade with Pakistan and Pakistan was about to be insolvent

because of his foolish decision.

1971 is the year of Pakistan's division which leads to so many problems in which trade deficit was

the chief problem a incredible amount of money was spends in war. In 1971, Pakistan's exports

reduced significantly and its imports heaved, especially of capital goods, thus creating a trade

deficit. A number of Pakistanis during this time traveled to the Middle East. Workers' remittances,

particularly from the Middle East countries, increased tremendously which helped a great in

steadying the Bop. The deficit in Balance of Trade was $836 million on an average while current

account deficit in BoP was $699 million on an average 1971-72.

In 1972 thirty-one substantial industries were nationalized life insurance and petroleum distribution

companies were also nationalized. In 1972 the Pakistan rupee was devalued from 4.76 US Dollar to

Rs. 11.00 to One US dollar and adjusted to 9.91 to one US dollars so our export becomes 31%

cheaper and our export enlarged by 130% that was a highest trade surplus in history of Pakistan.

Only two years 1952 & 1972 were the year of trade surplus but 1972 were the best after that

Pakistan never realized a trade surplus its now almost 38 years. On other hand or exports goods

were become luxurious for us so this was also for the short time of period. Soon after 1972's trade

surplus Pakistan again in 1973 stand in the same old worse position. The devaluation was not a long

term planning for Pakistan.

Today, Pakistan faces a severe balance-of-payments disaster and can cover only about four-six

weeks' value of imports. The Current account deficit has upgraded by $ 2.6 billion and stood at $

8.547 billion during July- April 2008-09 as against $ 11.173 billion in the corresponding period of

last year, thereby showing an enhancement of 23.5 percent. The Financial and Capital account stood

at $ 3608 million during July-April 2008-09 as against $ 6290 million in the corresponding period

of last year which shows a decline of $ 2682 million. Pakistan will face a serious B.O.P problem

next year partly because: The United States has not compensated over $ 1.2 billion the country paid

on the war on terror. Under the Coalition Support Fund the U.S recompenses Pakistan for terrorism
related actions. The govt. has received $447 million since Sep.2008 leaving a balance of over $ 1

billion.

Objectives of the Study

Based on the observations of current situation of the Export sector, following objectives are set

for this study:

To understand the importance of exports in the process of economic growth

To examine empirically the impact of exports on economic growth in Pakistan

Problem Identification

Research is conducted to investigate the impact of rise and fall in imports and exports on GDP

of Pakistan. Why the Pakistan exports are less than imports?

Research Questions

What are the reasons behind low Exports and High Imports?

What are the suitable remedies and suggestion to overcome this issue and to make a rapid

Growth in GDP of Pakistan?

What is the Relationship between (Imports, Exports) and GDP?

Hypotheses of the Study

The following hypotheses are formulated for testing:

Impact of exports on economic growth is expected to be positive, that is, an increase in

exports will promote economic growth of Pakistan.

 Chapter 2

Literature Review

Many empirical studies have been carried out to examine the role of exports in the process of

economic growth and found positive impact of exports on economic growth of developing

economies (e.g., Feder, 1982; Balassa, 1985). Using Error Correction Modeling (ECM)

approach, Bahmani-Oskooee and Alse (1993) examined the relationship between export growth

and economic growth for nine developing countries and found strong support for the export-led

growth hypothesis for all of the countries included in the sample. Khan and Saqib (1993), used

simultaneous equation model and found a strong relationship between export performance and

economic growth in Pakistan. Khan, et al. (1995) finds strong evidence of bi-directional

causality between export growth and economic growth in Pakistan. Ahmed, et al. (2000)

investigates the relationship between exports, economic growth and foreign debt for

