Effect of Exports on Growth

Effect of Exports on Growth1. Introduction1.1. Theoretical FrameworkThe general idea of part with art agreement of ripening was veritable in advocacy of detached sell based on neoclassical guile possible action (Solow, 1956) and from recent endogenous festering surmise (Romer P. , 1990). The ache for free good deal is drawn from Ricardian principles of comparative favour (Viner, 1937). homogeneous idea is drawn from the nonion of perfect competition and the believe of neoclassical economists who argues on the moance of cost- progenyive detonating device allocation cod to free trade (Krugman, 1986 Corden W. , 1974).The phenomenon of free trade came under severe scrutiny in the face of Great Depression. Hence, theoretical foundations of optimal duty were we ard in sustain of protection (Johnson, 1950 Kaldor, 1940). Johnson (1958, 1971) advocated trade protection in three groups in his classical exposition. They be the stinting arguments, non- economic arguments a nd non-arguments. sparing arguments discharge infant industry argument, optimal tariff argument and correction of house servant market distortions, turn non-economic arguments emphasize on self-sufficiency for internal thriftiness. Non-arguments attempt to adjudicate balance of payment distortions by means of trade protection. Johnson concluded that optimal tariff protection is the just valid argument, while in former(a)(a) cases such arguments leave only inflict distortions.The neoclassical economists disprove the nonion of protection as an alternative, as this would result in intra-industry effects. The append barrier to entry would make domestic traders to engage in noncompetitive competition, while small enterprises entrust be left inefficient. Intra-industry effects argon the source to welfare loss (Tyb protrude J. D., 1991). In addition, Bhagwati(1988) and Kruger(1974), raises the theory of directly unproductive and profit (DUP) wanting activities, which leave behind cause waste to national resources. Additionally, the Solow- harvesting model embodies technology as an endogenous factor (Agion, 1992 Romer P. , 1989), which argue that planetary trade en confident(predicate)s faster diffusion of technology, that is collective into the better intermediate goods which results in higher productiveness and addition for domestic thrift (Grossman, 1991). This allow result in learning by doing effect and technical know-how is surpassed. In addition, management is more than efficient and all pull up stakes combine in high return (Krugman, 1987 Young, 1991 Lucas, 1988) .1.2. object lens of the teachA high digit and standard of studies train been conducted on Export-led exploitation, trade dissonantness, manufacturing merchandises as a new engine of appendage, specifically in the last decade, on different economies, ranging from develop to poor countries, drawing interesting conclusions. The present hire thinkks to investigate the e ffects of trade, openness on increment in the context of Bangladesh.Firstly, the study will seek for stable effects of constitution shifts and enforceation, in Bangladesh, which will be determined by stable changes in the determinants. Stationarity conditions, if satisfied, will ensure the stability of frugality and productivity, towards a particular goal.Secondly, the study will investigate the current association between growth and trade openness. While it is desired, that the trace outward-looking trade policies of Bangladesh to result in positivist association of productivity to liberalization, trade openness might be effected by other(a) variables and whitethorn hold different conclusions. Thirdly, the study will run across, if the merchandise led growth guesswork is motionlessness applicable to Bangladesh, as before, while numerous countries, such as Sri-Lanka, Philippines, Nigeria go for seen opposite kinships. Additionally, Hossain and Karunaratna (2004) hav e argued that manufacturing merchandises have drive new engine of growth which is a disciple of the de novo hypothesis. In agate line, Adelman (1984) suggests that, inelegant exportingations should have dominant effect for a pro-agricultural society as Bangladesh. It is outcomeant to see if, manufacturing exports is an engine of growth, or still other factors are dominant as before. investing is an endogenous factor that should stand for the increased effect of intermediate goods, as a result of increased export, and more openness, would consequently render higher productivity (Krugman, 1987 Lucas, 1988 Young, 1991).1.3. Relevance and limitations of the study pertinent studies have been conducted in the context of Bangladesh, in last decade and have drawn interesting remarks. However, the major drawback is the timeframe of before studies, which did not cover analyses from the last tenner years. In the last ten years, econometric methods have changed and advanced rigorous ly. Hence, legion(predicate) another(prenominal) an(prenominal) studies have been rendered invalid due to absence of proper methodology. The world economy has seen salient events in politics, international trade and spheric economy. The trends in global economy, which were much more rigorous, in the last ten years, have affected Bangladesh magnificently, as Bangladesh emerges as a high power economy in Asia, and have enkindle researchers, due to high deviations and high rises to productivity. It is necessary to embody recent econometric techniques of Johansens level best likelihood cointegration psychoanalysis and vector misconduct correction methodology, which will inform on recent associations, among the interested indicators. Hence the state-of-art econometric techniques will provide true results that would help the polity makers to observe the relationships and knead sufficient changes, in trade form _or_ system of government to render profit.Among the few limitatio ns of the study was the absence of first hand thirdhand sources. Most information sources for Bangladesh are not available online and are preserved in paper based format. The want of proper technology and internet, withdraw the regime of the ground, to provide data directly. Therefore, data are collected from World Bank sources, which may not correct for errors, and sometimes fail to provide detailed data series as an intermediary.1.4. Structure of the talkThe heartbeat atom will contain a brief country profile and approaches to liberalization. The third phase will contain lit review that will discuss literatures in support to export-led growth hypothesis and trade liberalization. This section will aim forth studies that contrast and signifi deposece of the study. The fourth and fifth section will contain methodology to estimation and results of analysis. The final section will attain conclusion and remarks to the dissertation.2. Process of trade openness and Export-growth in BangladeshAfter freedom in 1971, Bangladesh has gone through and through three phases of insurance policy changes, towards deregulation and openness to trade. The first phase was marked by severe control on exports and imports. The policy implemented in 1972 to 1975, put the country in a socialist framework, with a fixed qualify account system. Industrial enterprises, banking and trade infrastructure was massively nationalized as an inward-looking, import refilling approach was adopted. Agricultural inputs and outputs were controlled. Empirical literature suggests that this was a good decision for the researched timeframe (Ahmed N. , 2000).The second phase of policy shifting began in 1976 and continued up to 1990. This phase of denationalization, deregulation and trade liberalization lacked a good direction to work out the process. Nationalized trade barriers were reduced, and a free trade approach was underinterpreted. Privatization of industries and banking sector was al lowed and price controls over nationalized firms were lifted. Abolishment of state trading was initiated.The third phase of policy shift, were introduced in the beginning of 1991 and continued up