Import‐economic growth nexus: ARDL approach to cointegration
| Date | 28 September 2012 |
| DOI | https://doi.org/10.1108/17544401211263964 |
| Published date | 28 September 2012 |
| Pages | 194-214 |
| Author | Faridul Islam,Qazi Muhammad Adnan Hye,Muhammad Shahbaz |
| Subject Matter | Economics |
Import-economic growth nexus:
ARDL approach to cointegration
Faridul Islam
Department of Economics, Morgan State University,
Baltimore, Maryland, USA
Qazi Muhammad Adnan Hye
Faculty of Economics and Administration, University of Malaya,
Kuala Lumpur, Malaysia, and
Muhammad Shahbaz
Department of Management Sciences, COMSATS Institute, Lahore, Pakistan
Abstract
Purpose – The purpose of this paper is to examine the relationship between import and economic
growth for 62 countries.
Design/methodology/approach – The paper applies autoregressive distributed lag model (ARDL)
for long-run relation and Granger causality test, in order to detect the direction of short-run and
long-run causal relationship.
Findings – The results indicate that the long-runrelationship existsin the USA, the UK, Japan, Iceland,
Canada, Italy, Algeria, Brazil, Chile, Colombia, Cuba, Gabon, Malaysia, Mexico, Peru, South Africa,
Uruguay, Bolivia, Cameroon, Cote d’Ivoire, Ecuador, Egypt, El Salvador, Guatemala, Honduras, India,
Lesotho, Nicaragua, Papua New Guinea, Thailand, Bangladesh, Benin, Chad, Congo, Gambia, Kenya,
Madagascar, Togo, Zambia and Zimbabwe when economic growth is dependent variable. This result
confirms the importance of import in the process ofsustainable economic growth of these countries. In
alternativecombination whenimport is dependent variable,the long-run relationshipis found in the USA,
the UK, Japan,Finland, Iceland, Canada,Italy, Brazil, Cuba, DominicanRepublic, Iran, Malaysia,Mexico,
Peru, South Africa, Bolivia, Cameroon, Guatemala, Honduras, India, Indonesia, Lesotho, Morocco,
Nicaragua, Pakistan, Philippines, Senegal, Sudan, Swaziland, Thailand, Tunisia, Bangladesh, Benin,
Burkina Faso, Chad,Congo, Gambia, Kenya, Madagascar,Malawi, Mali, Mauritania, Togo andZambia.
These findings confirmthe importance of source of economicgrowth for import. On the other hand, the
results of Granger causality test indicate mixed results but the importance is that in the case of higher
incomecountries, there is unidirectionallong-run causalityfound from import to economicgrowth (except
the USA, Iceland and Italy), and bidirectional long-run causal relationship exists between import and
economic growthin low income countries except Madagascarand Mauritania.
Originality/value – This paper provides the largest sample, including 62 countries, examining the
relationship between import and economic growth, from 1971 to 2009.
Keywords Imports, Economicgrowth, National economy, Autoregressive distributedlag model
Paper type Research paper
1. Introduction
The second-halfof the twentieth centuryhas witnessed the proliferationof a bourgeoning
literature on the relation between trade policy and economic growth. Despite
disagreements over the direction of causation, evidence suggests that trade enhances
economic growth. Some found exports cause economic growth (export-led-growth
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
JEL classification – O10
JCEFTS
5,3
194
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 5 No. 3, 2012
pp. 194-214
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401211263964
(ELG) hypothesis; see Krishna et al. (2003) for review). Others found growth led by
exports (GLE). Another grou p suggests that imports drive econom ic growth
(import-led-growth (ILG)), something consistent with the endogenous-growth literature.
From theoretical perspectives, imports of intermediate inputs, superior capital
machineries, and know-how help economic growth through technology transfer and
foreign R&D spillover (Lawrence and Weinstein, 1999; Mazumdar, 2001). Various
frameworks have beenproposed to explain the differential rates of economic growth for
otherwise similarnations. Models of open economy rooted inclosed endogenous-growth
models (Romer,1986; Lucas, 1988) have focusedon the determinants of growth (seeBarro
and Sala-i-Martin(1995) and Roubini and Sala-i-Martin (1995) for review).
Despite growing concerns over inequities in income distribution, the
newly-industrialized economies have benefited from the externalities of liberal trade
policy (Bhagwati and Srinivasan, 2002; Wacziarg and Welch, 2003; Spanu, 2003;
Harrison, 1996). LDC’s imports 85 percent of their machinery and transport equipment
from the developed world which help economic growth (Grossman and Helpman, 1991;
Rivera-Batiz and Romer, 1991). Edwards (1992) examines the relationship between trade
orientation and trade distortions within endogenous-growth model. “[...] (M)ore open
economies grow faster because they are able to invest in imported machinery that is
cheaper” (Mazumdar, 2001, p. 210).
According to the De Long-Summers hypothesis, equipment investment is
growth-enhancing. Imported foreign machineries are more efficient compared to their
domestic counterparts (Coe and Helpman, 1995; Krishna et al., 2003; Mazumdar, 2001):
Thus, this literature seems to provide a theoretical foundation for the long held conviction
among development economists that international trade, by providing essential and
efficient foreign inputs for industrializing sector, is an important factor of economic growth
p. 92).
Krueger (1985, p. 9) notes, “[...] reduction in capital goods import would reduce the
gross domestic product (GDP) growth rate and a reduction in intermediate goods and
raw materials imports would adversely affect output and employment”. This research
is motivated by the need to empirically further explore the ILG hypothesis. This is an
important topic in a globalized world in the context of contemporary growth literature.
The objective of the paper is twofold. First, explore a long-run relatio n between trade
policy (import) and economic growth. We implement autoregressive distributed lag
(ARDL) approach to cointegration which better suits small samples. Second, the
modified Granger causality procedure within vector error correction model (VECM) is
used to determine the direction of short-run and long-run causality. This is relevant
because if imports drive economic growth, policy should promote imports, and likewis e
for exports. If not, policy should focus on innovation, human capital, and other
domestic policies. “One obvious way to address this issue empirically is to look for
evidence on patterns of causality [...] the evidence [...] to date has been mixed”
(Krishna et al., 2003, p. 482). The 62 nations classified according to high, upper middle,
lower middle and low income groups[1] will help assess if the ILG hypothesis has any
connection with the particular stage of economic growth. The paper contributes by
providing further evidence to the imports-growth nexus literature.
Mishra et al.’s (2010) findings support the ILG hypotheses for the Pacific-Island
nations; and the causality is bidirectional. Awokuse (2008) found mixed results for the
ELG-ILG and GLE hypotheses for Argentina, Colombia and Peru. However, the support
Import-economic
growth nexus
195
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