Bangladesh, India, Pakistan, Sri Lanka and four South East Asian countries using a trivariate

causality framework. The study rejects the export-led growth hypothesis for all the countries,

included in the sample, except Bangladesh. Kemal, et al. (2002) examines export-led hypothesis

for five South Asian Countries including Pakistan. The study found no evidence of causation in

the short run for Pakistan in either direction. However, they find a strong support for long-run

causality from export to GDP for Pakistan. Aurangzeb (2006), investigates the relationship

between exports and economic growth in Pakistan by using

time series from 1973 to 2005. The results indicate that marginal factor productivities are

significantly higher in the exports sector. Abou-Stait, (2005), conducted a study in Egypt for the

period from 1977 to 2003 and stated that several empirical studies confirmed the strong association

between exports and economic growth. Shirazi and Manap (2005) analyzed the relationship

between exports, imports and economic growth for Pakistan for the period from 1960-2003. These

investigators used a different methodology that focused only on the long-run causal orderings and

shed no light on short run patterns of causality that too have plausible economic interpretation, and

may even turn out to be more important. The hypothesis of export-led growth in the Pakistan

economy was supported in both the short and long run during the period from 1971-2005 (Saima,

et al. 2008). Azam and Naeem (2009), finds that domestic investment, FDI, and trade openness had

positive effects on economic growth in Pakistan during 1971-2005.

The significance of the exports for economic expansion is evident from the writings of classical as

well as many modern economists. According to Marshall (1890), a nations economic progress

belongs to the study of international trade. Nurkse (1961) called international trade as an engine of

growth. For efficient utilization of available scarce resources and for expanding global trade

volume, free trade in goods and services is commendable Bhagwati (1973). It has been observed

that there is a close positive relationship between expansion in exports of a country and economic

development. High and rapidly growing economies are usually characterized by speedy expansion

in exports. However, it is critical to note that expansion in exports is possible not just in countries

endowed with plentiful natural resources. Even less developed countries with scarce natural

resources can introduce appropriate economic policies to transform scarce resources from

inefficient domestic use to dynamic export production. Moreover, it is also important that exports

are not be limited to primary products only but should to be extended to final exportable products
which are high in value added with high backward linkages in order to create dynamism in the

economy.

Economists often assert that trade liberalization that is, moving towards a free trade regime through

reductions of tariff and other barriers, is generally the major driving force behind globalization. It

improves welfare and alleviates poverty, as trade liberalization provides opportunities to create

jobs, fosters economic growth and improves consumer choice and living standards of the

inhabitants. Zaidi (2005) argues that the pattern and nature of foreign trade is a fairly good

indicator of the pattern and nature of the economies that enter into trade agreements. Countries

with comparative advantage in certain products are likely to produce and export those commodities

to attain maximum benefits from trade. However, countries often require importing raw materials

in order to expand their exports. Countries with a large agricultural sector may have to contend

with their output and export capacity being determined by climatic conditions. Single commodity

exporting countries or those with a narrow export base must frequently face the challenge of

unpredictable changes in world demand. They need diversification in their exports to compete in

the international market and increase volume of exports.

According to Federal Bureau of Statistics, Different commodities including milk, cream, milk food

for infants, tea and edible oil costing US$ 249.7 million were imported during February 2010. Tea

import was enlarged by 7.33% in the month of February 2010. The import of vegetables also

remained on down track showing a decrease of 20.02. The total imports of Pakistan in 2010 were

$32.71 billion. According to Khan and Zahler (1985), Trade Liberalization stimulate growth from

the supply side, but if there is a negative trade balance then growth will be adversely effected from

demand side. Because the payments deficits consequential from liberalization are habitually

unmaintainable and not easily rectified by relative price (real exchange rate) changes. Khan and
Knight (1988) employed 2SLS model to estimate the import solidity and export performance in

Pakistan. They found out a complete trade model by applying a cross sectional time series. Their

results did not provide country specific import constant; however, the combined elasticity of

exports with respect to imported inputs is statistically substantial, the point elasticity was

calculated as 0.52. Akhtar and Malik (2000) found that bilateral price and income consequences on

Pakistan. They made comparison with four major Trading Partners, (JAPAN, USA, UK, and

GERMANY). Using quarterly data for the period 1982-1Q to 1996-4Q applied three stage least

square procedure. But their results were not so confined.

