Trade-growth nexus and the rolling window analysis in United Arab Emirates

Publication Date10 December 2018
Date10 December 2018
DOIhttps://doi.org/10.1108/JABS-07-2016-0098
Pages469-488
AuthorSyed Ali Raza,Rashid Sbia,Muhammad Shahbaz,Sahel Al Rousan
SubjectStrategy,International business
Trade-growth nexus and the rolling
window analysis in United Arab Emirates
Syed Ali Raza, Rashid Sbia, Muhammad Shahbaz and Sahel Al Rousan
Abstract
Purpose This paper aims to examine the relationshipbetween trade and economic growth using data
of UAE economyfor the period of 1974-2011.
Design/methodology/approach The bounds testing is applied for testing the cointegration
relationshipbetween the variables. The rolling window approachhas been used to analyze the stability of
long run coefficients.
Findings The empirical analysis shows the presence of cointegration between trade and economic
growth. Furthermore, exports have positive, but imports have negative effect oneconomic growth. The
rollingwindow approach confirms the stabilityof long-run estimates.
Practical implications This paper provides new insights for policymakersto use trade as economic
tool for sustainableeconomic development.
Originality/value This paper makesa unique contribution to the literature with referenceto UAE, being
a pioneering attempt to investigatethe relationship between trade and economic growth by using long
time seriesdata and applying more rigorous techniqueslike time varying rolling windowanalysis.
Keywords Imports, UAE, Growth, Exports
Paper type Research paper
1. Introduction
In existing applied economics literature, the relationship between trade openness and
economic growth has become very important and concerned issue among academicians
and practitioners. This debate generally includes understanding either trade openness is
driven by economic growth or growth of economies of scale drives trade openness.Existing
literature provides an empirical investigation of the impact of trade liberalization on public
spending, investment pattern, total factor productivity and hence on economic growth. For
example, Krueger (1978) and Bhagwati (1978) argued that trade liberalization benefits an
economy via economies of scale and specialization which increases the productivity of an
economy for long-span of time. Tyler (1981) used data from OPEC and middle-income
countries and concluded that manufacturing exports growth increases the absorption
capacity via technological progress, which results in higher economic growth. Nishimizu
and Robinson (1984) discussed the case of Japan, South Korea, Turkey and Yugoslavia
and found that exports growth, increased competitiveness and economies of scale
stimulate economic activity and in the result, economic growth is increased, but imports
growth retards the growth of total factor productivity.
The relationship between exports and economic growth is always a circle hotspot issue of
concern. This prominently reflected in the so-called “export-led growth” debate on the
issue. Broadly speaking, thereare two channels exploring the relationship between exports
and economic growth. First, supply-side hypothesis reveals the contribution of exports to
economic growth. This theory is based on the neo-classical theory of economic growth,
which exposes that economic growth of any economyis based on factor inputs and efficient
Syed Ali Raza is based at
Business Administration,
Iqra University, Karachi,
Pakistan. Rashid Sbia is
based at Universitair
Ziekenhuis Brussel,
Brussel, Belgium.
Muhammad Shahbaz is
based at the COMSATS
Institute of Information
Technology - MA Jinnah
Campus, Lahore, Pakistan.
Sahel Al Rousan is based at
the Ministry of Finance,
Dubai, United Arab
Emirates.
Received 10 July 2016
Revised 7 January 2017
6 July 2017
Accepted 20 September 2017
DOI 10.1108/JABS-07-2016-0098 VOL. 12 NO. 4 2018,pp. 469-488, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 469
resource allocation of resources. The study which directly investigated the contribution of
exports to economic growth is by Feder (1983), but the contribution of terms of trade and
trade openness to economic growth is also investigated by Dollar (1992),Sachs and
Warner (1995),Ben-David (1993),Edwards (1998),Jawaid and Raza (2013,2015) and
Raza and Karim (2017). These studies reported the favorable impact of exports on
economic growth, but in turn, exports growth might in it is the result of economic growth.
Past studies have been shown the mingling results on the relationship between trade
barriers and economic growth. Some of the studiesconclude that decreasing trade barriers
lead to higher economic growth, whereas some studies concluded the contrasting
evidence of lower economic growth (Rodriguez and Rodrik, 1999). It is argued in the
endogenous growth theory that tradebarriers restrict the promotion of economic growth. As
per endogenous growth theory, the economies should promote economic resources to
activities which are conducive for long-term growth such as research and development,
increase product varieties and improve product quality. The researchers such as Feenstra
(1990),Matsuyama (1992) noted that technologically backwardness of a country declines
domestic production and hence economic growth due to trade barriers and specialization
in the production of traditional products.
Few studies seem to claim that traditional measurement way of the contribution of trade
openness to economic growth has some limitations (Shahbaz, 2012). They argue that only
take into account the contribution of trade openness to economic growth directly, without
consideration based on consumption patterns, investment patterns and government
spending may lead to misleading empirical results. A concrete manifestation of this
misleading is trade reforms and openingup to export does not have much role in economic
growth of an economy. These point out the negligence of the importance of expanding
domestic demand and boost exports. The specific role of imports on economic growth
approaches mainly via technology transfer and spillovers; new industry effect induced by
consumption and competition effects as well as import effects in export promotion.
Grossman and Helpman (1991) emphasized that technology spillover is the main benefit of
imports and exports. Frankel and Romer (1999)indicated that trade openness considerably
plays a role to boost income levels in an economy. Eaton and Kortum (2001) developed a
trade model and described that trade of capital goods has the important role for the
technological advances diffusion process. They argued thatproductivity differences among
countries about one-fourth arecaused by relative price differences in equipment, about half
is due to the equipment of the trade barriers.
The descriptive statistics in the log form related to the variables are presented in Table I.
The export has highest log value of 2.314 and the lowest log value of 1.938 with a mean
value of 2.094 and the standard deviation of 0.095. The import has the highest log value of
2.217 and the lowest log value of 1.776 with a mean value of 1.967 and the standard
deviation of 0.132. The economic growth has the highest value of 3.215 and the lowest
value of 2.876 with a mean value 3.082 and the standard deviation of 0.072. The trend of
considered variables in the logarithmic form is also presented in Figure 1.
Table I Descriptive statistics in logarithmic form
LEXP LIMP LY
Mean 2.094 1.967 3.082
Median 2.081 1.948 3.064
Maximum 2.314 2.217 3.215
Minimum 1.938 1.776 2.876
SD 0.095 0.132 0.072
Observations 148 148 148
PAGE 470 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 12 NO. 4 2018

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