Exports and Econ Growth in BD Begum Shamsuddin

This article was downloaded by:[Hiroshima University]
On: 20 June 2008

Access Details: [subscription number 789277225]
Publisher: Routledge
Informa Ltd Registered in England and Wales Registered Number: 1072954
Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK
Journal of Development Studies

Publication details, including instructions for authors and subscription information:
http://www.informaworld.com/smpp/title~content=t713395137
Exports and economic growth in Bangladesh
Shamshad Begum a; Abul F. M. Shamsuddin b
a
Senior Lecturer, School of Accounting, Finance and Entreprneurship, Vice
President of Prime Bank, Dhaka, Bangladesh
b
University of New England, Australia
Online Publication Date: 01 October 1998

To cite this Article: Begum, Shamshad and Shamsuddin, Abul F. M. (1998)
'Exports and economic growth in Bangladesh', Journal of Development Studies,
35:1, 89 — 114
To link to this article: DOI: 10.1080/00220389808422556
URL: http://dx.doi.org/10.1080/00220389808422556
PLEASE SCROLL DOWN FOR ARTICLE
Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf

This article maybe used for research, teaching and private study purposes. Any substantial or systematic reproduction,
re-distribution, re-selling, loan or sub-licensing, systematic supply or distribution in any form to anyone is expressly
forbidden.
The publisher does not give any warranty express or implied or make any representation that the contents will be
complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses should be
independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims, proceedings,
demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or
arising out of the use of this material.
Exports and Economic Growth
Downloaded By: [Hiroshima University] At: 03:39 20 June 2008
in Bangladesh
SHAMSHAD BEGUM and

ABUL F. M. SHAMSUDDIN
This study investigates the effect of exports on economic growth in

Bangladesh, based on a two-sector growth model. Using annual
data for the period 1961-92, the article estimates an
Autoregressive Conditional Heteroscedastic model of economic
growth, which is found to capture the volatility of the Bangladesh
economy. The results suggest that an increase in the share of
investment in GDP significantly increases the growth rate of GDP
in normal years, but negligibly increases GDP growth in abnormal
years. Abnormalities in the economy arise from war, political
turmoil and natural disasters. The key finding is that export growth
has significantly increased economic growth through its positive
impact on total factor productivity in the economy. The
contribution of exports to economic growth was more pronounced
during 1982-90 when the government pursued a policy of trade
liberalisation and structural reform, and political turmoil was not
persistent. This finding is not sensitive to the choice of the model
or the estimation technique.
I. INTRODUCTION
The recent literature on economic growth has focused considerable
attention on determining the effect of foreign trade on economic growth.
This article attempts to analyse the effect of exports on economic growth in
Bangladesh by adopting the supply side approach.1 Our model assumes that
there are two sectors in the economy, the non-export and the export sectors,
Shamshad Begum is Vice President of Prime Bank, Dhaka, Bangladesh. Abul Shamsuddin is
Senior Lecturer, School of Accounting, Finance and Entreprneurship, University of New
England, Australia. The authors would like to thank R. Holmes, M. Khan, D. Schulze, H.
Zafarullah and an anonymous referee of this journal for helpful comments.
The Journal of Development Studies, Vol.35, No.1, October 1998, pp.89-114
PUBLISHED BY FRANK CASS, LONDON
90 THE JOURNAL OF DEVELOPMENT STUDIES
and that there are four sources of GDP growth: input growth, changes in the
allocation of resources between the export and non-export sectors, changes
in the institutional characteristics of the economy, and technological
progress. In order to estimate the effect of exports on growth, we need to

focus on the second source of growth. If the initial allocation of resources is
not Pareto-optimal due to the existence of non-priced production
externalities or lack of mobility of inputs between sectors, total factor
productivity (TFP) can be increased by reallocating resources between the
two sectors. More specifically, if the export sector grows in line with the
static comparative advantage of the economy, any reallocation of resources
from the non-export sector to the export sector is likely to increase the level
of TFP which in turn raises GDP.2 The source of this growth is purely the
static allocative efficiency resulting from an expansion of the export sector.
The effect of exports on growth will be more pronounced if the structure of
exports changes in line with changes in the economy's comparative
advantage over time.
Bangladesh, like other South Asian countries, actively pursued import-
substituting industrialisation strategies during 1960-82. However, the
import-competing industries remained 'infant' despite more than two
decades of tariff and non-tariff protection. Since the early 1980s, the
government of Bangladesh has been liberalising foreign trade and
deregulating the economy. The policy of import substitution has been
replaced by the strategy of export-led growth.3 In order to evaluate the
success of export-oriented industrialisation strategies, it is important to
quantify the impact of exports on economic growth.4
This article is organised as follows: Section II contains a review of
previous studies on trade policy reform, exports and economic growth.
Section III discusses the stylised facts on exports and growth in the context
of Bangladesh. The analytical framework of the study is presented in
section IV. Section V interprets the empirical results. The final section
offers a summary and conclusions.
II. LITERATURE REVIEW