Badar (2006) used Time Series Data from 1973-2005 and determined the import intensity for

Export production in Pakistan. His study told us about a long run relation between exports and

imports of intermediate and capital merchandises. His study also determines that country's exports

are more sensitive to imports of raw-material rather than capital imports. It should import

consumer goods only and exports the capital goods. Jordan (2007) determined the interconnection

between Exports and GDP of a country for a period 35 years. He applied hypothesis of growth in

GDP by exports. He tested whether there is uni-directional or bi-direction causality between export

and GDP. His results describe that exports effect the per capita income and as exports increases,

GDP also increases. While, Pazim (2009) tested the validity of export-led growth hypothesis. It

was decided that there is no major relationship between the sizes on national income and amount

of export on the basis of applied model. The panel unit root test showed that the method for both

GDP and Export at first difference is not immobile while the panel co-integration test designates

that there is no co-integration relationship between the export and economic growth.
Critical Reasons for Low Exports and High Imports

Lack of Finance Facility to the Industry

One main reason of low exports is lack of finance facilities to the textile sector by govt. All Pakistan

Textile Mills Association (APTMA) has told that government's actions are not matching with its words

for the textile industry. Reintroduction of minimum tax on domestic sales would invite unavoidable

liquidity problematic areas, which is already reached to the alarming level. He said that textile industry

has negative generation of funds because of high rate of interests and mark ups.

Increased Cost of Production

The cost of production of textile rises due to many reasons like increasing interest rate, double digit

inflation & deteriorating value of Pakistani rupee. The above all reason increased the cost of fabrication

of textile industry which construct problem for a textile industry to compete in international market.

Political Instability and Internal Lack of Planning

Pakistan has been a victim of Political instability which is also a great issue of having energy crisis and

severe adverse balance of payments. Pakistan's textile industry is going through one of the hardest

period in decades. The global recession which has hit the global textile really hard is not the only

reason for concern. The high cost of production subsequent from an instant increase in the energy costs.

Depreciation of Pakistani rupee during last years raised the cost of imported inputs. In addition, double

digit inflation and great cost of financing has extremely affected the growth in the textile industry.

Pakistan's textile exports have gone down during last three years as exporters cannot effectively sale

out their products since buyers are not willing to stay in Pakistan due to adverse travel advice-giving

and it is getting more and channels of distribution are becoming harder.

Pakistan is facing energy crisis due to which volume of exports is being contracted and hence economy

of Pakistan is going downward.

Energy Crisis

Due to electricity crisis and load-shedding the textile production capacity of various sub-sectors has

been reduced by up to 30%. The joint meeting of APTMA & other related organization was held at

APTMA House to verbalize a joint strategy to address the alarming electricity crisis being faced by the

textile industry. In this meeting it was decided that a joint working constitute will be formed. The joint

working group will meet soon to design a detailed plan to pursue the following Achievements;

immediate total freedom from Electricity load shedding for the textile industry value chain;

Rationalization and reduction of electricity tariff. The load-shedding of electricity cause a rapid

decrease in production which also reduced the export order. The cost of production has also risen due

to instant upturn in electricity tariff. Due to load shedding some mill owner used alternative source of

energy like generator which increase their cost of production further. Other health and environment

problems also generated in this way. Due to such dramatic situation the capability of competitiveness

of this industry in international market affected badly. Our consumption of Electricity is more than our

production.

Despite an important increase in temperature, there was a continuous Gas load-shedding in Punjab and

NWFP. An Analyst for the All Pakistan Textile Mills Association (APTMA) claimed that 60 to 70% of

the industry had been affected and was incapable to accept export orders coming in from everywhere

the world. He said the textile industry had already undergone over 45 days of gas stoppage over a long

time period. Hence Pakistan has faced extra ordinary production losses. He described that supply

disturbance only was causing an estimated loss of Rs1 billion per day in Punjab. He advised that

government should apply planned investments regarding gas shortage and follow the remedies to

overcome this issue as soon as possible.