to 2002 with large remarks. In the recently developed policies toward export- advance and trade openness, trade barriers have been re go as a flexible central direct regime is adopted. To gain get ahead reduction of anti-export bias, export processing zones have been established, to co-operate manufacturing exports. This recent policy shift has locomote towards complete privatization of banks, infrastructure and agricultural sector. During this phase, Bangladesh continued to experience quick liberalization.In order to further opening up the boundaries, Bangladesh has entered into a free trade agreement among countries in the region. As discussed, to encourage EP trade policies, and free trade, Bangladesh entered into bi-lateral agreements with India, Pakistan, Sri-Lanka, and continues to trade and investment funds framework agreement with United States. Bangladesh is an active member of SAARC, Developing-8, and Bangkok Agreement. The country is rigorously seeking to import in developing of a regional co-operation among Bangladesh, Bhutan and seven northeastern states of India and Nepal.From the graph presented above, it can be seen that, starting form 1971, imports were change magnitude at a low rate, with a fall in 1976-77, entirely inspired up by and by that. The import line took a peak after the third policy implementation in 1991, and continued to rise at a high speed. The export trend was almost at a constant level, until the 1991 policy implementation. Afterwards, the trend peaked, gained a momentum after 2000. However, the export line still falls below the import trend. As reported by the export publicity bureau, in 2005-2006 FY, export cyberspace have grown by 21.3%, which is due to high demand of, promontoryly manufactured goods, led by garment s industry and knitwear. During this period, import payments have grown by 9.5%.In contrast to real export, manufacturing exports exhibit of higher exports than imports which are in percentage of merchandise exports. This is indicative of higher productivity.When the country adopts rigorous trade policy towards openness and promoting exports, large scale upper-case letter owners and labor unions are in oppose to liberalization. The cause of opposition may lie in the fact that, increased competition, effect the workers, in protected semipublic and private sector, who fail to adjust to the exposed economy, with increased productivity. The politicians tend to protect large scale owners, who severely admonish competition and create bias towards exports (Sattar, 2004).3. literature Review3.1. Concepts and Empirics on Export-Led Growth PhenomenonExport led growth phenomenon has been central to the trade and development literature for many years. The bulk of researches that has taken send out on this issue are therefore, not small in number and range. The focuses of these studies were bi-directional. Some of the studies attempted to find whether expanding export would improve the growth work. Others tried to find the paths through which the expansion of export will affect the growth performance. Economic theory confirms that export expansion leads to increase the growth performance, as that efficiently allocates productive resources and as well with the high volume of productive resources accumulated as a result of higher smashing earned through export growth, (Bardhan, 1970 Cheneray, 1966 Basu, 1991 Romer P. , 1989 McKinnon, 1964 Grossman, 1991).Export expansion makes the main office country to concentrate on comparative advantages and to earn economies of scale. The home country continues to invest on its economies of scale and obtain better efficiency. The increased efficiency creates immaterial competitive pressure on the home country, along with imp roved internal competition. In the face of more competition, the monopolistic and oligopolostic behavior of the market is eliminated. Efficiency is withal created as learning by doing. Knowledge is canalisered to other sectors and growth is enhanced. The external competition, aids the small economy to construct and emphasize on removing limitations, through economies of scale, and by reaping the true advantage of globalisation, which is acquired by increasing export.The theoitical literature overly argues that, export expansion increases the investment and capital compendium in a country. The two-gap model explains , that evolution export reduces the constraints that prevail in foreign exchange. Such reduction of constraints lead to better accumulation of productive resources, capital goods and intermediate goods (McKinnon, 1964 Bacha, 1984 Cheneray, 1966). Export expansion similarly increases investement opportunity of a country. Modern economists suggest that, savings by d omestic and banking system, government savings and foreign exchange savings cannot only induce investment. Investment opportunities determine investment alternatively than savings. The growth of export will provide investment opportunities to home country, (Sandrum, 1994).Theories suggest that, the relationship of export and economic growth is bi-directional. Economic growth may in any case increase export for a country. The effect of better learning and technological development, give rise to output. The growth of output ensures that domestic demand is met and export will expand. However, this technological process development or learning process development is not directly related to the export promoting policies (Jung, 1985). As the home country realizes economies of scale, expansion of export takes place. Investemnt (Grossman, 1991). Therefore, the bi-directional theory suggests that, GDP is a function of investment, that enhances export performance, and export increases inves tment opportunity, that is directed to GDP growth.In the calculative process of development economics, entailed was dominant export passimistic theories, rather than export promoting views. After the end of world war II, import exchange strategies were to be followed by many countries. However, the initial phase of implementing import shift strategies seemed ideal during that period, but the results of taking attempts to implement the import substitution strategies were not favorable for all economies. Economists found that, that export passimistic views were not justified for many economies that have chokeed a certain level of development, and industrialisation. On the other hand, the import substitution trade policies laid undesirable effcts on balance of payment. As a result, the growing economies did not accept import substitution strategies, rather accept export promoting views (Adelman, 1984).The growth led export is also suggested by theories. According to Bhagwati (1988) , growth led export hypothesis is dominant when supply and demand is induced by growth. In such cases, anti-trade bias is saturnine down.The possibility of bi-directional former prevails in many major theoritical literture (Grossman, 1991 Bhagwati J. , 1988).On the other hand, Irma Adelman (1984) argues that, export-led growth is not the only open development dodge for a least(prenominal) developed country. The open development strategy that ensures the allocation of agriculturally driven resources may prove superior than the strategy for allocation of capital for investment resources. An alternative to the import substituion strategy, for a closed development approach, maybe an ADLI ( agricultural-demand-led-industrialization) strategy. It is classical to identify the phase of closed development political orientation, which is dominant after the era of Pro-agricultural strategy is over. Another theoritical literature standardisedly argued that, ADLI as a balanced-gowth-approa ch, can only be a mean, to attain the goal for developing countries impoverishment for higher growth, and the need for growing industrialization by expanding the demand for domestically produecd consumer goods and intermediate goods. The linkage effect to agriculture with industrialization is also examined (Singer, 1979). Singer (1979) defines this