Recent growth-accounting literature clearly demonstrates that most per
capita income growth is explained by growth in total factor productivity
rather than by capital accumulation [Dornbusch, 1991, 1992]. One source
of this total factor productivity growth is an improved resource allocation
resulting from trade liberalisation. In the classical model, this static gain is
the main benefit from freer trade. In addition to this static gain, freer trade
provides domestic firms access to a wide variety of foreign inputs at a lower
cost which leads to an outward shift of the economy-wide production
EXPORTS AND ECONOMIC GROWTH IN BANGLADESH 91
function [Romer, 1989]. Freer trade exposes domestic firms to foreign

competition and forces them to rationalise their activities. It provides
domestic firms access to wider markets and enables them to gain technical
efficiency by exploiting both economies of scale and economies of scope.

Rodrik [1992] provides an excellent discussion on the limitations of
trade policy reform in the context of developing countries. He draws the
main reasons for trade reform in developing countries from the domain of
political economy. First, a macroeconomic crisis encourages politicians to
embrace trade policy reform. The political costs of undertaking trade reform
are perceived to be low during a national economic crisis. Second, foreign
creditors, particularly the IMF and World Bank, play an important role in
persuading cash-starved governments to undertake trade policy reform.
However, the success of trade reform depends on some key factors:
macroeconomic stability, the credibility of trade reform, and market
structure.
Many developing countries undertook trade policy reform in the 1980s,
which was also a decade of intense macroeconomic instability. Trade reform
improves economic welfare by reducing the distortions in relative prices
and by channelling resources to sectors that can use them most efficiently.
Macroeconomic instability interferes with the effectiveness of trade reform.
For example, during high and volatile inflation, economic agents may not
be able to disentangle relative price changes from changes in the general
price level. Hence, they may not be able to respond promptly to trade reform
which may slow economic activity and exacerbate unemployment at least in
the short term. A credible trade reform accompanied by a stable
macroeconomic environment provide unambiguous price signals to
economic agents and enable them to take advantage of emerging
opportunities from freer trade. However, the welfare consequences of a
trade liberalisation in an economy with imperfect competition is ambiguous
because freer trade increases welfare by improving the overall efficiency in
resource allocation and consumption but it also decreases welfare if
unexploited scale economies exist in import-competing industries.
Empirical Evaluation of Trade Policy Reform

Several studies in recent years have evaluated the impact of trade policy
reform on economic performance in developing countries. Lopez [1991]
provides evidence of the relationship between trade and macroeconomic
policy and economic growth using cross-sectional data for 35 developing
countries. It is observed that sustainable policies (as in Korea, Taiwan,
Singapore, Hong Kong, Thailand and Malaysia) promote growth through
relatively stable real exchange rates that are either fully aligned or
undervalued for prolonged periods of time. Export-promotion policies were
found to be more effective in generating growth than policies that remove

import restrictions. However, contrary to conventional wisdom, Lopez
found that capital accumulation is stimulated by export restrictions and is
not directly sensitive to economic instability.

Edwards [1992] uses alternative measures of trade orientation and trade
distortions to examine the role of trade policy in explaining cross-country
growth differentials. His study is based on a model where the country's
capacity to absorb new spillovers of world technology is negatively
dependent on the level of trade distortions. In other words, countries that
liberalise trade tend to accumulate knowledge at higher rates and grow
faster. In his basic empirical model, Edwards expresses the average growth
rate of per capita real GDP as a function of the investment-GDP ratio, the
gap between the world's and country's stock of knowledge and an index of
trade intervention or openness of the economy. The main results are
obtained from cross-sectional data for 30 developing countries. The results
suggest a strong and robust relationship between trade orientation and
economic growth. That is, countries with more open and less distorted trade
policies have experienced higher growth rates than those with more
distorted trade policies. This finding is robust to the estimation technique
and the use of alternative indicators of trade orientation.
Clarke and Kirkpatrick [1992] evaluate the effect of trade policy reform
on economic performance in developing countries using a multivariate
econometric model. The performance indicators are: growth of GDP,
growth of merchandise exports, the real exchange rate, growth of labour
productivity, balance of trade, growth of merchandise imports, and growth
of manufacturing value added. Pooling data for 80 low- and middle-income
countries for eight years (1981-88), they estimated the impact of trade
policy reform on each of these performance indicators. This study suggests
that lagged export growth leads to GDP growth and vice versa. With regard
to the role of trade policy, they make the following remark: 'The overall
conclusion of this study must be that there is no empirical evidence to
suggest that economic performance benefits from trade reform strategies'
[Clarke and Kirkpatrick, 1992: 69].
This result was attributed to some limitations of their methodology such
as omission of country-specific institutional characteristics and relative
levels of development. The former aspect is rightly emphasised in a recent
book on East Asian Newly Industrialising Economies [Chowdhury and
Islam, 1993: Ch.5]. Reviewing the debate on trade liberalisation and
growth, they draw explanations for the spectacular success of trade policy
reform inNIEs from the domain of political economy. The success of trade
policy reform crucially depends on the ability and willingness of economic
agents to take advantage of new opportunities created by the reform.
Governments in East Asia played a vital role in creating an institutional