Tight Monetary Policy

Tight monetary policy is another cause of intensive increase in cost of production. Due to high interest

rate financing cost upsurges which cause a severe result on production. The withholding tax of 1% also

affects the production badly. The high cost of doing business is becaus of rigorous increase in the rate

of interest which has increased the problems of the industry and there is a lack of export orders. The

government should take speedy measures to eliminate slowdown in the textile sector.

Tight Fiscal Policy and Lack of Investment

The provisions of Finance Bill 2009-10 were not textile industry openhearted at all. Provisions like

reintroduction of 0.5% minimum tax on domestic sales, 1% withholding tax on import of textile and

articles etc., are nothing but last strict on industry's back. Re-establishment of minimum tax on

domestic sales would offer inevitable liquidity problem, which is already reached to the shocking level.

The textile industry was facing negative generation of funds due to unaffordable markup rate and non-

cooperation of government.

Pakistan textile industry is facing problem of Low yield due to its obsolete textile machineries. To

overwhelm this problematic situation and to stand in competition, Pakistan Textile Industry will require

high investments. There is a unceasing trend of spending in spinning since many years. Pakistan's

textile industry estimates that around Rs1, 400 billion (US$32 billion) of investment was required till

2010 in order to achieve the government's export target." Pakistan is facing externally as well as within

the boundary problems which restrict the new investment. The unpredictable internal situation of

Pakistan and political instability causes a rapid decrease in foreign investment. This has an adverse

effect on industries specially textile industry which is the major portion of Pakistan industry.

Raw Input Prices

Rapid increase in the raw material prices also creates a problem of high cost of production. Prices of

cotton & other raw material used in textile industry fluctuate swiftly in Pakistan. The rapid increase in
the price raw material affects the cost of production badly and hence production is not made to the

requirements. The increase in raw material prices alters rapidly due to double digit inflation &

unbalanced internal condition of Pakistan. Due to increase in the cost of production the demand for

export & home as well decreased. Hence the unemployment level will also increase. Govt. should take

serious step to survive the textile industry. In order to decrease the price raw material for textile we

need to increase our manufacture capability.

History of Trade Policy

Trade policy reforms in Pakistan since the 1980s have sought to reverse the strongly protectionist, inward-

oriented import substitution policies of earlier decades. In particular, the Government of Pakistan embarked

on a substantial trade liberalization program in the 1990s to enhance domestic competition, expand trade

with an increasing emphasis on export diversification and outwardorientation, and gradually align domestic

relative prices of traded goods with international prices. Improvements in the trade policy regime were

realized through tariff cuts and rationalization, as well as through the removal of import quotas, import

surcharges, and regulatory duties. The monopoly of state enterprises on the import and export of certain

products was also eliminated.

While there was substantial trade liberalization in Pakistan during this period (the un-weighted, i.e., simple

average statutory tariff fell from 47.1% in 1997/98 to 14.4% in 2005/06) (World Bank, 2006), it is

important to emphasize that there has been an increase in tariff dispersion.15 Tariff dispersion increased

from about 45% of the simple average tariff in 1997/98 to over 76% in 2005/06 (World Bank, 2006). The

main reason for this increase was that lower tariffs were cut by a greater proportion than higher tariffs.

Items like cars and motorbikes were still subject to tariff rates two to three times higher than the normal

maximum customs duty rate. In implementing the reforms, the government was following the principle of

tariff escalation by stages of production which aggravated the problem of tariff dispersion. Consequently,

final consumer goods continued to be protected at relatively higher nominal protection rates and effective

protection rates (EPRs) were probably even more skewed in favor of the domestic production of final
consumer goods.