manoeuvre as Lime target and ADLI is the solution. However, Irma Adelman(1984), also puts out the constraints to ADLI strategy as it requires the improvement of infrastructure in Agriculture which is difficult to attain in in the south Asian Sub-continent. The physical capital ineluctably to be perfectly infrustructred for ADLI yield expected results. Therefore, ADLI strategy is a solution to allow time to the developing countries to bring abouth changes structurally, in 1980s to 1990s. This strategy cannot telegram out the importance of export-promoting strategies as an alternative for import substituion strategies at all (Adelman, 1 984).Alongside the theoritical literatures on export-led growth hypothesis, the number empirical literature from the first of its mixture by Maizels(1963) is many. Jung and Marsall(1985) scanned 11 empirical studies that were carried out from 1967 to 1982 timeframe, and all of the studies found supportive relationships to export and growth. Greenaway and Sapsford(1994), reviewed 14 empirical studies that were conducted on the export-led growth hypothesis, and 12 empirical studies vividly visualisen relationships between export and growth. One of a major study conducted by Giles and Williams (2000), which conducted 150 cross country analysis from 1963 to 1999. Out of the 57 countries that were analysed , only 4 countries failed to attest significant relationships between export and growth, and only 10 out of the 102 time series analysis didnt show significant relationships between export and growth.It has interested the empirical literature to examine export-led growth hypothesis prior and after the oil shock in 1973-74 timeframe. Among the studies,that took place prior to the oil shock, Michalopoulos and Jay (1973) conducted a study in a 1960-73 timeframe, by estimating export and gowth into a poduction function, signifcant relationships were found. Tyler (1981) conducted study on a group of middle income countries, put export and growth into similar fruit function framework, and found similar relationships.Therefore, export orientation into the framework is supposed to effect growth therough economies of scale, allcation of productive resources and engagement of capital, optimally. The study of Feder (1983) found similar results. Balassa (1983) were enigmatical about the relationship afther oil shock, as in the face of economic receding 1974-75 that took place after the multiply of oil price in 1973-74, may have effected the relationship because of the orientation of external shock in the production function. The study he conducted had taken th perio d of 1973-79, after the shcok, on 43 developing countries, who were directly affected by subsequent recession. The result did show export affecting growth electropositively and the numerical magnitude of the effect did grow compared to early results. The changes in intercountry growth rate before and after the oil shock is rather a result of different trade policies introduced.An important theoritical implication is increasing export also paves the way for imported capital goods to be entered into the country (Islam M. , 1998). As productivity is increased, investment along with profit grows and the economy enjoys higher growth (Edward, 1993 Levine, 1992). In last two decades, exports of newly industrialized countries grew by 20%. Manufacturing exports entailed 70% of sum of money exports. As a third factor, import of manufactured and productive capital goods increased. The demand for these capital goods indicates the increasing rate of growth. Therefore, the plethora of studies o n export and growth make this issue important rich to review.3.2. Cross-country empirical analysesIn light of previous section, many empirical literature also focused on perticular countries or a category of countries to examine the export-led growth hypothesis. In theoritical literature, it is defined that, if export growth coefficients and and output growth coefficients are significantly positive in regression, the country follows export promoting strategies. If output growth causes export growth in regression than the country is labelled immunoglobulin E or internally generated exports. On the other hand if a export growth coeiicient and output growth coefficient is negetively correlated in the regression for growth, the country follows ERG or export reducing growth strategy (Jung, 1985). Such countries are following inward-oriented strategies rather than outward-oriented policies. Inward-oriented countries may also follow IS (import substitution) trade policy.Many empirical stu dies on cross-country did confirm the existence of export-led growth for different countries, and in some countries results otherwise is found. Hatemi J. and Irandsout (2000) continued analysis on Ireland, Portugal and Mexico, and significant relationship was confirmed. In the same study, they failed to confirm causal relationship for Greece and flop (Hatemi-J.A., 2000). The study by Ghirmay et al. (2001) did find positive relationship of export and growth for a number of developing countries. Just after one year, another study by Greenaway et al. (2002) conducted analysis on a number of selected developing countries and found that the growth rate for these countries dropped immediately after trade reform, for a constant rate of export, but gained momentum following a J-curve response after the affect of trade refor wires out.M. Michaely (1976) analysed 41 developing countries for a significantly large period. The resulting conclusion implicate that while Greece, Taiwan, Portugal , Spain, Israel, Yoguslavia and Koria had rapid growth with increasing export, Portugal did not show significant export growth, while GDP was growing in same pace. On the other hand, when Ethiopia incresed its export performance considerably, but failed to increase its growth to the pace with other countries. On the basis of regulate correlations, M. Michaely (1976) concluded that export performance will positively effect growth of a country, only when a country achieves development of a perticular level. Countries below this level will fail to exhibit good export-growth relationships. Bela Balassa(1977) followed similar study conducted by M. Michaely (1976), running rank correlations on a sample of countries that established industrial base for a timeframe of 1960-73. Among these countries, Korea, Singapore and Taiwan adopted EP (export promoting) strategies at a very early stand for and provided incentive to the exporting sector by subsidizing the sector in many ways. On the con trary, though, Israel and Yoguslavia promoted export during the same period, but their efforts seemed to dim in the later periods. On the other extreme, Argentina, Brazil, Columbia and Mexico, continued the existing trade policy, supporting import substitution (IS). During this period, Chile and India continued their inward-oriented policies and was in the phase of weakly introducing export progression policies. The resulting conclusion estimated that, while Korea and Taiwan would have less growth with more export, Chile, India, Mexico,Brazil and almost all other countries would have better levels of growth with higher levels of export. The countries that moved to opposite direction is due to the unfavorable internal conditions and policy constraints, the countries have. Similarly, for Phillipines and Srilanka, opposite direction of relationship is found (Islam M. , 1998).3.3. debatable Theories and EvidenceDue to the debt crisis and continued recession that prevailed during 1980s , after many countries adopted export promoting strategies, theorists and economicsts were dubious about export-led growth hypothesis. It became a necessity to re-examine the export promoting strategies (Bhagwati J. , 1988).The revived passimistic school of thought was predominate by old and new school of thoughts. The most influencial school of thoughts were suggested by two great contemporay development economists, that were Raul Prebisch (Prebisch, 1952) and Ragner Nurkse (Nurkse, 