framework conducive to export-oriented growth. As Chowdhury and Islam
[1993: 86] state:
[Governments in East Asia have in general been able to withstand the

contending pressures of distributional coalitions in order to implement
coherent economic policies that led to trade dependence. Once
changes in domestic fortunes became closely linked to changes in
world market conditions, a virtuous circle set in leading to a process
of simultaneous interaction between exports and rapid economic
growth.
An alternative to conventional econometric modelling is applied general
equilibrium analysis which allows interactions between sectors and includes
more general specifications of the behaviour of producers and consumers.
Evaluating the literature on applied general equilibrium analysis of trade
liberalisation, Lai and Rajapatiram [1987] point out that under a general
equilibrium model with constant returns to scale, net static gains from trade
liberalisation are small. However, once imperfect competition and scale
economies are taken into account, a multi-lateral reduction of all tariffs
leads to a welfare gain of more than five per cent of GDP as was seen in a
Canadian context [Harris, 1983]. Gunasekera and Tyers [1991] use an
applied general equilibrium model for South Korea under the assumptions
of imperfect competition and scale economies. Their simulation results
indicate substantial gains from trade liberalisation.
Cross-Country Studies on Exports and Growth

Cross-country empirical studies use conventional econometric techniques to
estimate the potential impact of exports on growth. In general, the early
literature supports the hypothesis of a positive correlation between exports
and economic growth. Michaely [1977] estimated the Spearman correlation
coefficient between the growth rate of export share of GDP and the growth
rate of GDP using a sample of 41 less developed countries (LDCs) for the
period 1950-73. He found a statistically significant positive correlation
between the two variables. However,
[T]he positive association of the economy's growth rate with the
growth of the export share appears to be particularly strong among the
more developed countries, and not to exist at all among the least
developed . . . . This seems to indicate that growth is affected by export
performance only once countries achieve some minimum level of
development [Michaely, 1977: 52].
Helleiner's [1986] study of low-income countries for the period 1960-80
provides further support for Michaely's finding for least developed

countries. However, the sample used in Helleiner's study was over-
represented by inward-oriented sub-Saharan countries. Thus, it was not
surprising to find no significant relationship between export growth and

economic growth.
Since a correlation coefficient does not provide an estimate of the partial
effect of exports on GDP, a more sophisticated econometric analysis under
a neoclassical production function framework was pursued by many
authors. The essence of this approach was that exports raised total factor
productivity through their favourable effect on the efficiency of resource
allocation, economies of scale, capacity utilisation and technological
change. In his 1982 cross-sectional study, Feder employed an intuitively
appealing model of GDP growth. In this model, export growth can affect
GDP growth if factor productivity in the export sector differs from that of
the non-export sector, and/or the export sector generates production
externalities. The results support the hypothesis that export growth leads to
GDP growth.5
Lai and Rajapatiram [1987] also provide estimates of a GDP growth
model using data from the 1986 World Development Report. The empirical
results for a sample of 18 low-income countries indicate that the growth of
exports share of GDP over the period 1965-73 significantly increases
economic growth over the period 1973-84.
Time Series Studies on Exports and Growth

