A macroeconometric model for trade policy evaluation: evidence from Pakistan
| Pages | 49-103 |
| DOI | https://doi.org/10.1108/JCEFTS-08-2017-0023 |
| Date | 01 January 2018 |
| Published date | 01 January 2018 |
| Author | Syed Tehseen Jawaid,Abdul Waheed |
| Subject Matter | Economics,International economics |
A macroeconometric model for
trade policy evaluation: evidence
from Pakistan
Syed Tehseen Jawaid
Applied Economics Research Centre, University of Karachi, Karachi, Pakistan, and
Abdul Waheed
Department of Economics and Finance, College of Business Administration,
University of Bahrain, Sakhir, Kingdom of Bahrain
Abstract
Purpose –The purpose of the studyis to develop a macroeconometric model for evaluation of trade policies
and forecastingof trade performance of Pakistan with differentregions or group of countries.
Design/methodology/approach –These regions or group of countries are Organization of Islamic
Cooperation, Organization of Economic Cooperation and Development, Association of Southeast Asian
Nations, South Asian Association for Regional Cooperation and the rest of the world. A macroeconometric
model containing15 behavioral equations and eight identities.
Findings –Cointegration results suggest that there exist long-run relationships among variables of all
behavioral equations. Additionally, results of different policy shocks based onunit value of export (export
price), unit value of import(import price), exchange rate, foreign direct investment,interest rate and foreign
exchange reserve suggest that the modelis useful for economic planning to sustain growth performance of
Pakistan.
Originality/value –In this study, the authors developfor the first time evera macroeconometric model for
the evaluationand forecasting of regional trade policy and performancefor Pakistan.
Keywords Pakistan, Forecasting, Model, Trade
Paper type Research paper
1. Introduction
The world trade catalogues increase or decrease because of variation in global economic
activity. Trade not only is concerned with commodities but also is linked with technology. A
large amount of literature has identified trade policy as an extremely important factor for
economic growth and development. The basic concern of the trade policy is the choice between
adopting the policy of protection or the policy of free trade. International trade affects the
growth of a country in different ways, i.e. trade creates employment opportunities, generates
investment that leads to higher economic growth, allocates country’s resources toward efficient
utilization and enhances technical efficiency, leading to higher foreign exchange helpful in
developing the underdeveloped sectors of a country. Many studies in the literature indicate that
countries participating in international trade have a propensity to be more productive than
those countries which are only involved in production for a domestic market (Sun and
Heshmati, 2010). As a result of trade liberalization, economies become closer to each other and
bond with external factors than autarky condition. Therefore, the study of economic growth in
JEL classification –D58, F13, F17
Trade policy
evaluation
49
Journalof Chinese Economic and
ForeignTrade Studies
Vol.11 No. 1, 2018
pp. 49-103
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-08-2017-0023
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
relation with international trade has massive significance in the current era, and it can facilitate
the policy makers in devising growth-enhancing policies concerning international trade.
Pakistan’s trade has witnessed a rapid expansion because of the trade liberalization
policies it adopted in the past three decades, such as flexible exchange rate policy in 1982
and free float policy in 2000. The prices of exports and imports have changed considerably
after the adoption of liberalization policies. Pakistan’s trade with the rest of the world has
played a major role in its continuedeconomic growth, enhanced efficiency of local industries
and significant technologicaladvancement.
Globally, countries are a part of many groups such as Organization of Islamic
Cooperation (OIC), South Asian Association for Regional Cooperation (SAARC),
Organization for EconomicCooperation and Development (OECD), Association of Southeast
Asian Nations (ASEAN),etc. According to Table I, Pakistan’s 80 per cent international trade
is with OIC, SAARC, OECD and ASEAN(Jawaid and Waheed, 2017).
Many studies have been conducted to evaluate the relationship between trade policies
(exports, import and trade liberalization) and economic growth by using different
econometric methods (Iqbal and Zahid, 1998;Din et al., 2003;ullah et al., 2009;Hye, 2012;
Jawaid, 2014). However, there has not been any research investigating the relationship of
Pakistan’s regional tradewith its development, which is an area of immense importance.By
investigating the relationship of regional trade and economic growth in the context of
Pakistan, we can identify the regions with which Pakistan can adopt growth-enhancing
strategies, after facingdifferent external and policy shocks.
Many studies have been done to develop macroeconomic models for Pakistan. At
present, there are two main studies, namely, those by Naqvi et al. (1993) and Pasha et al.
