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Trade (exports) as an Opportunity for Bangladesh: a Vecm Analysis

Sultanuzzaman Md Reza
School of Economics, Huazhong University of Science and Technology, Wuhan, China

Hongzhong Fan
School of Economics, Huazhong University of Science and Technology, Wuhan, China

Banban Wang
School of Economics, Huazhong University of Science and Technology, Wuhan, China

Miraj Ahmed Bhuiyan
South China Business College, Guangdong University of Foreign Studies, Guangzhou, China

Adnan K. M. Mehedi
College of Economics and Management, Huazhong Agricultural University, Wuhan, China

Abstract/ Executive Summary:

This article examines the effects of trade (exports) on the economic growth of Bangladesh from 1986 to 2016, using the application of a Johansen cointegration and vector error correction model. The empirical findings exhibit that trade (exports) has a unique long-run equilibrium relationship with the economic growth of Bangladesh. The short-run results also display a robust causality between variables. This study suggests that exports play a major role in the growth of Bangladesh. Policymakers should promote the export of goods and services, especially manufactured goods, in the long term, in order to possibly reduce the trade deficit and rapidly stimulate the growth of Bangladesh.

Keywords: Bangladesh; Economic growth; Exports; VECM

Location: Bangladesh

Start Date: 00-00-1986

End Date: 00-00-2016

Program Area: Socio-economic and Policy

Non-commodity: Business

Objectives:

There are few studies that have investigated the direction of causality between exports and GDP growth in developed and developing countries, as well as in Bangladesh. That’s why we were motivated to investigate the relationship between exports and economic growth for Bangladesh. Also, this study can help to generate new knowledge in order to formulate attractive exports policy to increase output growth for Bangladesh.

Methodology:

The econometrics literature plays an important role in integrating the collaboration into growth models. Many empirical studies used the vector error correction model (VECM) to identify the convergence of trade (exports) and economic growth. This section covers the methodological framework, data sources, and specification of the model as well as the estimation technique.

Data sources and specification of the model This study seeks to specify the engine of growth and significant relationship between trade (exports) and the economic growth of Bangladesh. This article uses time series secondary annual data of Bangladesh for 1986 to 2016. For this study, we collected related variable data from the World Bank’s World Development Indicators database. Using this data, we created a vector error correction model (VECM) that helps to investigate the effects of trade (exports) on the economic growth of Bangladesh.

In order to check the causal relationship between trade (exports) and economic growth, the exports of goods and services (constant 2010 US$) uses a proxy of trade (denoted by EX) and the GDP annual growth rate uses a proxy of economic growth (denoted by GDP), respectively. We also used two more explanatory variables: official exchange rate (denoted by EXR), while real effective exchange rate cannot be found in the World Development Indicators database; and manufacturing exports (denoted by MFGEX) in current US$ by the authors’ calculations wherever there are missing data in manufacturing exports data (percentage of merchandise exports) for the years 1999, 2014, and 2016. We have applied 0 for missing value data as a dummy variable following Rahman et al. (2017). To calculate the manufacturing exports in US$, we have used total merchandise exports in US$ (manufacturing exports as a percent of merchandise exports). Thus, manufacturing export in US$ = total merchandise exports in US$ (percentage of merchandise exports). Moreover, we used real imports of goods and services in constant 2010 US$ (denoted by IM) as a growth-related dummy variable which does not appear in the equation. In our model, the VECM is the only vector autoregressive (VAR) model where variables do not have unit roots in the first difference; i.e., stationary in the first difference. The VECM is a system of equations and a special case of vector autoregression (VAR) which regress each endogenous variable. The theoretical and empirical literature suggested that the model may investigate the effects of trade (exports) on economic growth by using the Johansen cointegration and vector error correction model (VECM) framework.

Source of Information: THE INTERNATIONAL TRADE JOURNAL

Article Link (Online Journal): https://doi.org/10.1080/08853908.2018.1511489

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

In this study, we examined the effects of trade (exports) on the economic growth of Bangladesh for a sufficiently long period (1986 to 2016) using a cointegration and vector error correction model (VECM) approach. In order to reveal the best effect of the model, we used four major variables in this study: GDP annual growth rate (GDP), exports of goods and services (EX) as trade (exports), manufacturing exports (MFGEX), and official exchange rate (EXR). Moreover, we used imports of goods and services (IM) as a growth related dummy in the exogenous box of cointegration and VECM for influencing the GDP growth. After estimating the Johansen cointegration test, the study finds that there is a long-run association between variables. Consequently, after running the VECM, the analysis implies that there is a long-run relationship running from EX, MFGEX, and EXR to GDP growth. In addition, the Wald test short-run results show that there is a short-run causal relationship running from EX, MFGEX, and EXR to GDP growth. Our main findings are: trade (exports) has causal effects on the economic growth of Bangladesh in the long run as well as the short run. The study also suggests that trade (exports) is an “engine of economic growth” for Bangladesh. While comprehensive, coverage of our study reveals the effect of trade (exports) on only one exclusive dimension of the economic growth of Bangladesh. This study highly suggests that trade (exports) is the best opportunity for Bangladesh to develop its economy. This study is also influenced by Love and Chandra (2004) and covered limited samples. The case of Bangladesh should be examined in depth with the disaggregation of exports in this area. Furthermore, the causality of trade (exports) on economic growth may consider some modifications in future studies. Governments would need to bring advanced technology and heavy industries and use local raw materials, which can increase the skilled labor force and decrease the country’s imports. However, technology transfer, investments in infrastructure, tax reform, and skilled labor are potential needs for enhancing trade (exports) which leads to economic reform. There is a need to adopt trade (exports) policies that seek to expand international participation, such as a multilateral agreement with technology transfer.

Knowledge Management: Journal