Terms of trade and economic growth in developing country. Evidence from bilateral and commodity level analysis
| Pages | 1-19 |
| DOI | https://doi.org/10.1108/JCEFTS-07-2019-0035 |
| Date | 20 April 2020 |
| Published date | 20 April 2020 |
| Author | Syed Tehseen Jawaid,Abdul Waheed,Aamir Hussain Siddiqui |
| Subject Matter | Economics,International economics |
Terms of trade and economic
growth in developing country
Evidence from bilateral and commodity
level analysis
Syed Tehseen Jawaid
Applied Economics Research Centre, University of Karachi, Karachi, Pakistan
Abdul Waheed
Department of Economics, University of Karachi, Karachi, Pakistan, and
Aamir Hussain Siddiqui
Applied Economics Research Centre, University of Karachi, Karachi, Pakistan
Abstract
Purpose –The purpose of this study is to investigatethe first time ever the effects of overall terms of trade,
bilateralterms of trade and main commodity groups’terms of trade on economic growth.
Design/methodology/approach –Augmented Dickey Duller and Philips Perron unit root tests and
Johensan cointegrationtest have been applied by using annual time series data from 1974to 2017. Dynamic
ordinary least square and fully modified ordinary least square have also been used to perform sensitivity
analysis.
Findings –The cointegration test confirmthe positive long-run relationship between overallterms of trade
(ToT) and economicgrowth. Country-wise results show that ToT with Australia,Bangladesh, Canada, Hong
Kong, Japan, Kuwait, Malaysia, Singapore, Sri Lanka, UK and the USA have significant positive effect on
economic growth. Conversely,ToT with China and UAE has significant negative effect on economic growth.
In contrast, ToT with India, Norway,Saudi Arabia and Switzerland has insignificant effect on the economic
growth of Pakistan. Product-wise results indicate that the product group namely, Chemical, Crude Material
inedible except fuels,Manufactured and Minerals fuels and Lubricant found to be a significant positive effect
on economic growth. However,Beverages and Tobacco, and Machinery and Transport product groups found
to be significantnegative impact on economic, while Food and Liveanimals found to be insignificant.
Practical implications –In general, it is suggested that the beneficial terms of trade are favorable for
economic growth. The study suggested export promotion policy for which relationship between ToT and
economic growth found positiveand import substitution policy is suggested the products found a negative
relationshipbetween the said variables.
Originality/value –This paper is a pioneer attemptto investigate the effect of overall ToT, bilateral terms
of trade and the main commoditygroup’s ToT on economic growth in Pakistan.
Keywords Economic growth, Developing economy, Terms of trade
Paper type Research paper
1. Introduction
Economies of developing countries have been affected by the terms of trade (ToT). Baxter
and Kouparitsas (2000) discuss that fluctuations in ToT are more double in developing
countries than those in developed countries. They also confer that this is due to the
JEL classification –F10, F14, F43
Terms of trade
and economic
growth
1
Journalof Chinese Economic and
ForeignTrade Studies
Vol.13 No. 1, 2020
pp. 1-19
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-07-2019-0035
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1754-4408.htm
substantial dependency of developing countries on exports. Furthermore, generally, the
degree of trade openness in developingcountries is higher than that in developed countries.
These forceful fluctuationsin ToT have a large effect on their economies.
South Asia has confronted its leadin 2018 as the fastest growing region of the world[1].
Pakistan is one of the fast-growing nationsof South Asia. In Pakistan, during the last three
decades, the trend shows that ToT have deteriorated.In 1970s, the average ToT was 238.32;
in 1980s, the average ToT was 212.09; in 1990s, it declined to 183.21; and in 2000s, the
average ToT became 117.10[2].On the other hand, in 1970s, the average growth in real gross
domestic product (GDP) was 4.68 per cent; in 1980s, the average growth in real GDP was
8.66 per cent; in 1990s, it declined to 4.57 per cent; and in 2000s, it was 3.57 per cent. The
question is as follows: is the commodity ToT[3] correlated with economic growth? This
study examines this question using long-timeseries annual data of Pakistan covering from
1974 to 2017.
In the previous studies, the impactof ToT on economic growth is mainly examined using
cross-country data. There are few time-series studies on the subject. Furthermore, in cross-
country studies, Pakistan is mostly not included. The study by Jebran et al. (2018a) is the
only study that discussed the relationship between ToT and economic growth of Pakistan
using time-series data at the aggregate level . Moreover, this study is a pioneer attempt to
find the effect of ToT on economic growth not only at an aggregate level; this study also
examines the effect of country-wise and commodity groups’ToT on economic growth of
Pakistan.
Figure 1 shows a relationship between real GDP and ToT growth rates of various
countries. Similar to earlier figure, this also shows no trend or any smooth relationship
between ToT and economic growth. For Malaysia, UAE and Norway, graph shows larger
fluctuation, whereas for Singapore, Sri Lanka and Switzerland, the fluctuation is very
minimal. On the other hand, Figure 2 shows a relationship between real GDP and ToT
growth rates of different commodity groups. This figure shows no trend or any smooth
Figure 1.
Growth in Bilateral
ToT
–75.00
–25.00
25.00
75.00
125.00
175.00
225.00
3.88
3.25
0.42
10.33
5.53
7.33
28.82
7.56
6.79
3.97
8.71
6.36
5.81
6.44
4.81
4.58
5.57
7.71
2.27
4.54
5.10
6.60
1.70
3.50
4.20
3.90
2.00
3.10
4.70
7.50
9.00
5.80
6.72
3.88
1.39
-12.61
3.62
3.84
3.68
4.06
4.05
4.51
Growth in TOT
Growth in Real GDP
USA UK UAE SA Hong Kong Japan
Malaysia China India Kuwait Bangladesh Australia
Canada Norway Singapore Sri-Lanka Switzerland
Note: On X-Axis we have taken real GDP growth and on Y-Axis we have taken growth in ToT
Source: Author’s Construction
JCEFTS
13,1
2
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