(1996), which have developed macroeconomic models by considering all sectors of the
economy without focusing any particularone. Naqvi et al. (1993) used data in their model up
to the year 1988, and Pasha et al. (1996) used data up to the year 1993; therefore, these
models cannot represent the current structure of the economy. Some other studies have
developed macroeconomic models for evaluation of monetary policy of Pakistan (Khan,
1996;Hanif et al., 2011;Hassan and Shahzad, 2011), as well as other small macroeconomic
models (Chishti et al.,1989;Khan, 1996). Khan and Din (2011) consideredmore sectors than
other small macroeconomic models of Pakistan, and Saqib and Waheed (2011) developed a
macroeconomic modelwith the focus on financial sector of Pakistan.
In addition, Fatima and Waheed (2014) developed a macroeconomic model to find the
effect of uncertainties on growth performance of Pakistan. Qadri and Waheed (2014) also
developed a macroeconomic model for Pakistan with the focus on human capital. The
literature discussed above makes it clear that Pakistan’s region-related (or regional) trade
Table I.
Pakistan’s share of
exports and imports
with OIC, OECD,
SAARC and ASEAN
regions (%)
Years
Total share OIC OECD SAARC ASEAN
Export Imports Export Imports Export Imports Export Imports Export Imports
1970’s 78.97 88.92 27.45 19.21 40.97 61.00 5.25 3.56 5.28 5.13
1980’s 80.01 87.38 25.79 25.21 46.25 54.29 4.64 1.73 3.31 6.14
1990’s 79.22 84.10 13.05 21.01 58.31 51.19 3.61 1.75 4.23 10.13
2000’s 82.45 79.17 21.82 34.36 54.42 32.05 3.75 3.15 2.45 9.59
2010 80.22 78.08 29.15 37.42 42.84 25.35 5.40 3.93 2.83 11.38
2011 79.44 76.15 28.29 37.99 42.34 21.59 6.52 4.66 2.30 11.91
2012 76.40 76.17 28.80 40.81 39.16 19.89 5.44 3.66 3.01 11.81
Source: Jawaid and Waheed (2017)
JCEFTS
11,1
50
policy has not been evaluated with the help of the macroeconomic modeling framework. A
region- or group of countries-related macroeconomic model will be helpful in enhancing the
growth of regional trade, which will lead to economic growth in Pakistan. Thus, there is a
need to construct a macroeconomic model to evaluate Pakistan’s trade performance with
different regionsto devise growth-enhancing trade policies for the country.
Practical crams on the link between trade policy and economic growth have basically
sustained the vision that openness has an encouraging impact on economic growth. Trade
also has some negative features whichdepend upon certain circumstances. Regional trade is
always considered a growth-enhancing strategy for the country; therefore, forecasting
regional trade can be beneficial for country’s future economic growth. Thus, in the current
study, we aim to answer the question of “in context of regional trade of Pakistan, do trade
policies enhance economicgrowth?
The arguments discussed above demonstrate that the macroeconometric model is a
useful tool for forecasting important economic indicators, specifically regional trade, in the
context of Pakistan. It also aims to identify the trend and pattern, policy shocks and
forecasting of regionaltrade of Pakistan. The findings will help policy makers in Pakistan to
design an appropriate growth-enhancingtrade policy that is also beneficial for the Pakistan.
The findings may also be helpful for other countries with similar circumstances, such as
India, Sri Lanka and Bangladesh.
The rest of the paperis organized as follows. Following Introduction,Section 2 highlights
the review of literature. Section 3 shows the model specification and linkages. Section 4
sheds some light on data and methodology. Section 5 represents the model estimations.
Section 6 demonstrates the forecasting performance of the model. Section 7 reveals sample
forecast. Section 8 discuses policy simulations results of different shocks. Section 9
concludes the studyand provides some policy implications.
2. Review of literature
In this section, theoretical and empirical literature has been reviewed. Theoretical literature
discusses the relationship between trade and economic growth. Empirical literature has
been reviewed on macroeconomic modeling framework for Pakistan, as well as other
countries.
2.1 Review of theoretical literature
Generally, an export-orientedplan for development can lead to highergrowth. Because some
economic factors as return to scale and competition may lead better economic performance
than plan under import substitution. Furthermore, import liberalization is feasible to
encourage transfer of technology through the import of more advanced capital good. This
technological improvement is also increased by an increase in export revenue and foreign
capital inflows (Krueger,1978).
An efficacious export sector widens the local market with the goal that firms achieve
economies of scale.This is because of the reason that the export sector allowsan economy to
trade by concentrating on comparative advantage and where the average cost is lesser
(Tyler, 1981). Jung and Marshall (1985) discussedthat export-led growth is an amplification
strategy of a country in which exports and foreign tradeperform a crucial role in economic
growth and development. Generalworldwide revolution toward export-led growth has been
observed, and it has been found that this change is accompanied by actual and potential
economic benefit. Both developedand developing countries have adopted export-ledgrowth
alike.
Trade policy
evaluation
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