1953). Prebisch (1952) recommended that, chief exports for newly industrialized countries will moderate following a natural cycle, regardless of the trade policy implemented by the home country. Producers of home economy will respond by rapid industrialization and the economy will respond by employing more protection and higher level of restrictions. All these attempts will make export promotion excessive. The other dominant export passimism was realized by Nurkse(1953), who stressed more on balanced growth. The balanced growth theory suggests that the accelerated pace of growth and exports of developing countries, make foreign markets unable to accommodate imports on sufficient level. Developing economies shift from raw materials to synthetic materials as inputs, and damage exports for developing countries drawn-out run. Riedel (1984) suggests that, demand dominates export performance. It is a biased view towards export growth relationship if that is explained by export performance of selected countries. Export performance maybe more reliant on domestic incentives of a country, rather than the external conditions (Riedel, 1984).The new literatures focus more on prospered Asian exporters, which maybe a skid to be implemented as a general strategy for all economies. The sources of worry advocates that, markets are shifted to export promotion, markets will fail to absorb all exports. The earlier wave of export passimism was afflicted by this idea. Economists have always suppor ted the idea of intra-industry specialization which leads to adoption of inward-oriented policies, and name an economy as closed economy.The countries that adopt outward-oriented policies to a greater extent, or publicly promotes export promoting strategies, associates some level of government intervention. The government intervention makes sure that exports are promoted, subsidized and invested into. The countries that are empirically supportive of export-led growth hypothesis, mostly follow government intervention. This practice is generalized except countries like Hong-Kong. However, these are olympian cases and should not be generalized (Bhagwati J. , 1988).Economists also view that, export promoting trade policies, make the domestic market less sheltered and susceptible to world economic condition, outside pressure, world competition as well as innovation. This view has also been critisized and the opposite direction is supported by Schumpeterian arguments (Bhagwati J. , 198 4). The theory of market imperfections turn to by Fields(1984) suggests that, in presence of as well high wages, countries may do poorly. An example of this theory is set to Jamaica. Another interesting theory is the satisfaction theory of import substitution suggests that, the export promotion strategies are not suitable for many newly industrialzed countries due to their lack of flexibility for movemet of capital resources. Countries also lack the political capabilities to implement this flexibility (Ruggie,1983). Similar argument is also suggested by Adelman (1984) who argues that, agricultural-demand-led-industrialization strategy should be applied to allow a country enough time, for it to develop a structural base, before the country can successfully implement export promoting strategies. Export-led growth will follow if the country can achieve a minimum level of development as suggested before. While in the face of rapid growth, many countries are doing well with export promo ting trade policies, countries like Taiwan, Sri-Lanka, Phillipines, Jamaica, Brazil, Korea. are examples of countries, that was not in the position to implement export-promoting trade strategies,and the desired export-led growth was not achieved.In some theories, learning by doing or intra-industrial knowledge transfer was an important factor for adopting export promotion strategies. It is believed to be a mean of acquiring economies of scale for industries. The know-how process is a major motivating factor for economies, to support export promotion strategies. However, even, learning by doing effect dims down and may stop completely in absence of newly developed technology (Young, 1991). This makes outward-orientation unjustified and export-led growth, a failure. Import substitution and export promotion strategies do best when they are complemental (Grabowski,1994 Hamilton and Thompson, 1994).One important alternative suggested by Adelman (1984), is the ADLI (agricultural-demand-l ed-industrialization) strategy. The ADLI argument can be set into the similar footsteps of IGE (internally gorwn exports) of Jung (1985). Adelman (1984) argues that, when the countries became more reliant on industrial export-led growth, the controversies arise as many of least developed countries experienced set down employment, deteriorated income distribution, high level of food imports as domestic demand is not met, and lower level of growth. Therefore, countries required to implement more basic need oriented strategies. The rising foreign exchange constraints, and the stern liquidity problems, least developed countries faced, as they moved towards more export promoting strategies, following the export-led growth hypothesis, newly regenerate export passimism (Adelman, 1984).As empirical evidence, causality tests between export and groth conducted by Jung and Marshall (1985) on 37 countries should be addressed. In this empirical study, countries as many as South Africa, Korea, Pakistan, Israel, Bolivia and Peru did not show significantly positive relationship between export and growth. Rather these countries showed export reducing growth, which is the other way around. If these countries implements export promoting trade strategy, the countries will experience spirited economy and lower growth. Countries such as Iran, Kenya and Thailand are in favor of internally generated growth, and in the process of successfully implement export promoting growth policy (Jung, 1985).Looking at the above results, countries therefore, support import substitution as a pro-agricultural trade policy (Adelman, 1984). Countries are also adviced to move towards ADLI strategy in this stage. It may not be favorable for countries to immediately implement export promoting trade strategies, hoping to yield benefits of export-led growth hypthesis. In the primary stage, countries require import substitution policies, to develop intra-indistrial skills, economies of scale, and a trade base to a minimum level. The level in between is a complementary stage between import substitution and export promotion. Countries as India, Malaysia, Bangldesh in South east Asian region, followed import substitution for longer period until they believed to reach the minimum level, before these countries can move towards outward-oriented policies and introduced trade openness, and enjoyed the benefits of export-led-growth. For many countries mentioned above, steps taken in an earlier phase, have backfired. Therefore, the controversies to export led growth is as prevailent as the support toward the hypothesis.3.4. Empirics on export led-growth and trade liberalization in the context of BangladeshAs one of Asias growing power house economy, The export-led growth hypothesis has been examined in the context of Bangladesh, in many empirical literaures. Among the newly conducted researches, conintegration analyses, vector error correction models, explained many important variables such as manufacturing exports, investment capital to the total exports and growth. This part will curtly review the studies conducted in the context of Bangladesh.Since its independence, Bangladesh embarked in a import substitution trade policy following the ideology that a pro-agricultural society should be move to develop intra-industry to achieve economies of scale (Adelman, 1984). The mounting foreign debt, instable political condition, low productivity and growth, lower national income, did not allow the country to achieve its economic objective. Therefore, the country had to convert its inward looking