Most of the studies mentioned above rely on cross-country data. Since
institutional characteristics and the quality of inputs vary widely across
countries, no firm conclusion can be drawn from studies which do not allow
the structure of the growth model to vary across countries. A country-
specific study based on time series data is not subject to this shortcoming.
This view is supported by Edwards [1993] in a comprehensive review of the
modern empirical literature on trade-orientation and growth. With regard to
cross-country empirical analysis, Edwards makes the following remark:
'Applied economists often ask too much of their data sets, and try to extract
information that simply is not there. In that sense, cross-country aggregate
data sets have little information regarding the relationship between trade
policy and growth' [1993: 1390]. The country-specific analyses have been
useful not only in enhancing academic literature about how different trade
reform policies have affected growth in developing countries but also in
influencing policy circles. However, most of these country-specific studies
are based on a traditional neo-classical framework where, in long-run
equilibrium, the steady-state rate of growth is independent of trade policies.
As a modelling strategy, many applied researchers have invoked the non-
steady state assumptions, such as the externality effect of exports and

productivity differential between the export and non-export sectors, in a
traditional growth model [e.g., Feder, 1982]. Edwards argues that the new
vintage of endogenous growth models provides a more promising
framework to establish a long-run equilibrium relationship between trade

policies and economic growth.
In the context of Bangladesh, the evaluation of the effect of exports on
economic growth is an under-researched area. Our literature search failed to
identify any study that uses a theoretically sound model to examine the
impact of exports on growth in Bangladesh. Roy [1991] and Rahman [1993]
provide some evidence of the impact of exports on economic growth. Roy
investigates Bangladesh's export performance and provides some
preliminary evidence of the relationship between exports and GNP. Using
annual data for 1975-88, Roy observes a large positive rank correlation
coefficient between GNP and the share of exports in GNP. In addition, he
found a positive correlation between the export and non-export sectors
output. The correlation result is indicative of a strong relationship; however,
no firm conclusion can be drawn from Roy's study about the partial impact
of exports on economic growth.
Rahman [1993] evaluated the effect of exports on economic growth
applying an ad hoc regression model of GNP on a sample of only 14 annual
observations, covering the period 1972-73 to 1985-86. Regressing the
current level of GNP on the last period's levels of exports and investment,
he observes that a unit (1 Taka) increase in the last period's exports leads to
at least an 11 unit increase in current GNP. This surprisingly large effect of
exports on GNP seems to arise from the misspecification of the model, the
non-stationarity of the data and the small size of the sample. The model is
misspecified because it excludes an important input, labour, and expresses
the level of final output as a function of investment, rather than the stock of
capital (K). The first difference of final output (AGNP) is dependent on
investment, that is, the first difference of capital stock (AK). Furthermore,
both GNP and exports in Bangladesh contain strong trend components.
Hence, a regression in the levels of the variables produces spurious results
and the conventional t and F tests are biased towards the rejection of the null
hypothesis of no relationship. Rahman also provides evidence for Granger-
causality between manufacturing GDP and manufacturing export based on
annual data for the period 1972-73 to 1990-91. The results suggest that
manufacturing exports cause an expansion of manufacturing GDP. This test
is a heroic attempt because as a rule of thumb, the literature on time series
econometrics advocates the use of a large sample (at least 40 observations)
to conduct the causality test. Although the empirical literature for export-led
growth is limited in the context of Bangladesh, a large number of studies
have been undertaken by researchers for other countries after the mid-
1970s.
Jung and Marshall [1985] conducted the Granger causality test using
data on 37 developing countries. They found support for the export-led

growth hypothesis for four countries: Indonesia, Egypt, Costa Rica, and
Ecuador. Surprisingly, they found no evidence for the export-led growth
hypothesis for countries that are well known for export promotion policies
such as South Korea, Taiwan and Brazil. Darratt [1986] also observes that
exports did not Granger-cause economic growth for any of the four newly
industrialised economies of Asia (Hong Kong, Korea, Singapore and
Taiwan) over the period 1960-82. Further evidence against the export-led
growth hypothesis comes from a recent Canadian study by Henriques and
Sadorsky [1996]. Using a VAR model, they found that export growth did
not Granger-cause GDP growth in Canada over the period 1870-1991.
Applying a vector auto-regressive model to Taiwan, USA and Japan,
Ghartey [1993] observes that export growth Granger-causes economic
growth in Taiwan, economic growth Granger-causes export growth in the
USA, and a feedback casual relationship exists in the case of Japan. The
time series literature casts some doubt on the effectiveness of an export-led
growth strategy.
However, the results from the atheoretical Granger causality test cannot
be used to reject the claim that exports lead economic growth. The Granger
causality test is a test of precedence which examines the precedence of one
variable over another. A test for precedence does not necessarily imply a
test for economic causality. Learner's [1985] remark is worth mentioning in
this context: 'We can all think of contexts in which precedence is suggestive
of causation and also contexts in which it is n o t . . . . It is altogether clear that
precedence is not sufficient for causality. Weather forecasts regularly
precede the weather, but few of us take this as evidence that the forecasts
"cause" the weather' [1985: 259, 283]. Thus further research using
alternative analytical tools might contribute to the ongoing debate on
export-oriented growth policy in LDCs like Bangladesh. Considering the
limitations of the Granger-causality test and the small size of our sample,
this article employed a structural econometric model as the principal
method of analysis. The Granger-causality test is used as a supplementary
tool to verify the key finding from our structural model.
III. STYLISED FACTS