It can be concluded that, with the average bias around 20%, the structure of incentives created by the trade

policy still favors the production of import substitutes. It also constitutes a significant barrier to the

emergence of new areas of exports and to the expansion of exports that are not being compensated

effectively for the duties/taxes paid on imported and domestically acquired inputs. The Trade Policy

Framework (TPF) for 2009-12 is the governments most recent initiative to overcome past weaknesses as

well as to provide a way forward for the future (Government of Pakistan, 2009). The main thrust of the

proposed framework includes;

The TPF reiterates the need to develop coherent, comprehensive initiatives to realize the objectives of

product and market diversification. The proposed thrusts of the TPF are appropriate and need to be

implemented. The recommendations are fairly straightforward, i.e., the trade regimes anti-export bias must

be reduced with the objective of promoting export diversification and boosting export competitiveness. To

that end, steps such as continually reducing the general maximum customs duty rate, eliminating existing

tariff exemptions and concessions on highly protected sectors, and changing the nature of tariffs from

specific to ad valorem on certain products (such as edible oils) are necessary. There is nothing new in these

recommendations as they have been the stated basis of trade policy since the 1990s. The problem lies in

their implementation.

Macroeconomic Instability and Economic Growth

Macroeconomic instability makes the domestic economic environment less predictable, increases risk and

uncertainty, and thereby distorts resource allocation decisions, investment, and growth. It is widely argued

that macroeconomic instability adversely affects the rates of productivity growth and investment mainly by

creating uncertainty about current and future macroeconomic environments. Macroeconomic instability is

defined as a rise in one or more policy-affected indicators, such as the inflation-rate, overall deficit-to GDP

ratio, and external debt-to-GDP ratio (Fischer, 1993). Over the past two decades, Pakistan has suffered from

all these symptoms of macroeconomic instability. According to the Global Competitiveness Report (2009-

10), Pakistan ranks 114th in terms of macroeconomic stability compared to India (96), Bangladesh (84),
Malaysia (42), Korea (11), and China (8).

The most important reason for macroeconomic instability is the countrys low national savings rate, which

is the root cause of its large fiscal deficits resulting from Pakistans low tax-to-GDP ratio, which at around

10% is among the lowest in Asia. Another factor is the current account deficit. Pakistans national savings

rate is significantly lower than other developing countries in Asia. One reason for the low national savings

is the low rate of government savings (ranging between 2 to 4% of GDP between FY2004 and FY2007)19

which in turn is on account of the countrys low tax-to GDP ratio. Therefore, a strategy to ensure

macroeconomic stability and sustainable levels of competitiveness in the future must entail an increase in

the tax-to-GDP ratio.

Skill Development and Export Growth

In terms of skill development, Pakistans performance has been low relative to other developing countries.

During the period 1990-2006, overall labor productivity in Pakistan grew by a modest 1.29 %. This is quite

low compared with labor productivity growth in other developing countries like India, Bangladesh,

Malaysia, Indonesia, and Thailand. During the 1990s, total factor productivity growth in the manufacturing

sector was only 1.64% due to low and falling levels of investment (Chaudhry, 2009).

Strong growth in productivity is essential for sustaining the competitiveness of those industries in which the

country has comparative advantage and for attaining comparative advantage where productivity levels are

low relative to competitor countries. Given that Pakistans labor force is young and expected to grow at 3%

per annum in the foreseeable future, an effective policy toward skill development would also enable the

country to reap the potential of the demographic dividend.

This study proposes that Pakistan implement a strategy for skill development which aims to significantly

reduce the countrys skill deficit in the next five years. The implementation should be through public-

private partnerships. In working out a modality for such initiatives, the government should consider supply-

side interventions such as technical training grants to institutions (managed by either the public or private

sector) that meet eligibility criteria for such support. Of particular importance in such an intervention would

be a transparent and competitive bidding process for access to funding. Demand-side interventions could
take the form of training vouchers for those seeking technical training in disciplines of their choice. A large

increase in skill training capacity is crucial indeed but it is equally important that the government ensures

the quality of skills being acquired. To this end, we recommend that a system of international certification

be adopted. Only a credible certification system will have acceptance and ensure the quality and relevance

of training.
 Chapter 3

Methodology and Data Description

Methodology used in this study is multiple regression analysis while the historical time-series data

for Pakistan is used. The econometric model and the data description are given in the following

paragraphs.