policies, towards more outward looking policy, and adopted export promoting trade policy in 1982. Many structural adjustments were adviced by world bank and international monetary fund. The country went under furthEffect of Exports on GrowthEffect of Exports on Growth1. Introduction1.1. Theoretical FrameworkThe general idea of free trade agreement of growth was developed in advocacy of free trade based on neoclassical trade theory (Solow, 1956) and from recent endogenous growth theory (Romer P. , 1990). The support for free trade is drawn from Ricardian principles of comparative advantage (Viner, 1937). Similar idea is drawn from the notion of perfect competition and the believe of neoclassical economists who argues on the importance of efficient capital allocation due to free trade (Krugman, 1986 Corden W. , 1974).The phenomenon of free trade came under severe scrutiny in the face of Great Depression. Hence, theoretical foundations of optimum tariff were developed in support of protection (Johnson, 1950 Kaldor, 1940). Johnson (1958, 1971) advocated trade protection in three groups in his classical exposition. They are the economic arguments, non-economic arguments and non-arguments. Economic arguments raise infant industry argument, optimal tariff argument and correction of domestic market distortions, while non-economic arguments emphasize on self-sufficienc y for domestic economy. Non-arguments attempt to resolve balance of payment distortions through trade protection. Johnson concluded that optimal tariff protection is the only valid argument, while in other cases such arguments will only inflict distortions.The neoclassical economists refute the notion of protection as an alternative, as this would result in intra-industry effects. The increased barrier to entry would make domestic traders to engage in monopolistic competition, while small enterprises will be left inefficient. Intra-industry effects are the source to welfare loss (Tybout J. D., 1991). In addition, Bhagwati(1988) and Kruger(1974), raises the theory of directly unproductive and profit (DUP) seeking activities, which will cause waste to national resources. Additionally, the Solow-growth model embodies technology as an endogenous factor (Agion, 1992 Romer P. , 1989), which argue that international trade ensures faster diffusion of technology, that is embodied into the be tter intermediate goods which results in higher productivity and growth for domestic economy (Grossman, 1991). This will result in learning by doing effect and technological know-how is surpassed. In addition, management is more efficient and all will combine in high growth (Krugman, 1987 Young, 1991 Lucas, 1988) .1.2. Objective of the studyA high number and standard of studies have been conducted on Export-led growth, trade openness, manufacturing exports as a new engine of growth, specifically in the last decade, on different economies, ranging from developed to poor countries, drawing interesting conclusions. The present study seeks to investigate the effects of export, openness on growth in the context of Bangladesh.Firstly, the study will seek for stable effects of policy shifts and implementation, in Bangladesh, which will be determined by stable changes in the determinants. Stationarity conditions, if satisfied, will ensure the stability of economy and productivity, towards a particular goal.Secondly, the study will investigate the current association between growth and trade openness. While it is desired, that the adopted outward-looking trade policies of Bangladesh to result in positive association of productivity to liberalization, trade openness might be effected by other variables and may render different conclusions. Thirdly, the study will examine, if the export led growth hypothesis is still applicable to Bangladesh, as before, while many countries, such as Sri-Lanka, Philippines, Nigeria have seen opposite relationships. Additionally, Hossain and Karunaratna (2004) have argued that manufacturing exports have become new engine of growth which is a disciple of the de novo hypothesis. In contrast, Adelman (1984) suggests that, agricultural exports should have dominant effect for a pro-agricultural society as Bangladesh. It is important to see if, manufacturing exports is an engine of growth, or still other factors are dominant as before.Investment is an endogenous factor that should imply the increased import of intermediate goods, as a result of increased export, and more openness, would consequently render higher productivity (Krugman, 1987 Lucas, 1988 Young, 1991).1.3. Relevance and limitations of the studyRelevant studies have been conducted in the context of Bangladesh, in last decade and have drawn interesting remarks. However, the major drawback is the timeframe of earlier studies, which did not cover analyses from the last ten years. In the last ten years, econometric methods have changed and improved rigorously. Hence, many studies have been rendered invalid due to absence of proper methodology. The world economy has seen dramatic events in politics, international trade and global economy. The trends in global economy, which were much more rigorous, in the last ten years, have affected Bangladesh magnificently, as Bangladesh emerges as a high power economy in Asia, and have interested researchers, due to high deviat ions and high rises to productivity. It is necessary to embody recent econometric techniques of Johansens maximum likelihood cointegration analysis and vector error correction methodology, which will inform on recent associations, among the interested indicators. Hence the state-of-art econometric techniques will provide reliable results that would help the policy makers to observe the relationships and bring sufficient changes, in trade policy to render profit.Among the few limitations of the study was the absence of first hand secondary sources. Most data sources for Bangladesh are not available online and are preserved in paper based format. The lack of proper technology and internet, withdraw the authorities of the country, to provide data directly. Therefore, data are collected from World Bank sources, which may not correct for errors, and sometimes fail to provide detailed data series as an intermediary.1.4. Structure of the dissertationThe second section will contain a brief country profile and approaches to liberalization. The third phase will contain literature review that will discuss literatures in support to export-led growth hypothesis and trade liberalization. This section will bring forth studies that contrast and significance of the study. The fourth and fifth section will contain methodology to estimation and results of analysis. The final section will give conclusion and remarks to the dissertation.2. Process of trade openness and Export-growth in BangladeshAfter independence in 1971, Bangladesh has gone through three phases of policy changes, towards deregulation and openness to trade. The first phase was marked by severe control on exports and imports. The policy implemented in 1972 to 1975, put the country in a socialist framework, with a fixed exchange rate system. Industrial enterprises, banking and trade infrastructure was massively nationalized as an inward-looking, import substitution approach was adopted. Agricultural inputs and outp uts were controlled. Empirical literature suggests that this was a good decision for the researched timeframe (Ahmed N. , 2000).The second phase of policy shifting began in 1976 and continued up to 1990. This phase of denationalization, deregulation and trade liberalization lacked a good direction to work out the process. Nationalized trade barriers were reduced, and a free trade approach was undertaken. Privatization of industries and banking sector was allowed and price controls over nationalized firms were lifted. Abolishment of state trading was initiated.The third phase of policy shift, were introduced in the beginning of 1991 and continued up to 2002 with significant remarks. In the recently developed policies toward