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Impact of Globalization and Trade Openness on Economic Growth in Bangladesh

Muhammad Meraj
Graduate School of Asia Pacific Studies, Ritsumeikan Asian Pacific University (APU), Beppu City, Oita, Japan

Abstract/ Executive Summary:

We investigate the impact of globalization and openness in trade on the economic growth of Bangladesh by econometric testing using an autoregressive distributed lag (ARDL) model and the Granger causality test. The key variables used in the study are in log transformation i.e. the log of GDP, log of exports and log of imports. In order to examine the existence of a causal relationship (both long run and short-run) between economic growth and globalization in terms of trade openness measured by exports and imports of Bangladesh, the Granger causality was used with vector autoregression (VAR) methodology along with two different approaches for testing of cointegration: Johansen cointegration and autoregressive distributed lag (ARDL). The results of the error correction model (ECM) and Granger causality test suggest a causal relationship between GDP and exports and imports. The exports show bidirectional Granger causality with economic growth, but imports do not Granger cause GDP and exports. This indicates a positive impact for globalization over trade and economic growth in the least developed countries (LDCs) such as Bangladesh. This vital connection may become a footstep for those LDCs who are reluctant to open up their trade barriers. The empirical findings suggest bidirectional causality between exports and GDP, with impacts of globalization in terms of exports affecting economic growth (GDP). Accordingly, more export-oriented policies may be recommended with strong checks on imports because the expansion of exports may generate more foreign exchange for payment of import bills as well as enhance capital accumulation.

Keywords: Bangladesh, Economic growth, Exports and imports, Globalization, Granger causality, Trade openness

Location: In Bangladesh

Start Date:

End Date:

Program Area: Comparative study

Commodity: Trade, Market analysis, Livelihood

Objectives:

To investigate the impact of globalization and openness in trade on the economic growth of Bangladesh by econometric testing using an autoregressive distributed lag (ARDL) model and the Granger causality test.

Methodology:

The data set used in this study is secondary and has been collected from ‘World Development Indicators published by the World Bank, and includes annual data of exports of goods and services, imports of goods and services, and GDP for the period of 1971 to 2005. The base year for the three data series is 2000 with the values mentioned in a constant U.S. dollar. All three series are transformed into natural logarithms. The variables EX, IM and GDP are used for exports, imports and GDP, respectively. For a compilation of data Microsoft Excel and econometric software package E-Views was used. Since all three variables trend over time, it is possible to have a causal connection between the variables. For testing the stationary properties of variables, we used the ‘augmented Dickey-Fuller and Philips-Perron unit root testing procedures. The results; all three variables are I(I) i.e. non-stationary at the level and become I(0) i.e. stationary after the first differencing applied. After confirming that all variables of the study are integrated of order 1, I(I) we proceed to test the cointegration between the variables. According to Iqbal (2011) “two time series are cointegrated when a linear combination of the time series is stationary. Since non-stationary time series don't return to their long-run average value following a disturbance, it is important to convert them to stationary processes because regressing one non-stationary series to another non-stationary series may lead to spurious results.” Two cointegration testing techniques were used: Johansen (1990) and the ‘autoregressive distributed lag’ (ARDL) technique by Pesaran, M. H., Shin, Y. and Smith, R. J. (2001). For the Johansen (1990) technique the number of cointegrating vectors must be known which includes the trace statistics as well as maximum Eigenvalue test statistics. Pesaran et al. (2001) developed another method for finding cointegration among variables which is based on an ARDL model augmented by level variables. Contrary to the Engle-Granger and Johansen approach, pre-testing of the unit root is not needed because the test can be applied on both I(0) and I(1) variables. This is seen as a major advantage over the ARDL approach.

Source of Information: Ritsumeikan Journal of Asia Pacific Studies, Volume 32, September 2013

Article Link (Online Journal):

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

We have investigated the impact of globalization and free trade on the economic growth of Bangladesh by econometric testing using ‘autoregressive distributed lag’ (ARDL) and Granger causality, to show the importance of globalization in terms of enhancing the volume of foreign trade in Bangladesh as one of the least developed countries of Asia. The Granger causality ran bi-directionally from exports to GDP implying that export was the key factor determining the growth of Bangladesh during the period under consideration. A limitation of this study is the lack of a specific variable to indicate ‘openness in trade’ in the tests; the improvement in trade imbalance may have contributed to the GDP growth in Bangladesh. However, we assumed that there was a correlation between the improvement in trade imbalance and openness in trade. We referred to the changes in the economic policies of Bangladesh from its independence till the present to demonstrate a historical trend of gradually enhanced openness in trade. The conclusion of our study may also require an assumption that the increase in the volume of trade has contributed to ‘technological change’ which could be calculated as residuals in the economic growth model. However, other factors could have contributed to technological change during the period being tested. Our assumption was that other factors related to economic growth have been quite neutral during the period. Since this study could not cover the whole aspect of the problem under consideration, because of its limited scope, further reading in this area is suggested. Finally, the empirical findings of this study and the review of the current situation of Bangladesh in international trade suggest the following policy recommendations, in that order: a) To enhance economic growth, the government may adopt stronger export promotion strategies in Bangladesh. Free trade policies may be implemented i.e. lowering trade and tariff barriers and relaxation of trade barriers so that bilateral trade with neighboring countries may increase. b) Development of infrastructure may facilitate exports, as well as provision of uninterrupted energy supplies. Other possible solutions include enhancing the incentives on exports like duty drawback/rebate and refund payments.

Knowledge Management: Report/Proceedings