Econometric Model

The following simple log linear regression model is used in this study;

Economic Growth= f (exports, foreign direct investment) . (1)

Symbolically equation (1) can be written as follows;

Y = 0 + 1EXP + 2 FDI + (2)

Where

Y= Economic growth (gross national product in log form used for economic growth), EXP=

exports in log form, FDI= foreign direct investment in log form and = stochastic term

List of Variables

Economic Growth; Gross National Product (GNP) at factor cost (fc) in (Pak. rupees million) in log

form used for economic growth of Pakistan and the data taken from Economic Survey of Pakistan

(1980-81, 2000-2001, 2008-09) and Federal Bureau of Statistics (1980, 2000, 2009).

Exports; Exports of Pakistan in Pak. rupees million in log form. The data on this variable taken

from Federal Bureau of Statistics (1980-81, 2000-2001, 2008-09), and Economic Survey of

Pakistan (1980, 2000, 2009).

FDI; Foreign direct investment (FDI) Pak. rupees million in log form. The data on this variable

taken from Federal Bureau of Statistics (1980-81, 2000-2001, 2008-09), and Economic Survey of

Pakistan (1980, 2000, 2009).

Estimation Procedure

This study is based on secondary data ranging from 1971 to 2009 and therefore, the study consists

of total 38 observations. Simple log linear regression model and the method of least squares

technique have been used. In addition, for time series data analysis Augmented Dickey Fuller

(ADF) test and Johansen co-integration test have been used. The data for empirical analysis have

been transformed into one unit (i.e., Pak. rupees million) and then converted into natural log form

for overcoming non-linearity problem. EViews statistical software has been utilized to perform

estimations.
 Chapter 4

Results and Discussion

The empirical investigation on the economic growth of Pakistan uses time series data ranging from

1971 to 2009, where correlation matrix shown in Table 1, results of Augmented Dickey Fuller

(ADF) test are given in Table 2, OLS estimates are presented in Table 3 and Johansen co-

integration results are shown in Table 4 respectively.

Table 1. Correlation between Dependent Variable (GNP) and other Variables

GNP FDI EXP

GNP 1

FDI 0.925 1

EXP 0.973 0.901 1

Table 2. Results of Augmented Dickey Fuller Test

Variables Level/ Without Conclusion 5% Critical

Difference Trend Value (without

(Intercept) trend)

GNP Level -1.438 I(0) -2.942

First Difference -3.589 I(1)

FDI Level -1.447 I(0) -2.942

First Difference -10.849 I(1)

EXP Level -1.799 I(0) -2.942

 First Difference -8.663 I(1)

Table 2 shows the 95% critical value for Augmented Dickey Fuller Test (ADF) statistics for all

variables i.e., -2.942 (without trend). ADF Test demonstrates that almost all variables have

stationary in the levels of 95% critical values without trend. From the Unit Root Tests it has been

concluded that all of the variables are integrated of order I.

Table 3. Ordinary Least Square Estimates

Variables Coefficient

EXP 0.76

FDI 0.08

R-squared 0.57

Adjusted R-squared 0.52

Table 4. Johansen Cointegration Test Results

Eigen Values Likelihood 5% 1% Hypothesized

Ratio Critical Critical No. of CE(s)

Value Value

0.652291 48.24970 29.68 35.65 None **

0.216806 9.163319 15.41 20.04 At most 1

0.003277 0.121441 3.76 6.65 At most 2

*(**) denotes rejection of the hypothesis at 5% (1%) significance level L.R. test indicates 1

cointegrating equation(s) at 5% significance level

Results presented in Table 3 show that economic growth of Pakistan is significantly correlated with