export-promotion and trade openness, trade barriers have been removed as a flexible exchange rate regime is adopted. To encourage further reduction of anti-export bias, export processing zones have been established, to co-operate manufacturing exports. This recent policy shift has moved towards complete privatization of banks, infrastructure and agricultural sector. During this phase, Bangladesh continued to experience rapid liberalization.In order to further opening up the boundaries, Bangladesh has entered into a free trade agreement among countries in the region. As discussed, to encourage EP trade policies, and free trade, Bangladesh entered into bi-lateral agreements with India, Pakistan, Sri-Lanka, and continues to trade and investment framework agreement with United States. Bangladesh is an active member of SAARC, Developing-8, and Bangkok Agreement. The country is rigorously seeking to import in developing of a regional co-operation among Bangladesh, Bhutan and seven northeastern states of India and Nepal.From the graph presented above, it can be seen that, starting form 1971, imports were increasing at a low rate, with a fall in 1976-77, but moved up after that. The import line took a peak after the third policy implementation in 19 91, and continued to rise at a high speed. The export trend was almost at a constant level, until the 1991 policy implementation. Afterwards, the trend peaked, gained a momentum after 2000. However, the export line still falls below the import trend. As reported by the export promotion bureau, in 2005-2006 FY, export earnings have grown by 21.3%, which is due to high demand of, chiefly manufactured goods, led by garments industry and knitwear. During this period, import payments have grown by 9.5%.In contrast to real export, manufacturing exports exhibit of higher exports than imports which are in percentage of merchandise exports. This is indicative of higher productivity.When the country adopts rigorous trade policy towards openness and promoting exports, large scale capital owners and labor unions are in oppose to liberalization. The cause of opposition may lie in the fact that, increased competition, effect the workers, in protected public and private sector, who fail to adjust to the exposed economy, with increased productivity. The politicians tend to protect large scale owners, who severely discourage competition and create bias towards exports (Sattar, 2004).3. Literature Review3.1. Concepts and Empirics on Export-Led Growth PhenomenonExport led growth phenomenon has been central to the trade and development literature for many years. The bulk of researches that has taken place on this issue are therefore, not small in number and range. The focuses of these studies were bi-directional. Some of the studies attempted to find whether expanding export would improve the growth performance. Others tried to find the paths through which the expansion of export will affect the growth performance. Economic theory confirms that export expansion leads to increase the growth performance, as that efficiently allocates productive resources and also with the high volume of productive resources accumulated as a result of higher capital earned through export growth, (Ba rdhan, 1970 Cheneray, 1966 Basu, 1991 Romer P. , 1989 McKinnon, 1964 Grossman, 1991).Export expansion makes the home country to concentrate on comparative advantages and to earn economies of scale. The home country continues to invest on its economies of scale and achieve better efficiency. The increased efficiency creates external competitive pressure on the home country, along with improved internal competition. In the face of more competition, the monopolistic and oligopolostic behavior of the market is eliminated. Efficiency is also created as learning by doing. Knowledge is transferred to other sectors and growth is enhanced. The external competition, aids the small economy to realise and emphasize on removing limitations, through economies of scale, and by reaping the true advantage of globalisation, which is acquired by increasing export.The theoitical literature also argues that, export expansion increases the investment and capital accumulation in a country. The two-gap mo del explains , that growing export reduces the constraints that prevail in foreign exchange. Such reduction of constraints lead to better accumulation of productive resources, capital goods and intermediate goods (McKinnon, 1964 Bacha, 1984 Cheneray, 1966). Export expansion also increases investement opportunity of a country. Modern economists suggest that, savings by domestic and banking system, government savings and foreign exchange savings cannot only induce investment. Investment opportunities determine investment rather than savings. The growth of export will provide investment opportunities to home country, (Sandrum, 1994).Theories suggest that, the relationship of export and economic growth is bi-directional. Economic growth may also increase export for a country. The effect of better learning and technological development, give rise to output. The growth of output ensures that domestic demand is met and export will expand. However, this technological process development or learning process development is not directly related to the export promoting policies (Jung, 1985). As the home country realizes economies of scale, expansion of export takes place. Investemnt (Grossman, 1991). Therefore, the bi-directional theory suggests that, GDP is a function of investment, that enhances export performance, and export increases investment opportunity, that is directed to GDP growth.In the designing process of development economics, entailed was dominant export passimistic theories, rather than export promoting views. After the end of world war II, import substitution strategies were to be followed by many countries. However, the initial phase of implementing import substitution strategies seemed ideal during that period, but the results of taking attempts to implement the import substitution strategies were not favorable for all economies. Economists found that, that export passimistic views were not justified for many economies that have reached a certain level of development, and industrialization. On the other hand, the import substitution trade policies laid undesirable effcts on balance of payment. As a result, the growing economies did not accept import substitution strategies, rather accept export promoting views (Adelman, 1984).The growth led export is also suggested by theories. According to Bhagwati (1988), growth led export hypothesis is dominant when supply and demand is induced by growth. In such cases, anti-trade bias is turned down.The possibility of bi-directional causality prevails in many major theoritical literture (Grossman, 1991 Bhagwati J. , 1988).On the other hand, Irma Adelman (1984) argues that, export-led growth is not the only open development strategy for a least developed country. The open development strategy that ensures the allocation of agriculturally driven resources may prove superior than the strategy for allocation of capital for investment resources. An alternative to the import substituion strategy, f or a closed development approach, maybe an ADLI ( agricultural-demand-led-industrialization) strategy. It is important to identify the phase of closed development ideology, which is dominant after the era of Pro-agricultural strategy is over. Another theoritical literature similarly argued that, ADLI as a balanced-gowth-approach, can only be a mean, to attain the goal for developing countries need for higher growth, and the need for growing industrialization by expanding the demand for domestically produecd consumer goods and intermediate goods. The linkage effect to agriculture with industrialization is also examined (Singer, 1979). Singer (1979) defines this target as Lime target and ADLI is the solution. However, Irma Adelman(1984), also puts out the constraints to ADLI strategy as it requires the improvement of infrastructure in Agriculture which is difficult to attain in South Asian Sub-continent. The physical capital needs to be perfectly infrustructred for ADLI yield expected results. Therefore, ADLI strategy is a solution to allow time to the developing countries to bring abouth changes structurally, in 1980s to 1990s. This strategy cannot wire out the importance of export-promoting strategies as an alternative for import substituion strategies at all (Adelman, 1984).Alongside the theoritical literatures on export-led growth hypothesis, the number empirical literature from the first of its kind by Maizels(1963) is many. Jung and Marsall(1985) scanned 11 empirical studies that were carried out from 1967 to 1982 timeframe, and all of the studies found supportive relationships to export and growth. Greenaway and Sapsford(1994), reviewed 14 empirical studies that were conducted on the export-led growth hypothesis, and 12 empirical studies vividly shown relationships between export and growth. One of a major study conducted by Giles and Williams (2000), which conducted 150 cross country analysis from 1963 to 1999. Out of the 57 countries that were analysed , only 4 countries failed to show significant relationships between export and growth, and only 10 out of the 102 time series analysis didnt show significant relationships between export and growth.It has interested the empirical literature to examine export-led growth hypothesis prior and after the oil shock in 1973-74 timeframe. Among the studies,that took place prior to the oil shock, Michalopoulos and Jay (1973) conducted a study in a 1960-73 timeframe, by estimating export and gowth into a poduction function, signifcant relationships were found. Tyler (1981) conducted study on a group of middle income countries, putting export and growth into similar production function framework, and found similar relationships.Therefore, export orientation into the framework is supposed to effect growth therough economies of scale, allcation of productive resources and utilization of capital, optimally. The study of Feder (1983) found similar results. Balassa (1983) were dubious about the rel ationship afther oil shock, as in the face of economic recession 1974-75 that took place after the quadrupling of oil price in 1973-74, may have effected the relationship because of the orientation of external shock in the production function. The study he conducted had taken th period of 1973-79, after the shcok, on 43 developing countries, who were directly affected by subsequent recession. The result did show export affecting growth positively and the numerical magnitude of the effect did grow compared to early results. The changes in intercountry growth rate before and after the oil shock is rather a result of different trade policies introduced.An important theoritical implication is increasing export also paves the way for imported capital goods to be entered into the country (Islam M. , 1998). As productivity is increased, investment along with profit grows and the economy enjoys higher growth (Edward, 1993 Levine, 1992). In last two decades, exports of newly industrialized c ountries grew by 20%. Manufacturing exports entailed 70% of total exports. As a third factor, import of manufactured and productive capital goods increased. The demand for these capital goods indicates the increasing rate of growth. Therefore, the plethora of studies on export and growth make this issue important enough to review.3.2. Cross-country empirical analysesIn light of previous section, many empirical literature also focused on perticular countries or a category of countries to examine the export-led growth hypothesis. In theoritical literature, it is defined that, if export growth coefficients and and output growth coefficients are significantly positive in regression, the country follows export promoting strategies. If output growth causes export growth in regression than the country is labelled IGE or internally generated exports. On the other hand if a export growth coeiicient and output growth coefficient is negetively correlated in the regression for growth, the count ry follows ERG or export reducing growth strategy (Jung, 1985). Such countries are following inward-oriented strategies rather than outward-oriented policies. Inward-oriented countries may also follow IS (import substitution) trade policy.Many empirical studies on cross-country did confirm the existence of export-led growth for different countries, and in some countries results otherwise is found. Hatemi J. and Irandsout (2000) continued analysis on Ireland, Portugal and Mexico, and significant relationship was confirmed. In the same study, they failed to confirm causal relationship for Greece and Turkey (Hatemi-J.A., 2000). The study by Ghirmay et al. (2001) did find positive relationship of export and growth for a number of developing countries. Just after one year, another study by Greenaway et al. (2002) conducted analysis on a number of selected developing countries and found that the growth rate for these countries dropped immediately after trade reform, for a constant rate of export, but gained momentum following a J-curve response after the affect of trade refor wires out.M. Michaely (1976) analysed 41 developing countries for a significantly large period. The resulting conclusion implicated that while Greece, Taiwan, Portugal, Spain, Israel, Yoguslavia and Koria had rapid growth with increasing export, Portugal did not show significant export growth, while GDP was growing in same pace. On the other hand, when Ethiopia incresed its export performance considerably, but failed to increase its growth to the pace with other countries. On the basis of rank correlations, M. Michaely (1976) concluded that export performance will positively effect growth of a country, only when a country achieves development of a perticular level. Countries below this level will fail to exhibit good export-growth relationships. Bela Balassa(1977) followed similar study conducted by M. Michaely (1976), running rank correlations on a sample of countries that established industri al base for a timeframe of 1960-73. Among these countries, Korea, Singapore and Taiwan adopted EP (export promoting) strategies at a very early stage and provided incentive to the exporting sector by subsidizing the sector in many ways. On the contrary, though, Israel and Yoguslavia promoted export during the same period, but their efforts seemed to dim in the later periods. On the other extreme, Argentina, Brazil, Columbia and Mexico, continued the existing trade policy, supporting import substitution (IS). During this period, Chile and India continued their inward-oriented policies and was in the phase of weakly introducing export promotion policies. The resulting conclusion estimated that, while Korea and Taiwan would have less growth with more export, Chile, India, Mexico,Brazil and almost all other countries would have better levels of growth with higher levels of export. The countries that moved to opposite direction is due to the unfavorable internal conditions and policy con straints, the countries have. Similarly, for Phillipines and Srilanka, opposite direction of relationship is found (Islam M. , 1998).3.3. Controversial Theories and EvidenceDue to the debt crisis and continued recession that prevailed during 1980s, after many countries adopted export promoting strategies, theorists and economicsts were dubious about export-led growth hypothesis. It became a necessity to re-examine the export promoting strategies (Bhagwati J. , 1988).The revived passimistic school of thought was dominated by old and new school of thoughts. The most influencial school of thoughts were suggested by two great contemporay development economists, that were Raul Prebisch (Prebisch, 1952) and Ragner Nurkse (Nurkse, 1953). Prebisch (1952) recommended that, chief exports for newly industrialized countries will decline following a natural cycle, regardless of the trade policy implemented by the home country. Producers of home economy will