FDI and exports of the country. Adjusted R-squared value is 0.57 which shows that 57% variation
in dependent variable (economic growth) can be accounted for by the variability in FDI and

exports of the country. These results strongly support the study hypotheses. Table 1 further shows

that the impact of explanatory variable, export, is found positively significant at the 0.01 level of

significance. The coefficient size of export is 0.76. In this case one unit change in export will

change economic growth by 0.76 units. It means that due to promotion of exports, economic

growth of the country would increase. The present study also found FDI positively significant at

the 1% level of significance and the coefficient size of FDI is 0.08. It shows that the impact of FDI

on economic growth is important. The positive relationship between exports and economic growth,

found in our study is consistent with the findings of other studies by Khan and Saqib (1993), and

Abou-Stait (2005). Similarly, the positive impact of FDI on economic growth has also been found

by Borensztein, et al., (1998), and Alireza et al., (2005). Thus, results of the earlier studies strongly

support results of the present study.

 Chapter 5

Policy Recommendations and Conclusions

Policy Recommendations

There is evidence that supportive economic policies have played a key role in rapid, export-oriented growth

in Asia. In this regard, an outward-oriented trade policy, competitive exchange rate policy, and policies for

ensuring macroeconomic stability have been the most important. This section examines Pakistans

experience with policies in these areas and discusses reforms and adjustments needed to promote export

competitiveness and growth.

If Pakistan is serious about implementing an export-oriented growth policy, it must focus on two things. It

should follow an exchange rate policy with the specific goal of aiming for a zero balance on the goods and

services account. This will require not only correcting the existing overvaluation in the exchange rate (on

average, RER overvaluation was approximately 21% in FY2007-2009, see Appendix B) but also avoiding

the anti-export bias resulting from the appreciating effects of remittances. Given that the elasticity of the

exchange rate with respect to remittances is 2.4%, and remittances were approximately 5% of GDP in

FY2009, a correction of approximately 12% is required on this account. Therefore, from an exports point of

view, the RER correction required is approximately 33%.Thus, to achieve a competitive exchange rate in

the medium term, Pakistan should aim for an average depreciation of the RER by 6% per annum over the

next five years.

The Global Enabling Trade Index (2009) measures the factors, policies, and services facilitating

the free flow of goods over borders and to destinations. The index comprises four broad areas: (i)

market access, (ii) border administration, (iii) transport and communications infrastructure, and (iv)

the business environment. Pakistan has been ranked at 100 among the 121 countries studied for the

report, highlighting the governments dismal performance in trying to create a conducive

environment for exports. The following sections identify the problems faced in areas (ii) and (iii)
and then suggest targeted steps for improving the situation in the medium term.

Compared to more efficient countries, such as India, Malaysia, and Thailand, Pakistan requires on

average up to 70% more days to export anything (Table 11). The inefficiency of export procedures

in terms of time taken and documents required is an indicator of the governments attitude toward

exports in general. There is need to adopt modern, simplified, and transparent export procedures.

Cumbersome procedures for exporting goods have developed over the years primarily in order to

check under-invoicing during the time when there was a substantial difference between the official

and black market exchange rates. Today, in the open market, there is a negligible premium on the

official exchange rate and there is no need for the existing complicated and time-consuming

procedures. Unlike other measures, this proposed deregulation of export procedures puts no strain

on the governments limited resources, nor will it result in any loss of government revenue.

The logistics performance index ranks Pakistan at 68 out of 150 countries, which is relatively

better than many other countries. However, the country is ranked at 90 in terms of domestic

logistic costs and 88 in terms of timeliness, highlighting two areas of weakness.

Conclusion

The present study has been conducted with the aim to examine empirically the impact of exports

and FDI on economic growth in Pakistan using data from 1971 to 2009, particularly to understand

the importance of exports in the enhancement of economic growth. Least squares results support

research hypotheses of the study in hand. The impacts of exports and foreign direct investment

during the study period are statistically significant. The positive impact of exports on economic

growth demonstrates that expansion of exports is highly important for accelerating economic

growth of the country.

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