respond by rapid industrialization and the economy will respond by employing more protection and higher level of restrictions. All these attempts will make export promotion unjustified. The other dominant export passimism was realized by Nurkse(1953), who stressed more on balanced growth. The balanced growth theory suggests that the accelerated pace of growth and exports of developing countries, make foreign markets unable to accommodate imports on sufficient level. Developing economies shift from raw materials to synthetic materials as inputs, and damage exports for developing countries longer run. Riedel (1984) suggests that, demand dominates export performance. It is a biased view towards export growth relationship if that is explained by export performance of selected countries. Export performance maybe more reliant on domestic incentives of a country, rather than the external conditions (Riedel, 1984).The new literatures focus more on successful Asian exporters, which maybe a mistake to be implemented as a general strategy for all economies. The sources of worry advocates that, markets are shifted to export promotion, markets will fail to absorb all exports. The earlier wave of export passimism was afflicted by this idea. Economists have always supported the idea of intra-industry specialization which leads to adoption of inward-oriented policies, and terms an economy as closed economy.The countries that adopt outward-oriented policies to a greater extent, or publicly promotes export promoting strategies, associates some level of government intervention. The government intervention makes sure that exports are promoted, subsidized and invested into. The countries that are empirically supportive of export-led growth hypothesis, mostly follow government intervention. This practice is generalized except countries like Hong-Kong. However, these are exceptional cases and should not be generalized (Bhagwati J. , 1988).Economists also view that, export promoting trade policies, make the domestic mark et less sheltered and susceptible to world economic condition, outside pressure, world competition as well as innovation. This view has also been critisized and the opposite direction is supported by Schumpeterian arguments (Bhagwati J. , 1984). The theory of market imperfections addressed by Fields(1984) suggests that, in presence of excessively high wages, countries may do poorly. An example of this theory is set to Jamaica. Another interesting theory is the satisfaction theory of import substitution suggests that, the export promotion strategies are not suitable for many newly industrialzed countries due to their lack of flexibility for movemet of capital resources. Countries also lack the political capabilities to implement this flexibility (Ruggie,1983). Similar argument is also suggested by Adelman (1984) who argues that, agricultural-demand-led-industrialization strategy should be applied to allow a country enough time, for it to develop a structural base, before the country can successfully implement export promoting strategies. Export-led growth will follow if the country can achieve a minimum level of development as suggested before. While in the face of rapid growth, many countries are doing well with export promoting trade policies, countries like Taiwan, Sri-Lanka, Phillipines, Jamaica, Brazil, Korea. are examples of countries, that was not in the position to implement export-promoting trade strategies,and the desired export-led growth was not achieved.In some theories, learning by doing or intra-industrial knowledge transfer was an important factor for adopting export promotion strategies. It is believed to be a mean of acquiring economies of scale for industries. The know-how process is a major motivating factor for economies, to support export promotion strategies. However, even, learning by doing effect dims down and may stop completely in absence of newly developed technology (Young, 1991). This makes outward-orientation unjustified and expor t-led growth, a failure. Import substitution and export promotion strategies do best when they are complementary (Grabowski,1994 Hamilton and Thompson, 1994).One important alternative suggested by Adelman (1984), is the ADLI (agricultural-demand-led-industrialization) strategy. The ADLI argument can be set into the similar footsteps of IGE (internally gorwn exports) of Jung (1985). Adelman (1984) argues that, when the countries became more reliant on industrial export-led growth, the controversies arise as many of least developed countries experienced lower employment, deteriorated income distribution, high level of food imports as domestic demand is not met, and lower level of growth. Therefore, countries required to implement more basic need oriented strategies. The rising foreign exchange constraints, and the serious liquidity problems, least developed countries faced, as they moved towards more export promoting strategies, following the export-led growth hypothesis, newly renewe d export passimism (Adelman, 1984).As empirical evidence, causality tests between export and groth conducted by Jung and Marshall (1985) on 37 countries should be addressed. In this empirical study, countries as many as South Africa, Korea, Pakistan, Israel, Bolivia and Peru did not show significantly positive relationship between export and growth. Rather these countries showed export reducing growth, which is the other way around. If these countries implements export promoting trade strategy, the countries will experience crippled economy and lower growth. Countries such as Iran, Kenya and Thailand are in favor of internally generated growth, and in the process of successfully implement export promoting growth policy (Jung, 1985).Looking at the above results, countries therefore, support import substitution as a pro-agricultural trade policy (Adelman, 1984). Countries are also adviced to move towards ADLI strategy in this stage. It may not be favorable for countries to immediately implement export promoting trade strategies, hoping to yield benefits of export-led growth hypthesis. In the primary stage, countries require import substitution policies, to develop intra-indistrial skills, economies of scale, and a trade base to a minimum level. The level in between is a complementary stage between import substitution and export promotion. Countries as India, Malaysia, Bangldesh in South east Asian region, followed import substitution for longer period until they believed to reach the minimum level, before these countries can move towards outward-oriented policies and introduced trade openness, and enjoyed the benefits of export-led-growth. For many countries mentioned above, steps taken in an earlier phase, have backfired. Therefore, the controversies to export led growth is as prevailent as the support toward the hypothesis.3.4. Empirics on export led-growth and trade liberalization in the context of BangladeshAs one of Asias growing power house economy, The ex port-led growth hypothesis has been examined in the context of Bangladesh, in many empirical literaures. Among the newly conducted researches, conintegration analyses, vector error correction models, explained many important variables such as manufacturing exports, investment capital to the total exports and growth. This part will briefly review the studies conducted in the context of Bangladesh.Since its independence, Bangladesh embarked in a import substitution trade policy following the ideology that a pro-agricultural society should be motivated to develop intra-industry to achieve economies of scale (Adelman, 1984). The mounting foreign debt, instable political condition, low productivity and growth, lower national income, did not allow the country to achieve its economic objective. Therefore, the country had to convert its inward looking policies, towards more outward looking policy, and adopted export promoting trade policy in 1982. Many structural adjustments were adviced by world bank and international monetary fund. The country went under furth