This section describes the stylised facts of export performance and
economic growth in Bangladesh over the 1961-92 period. The whole period
is divided into three identifiable policy regimes: pre-liberation regime
(1961-71), post-liberation regime I (1972-82) and post-liberation regime II

(1983-92).
The main characteristics of the pre-liberation regime were a pegged
foreign exchange rate, import-substituting industrialisation and
specialisation in a few primary products. The policies of a pegged exchange

rate and import substitution were maintained in the post-liberation regime I.
The most distinguishing policy of this regime was the nationalisation of
major industries such as jute, cotton, textiles, sugar mills, banks and
insurance companies. Until 1975, the government pursued a public
ownership strategy to attain a socialist economy. However, this goal was
abandoned in late 1975 in favour of a mixed economy. Finally, in the post-
liberation regime II, the government pursued the policies of
denationalisation of the banking and industrial sectors, deregulation of the
capital market, structural reform of the tax system and trade liberalisation
(under the sponsorship of the World Bank). This regime witnessed the
replacement of import-substituting industrialisation (ISI) by a policy of
export-oriented industrialisation (EOI) and the introduction of a managed
flexible exchange rate policy. As trade liberalisation allows the export
sector to grow along the line of comparative advantages, one may expect a
more pronounced contribution of exports to economic growth in a regime of
freer trade.
Table 1 depicts the statistical properties of the data for each regime.
Variable definitions and data sources are given in the Appendix (see Table
Al). Real per capita income and the investment-GDP ratio were higher in
the post-liberation period than in the pre-liberation period. The average
annual growth rate of GDP increased from 4.2 per cent in 1961-71 to only
4.4 per cent in 1972-92 despite a large increase in the growth rate of exports
(2.7 to 12.9 per cent) over this period. It seems to indicate a weak
relationship between exports and economic growth.
Furthermore, the average annual export growth rate was 15.2 per cent in
the post-liberation regime I, and 10.1 per cent in the post-liberation regime
II, which does not seem to be consistent with the notion that an outward
orientation of the economy improves export performance. In general, the
descriptive statistics suggest that despite structural reform and fluctuations
in export growth, the GDP growth rate remained just above four per cent
over the period 1961-92.
Further evidence on the relationship between exports and economic
growth is depicted in Table 2. Since exports are a component of GDP, one
would normally expect a high correlation coefficient between GDP and
exports. In order to determine a systematic economic relationship rather
than an accounting relationship, we estimate alternative measures of the
correlation coefficient. The second column of Table 2 presents correlation
TABLE 1
DESCRIPTIVE STATISTICS OF THE VARIABLES8
Variables Pre-Iiberation Post-liberation Post-liberation Post-liberation

regime: regime: regime I: regime II:
1961-62 to 1972-73 to 1972-73 to 1982-83 to

1971-72 1991-92 1981-82 1991-92
Mean real per capita 3014.1 4086.2 3802.2 4433.3

GDP (in Taka) (0.080) (0.091) (0.041) (0.053)
Mean export-GDP ratio 0.094 0.094 0.076 0.117

(0.226) (0.336) (0.267) (0.243)
Mean investment-GDP 0.098 0.116 0.103 0.131

ratio (0.244) (0.273) (0.333) (0.154)
Average annual growth 0.042 0.044 0.047 0.041

rate of GDP (1.067) (0.873) (1.096) (0.323)
Average annual growth 0.023 0.022 0.023 0.020

rate of Population (0.231) (0.127) (0.109) (0.079)
Average annual growth 0.027b 0.129 0.152 0.101

rate of export (2.750) (1.620) (1.609) (1.637)
Average annual weighted 0.03 l b 0.013 0.013 0.014

growth rate of export (2.60) (1.297) (1.296) (1.367)
Mean share of manufacturing — 0.399 0.376 0.407

goods in exports (0.161) (0.195) (0.109)
Mean share of private — 0.558 0.573 0.540

investment in gross (0.191) (0.241) (0.093)
domestic investment
Notes:
a
Figures in parentheses are the coefficients of variation.
b
These figures are calculated by excluding two years of political instability and war (1970-71
and 1971-72) from the sample.
coefficients for the full sample. The correlation between exports and non-
export output is very high (0.83) which may be due to a strong trend
component in both variables or Feder's [1982] hypothesis that the export
sector generates positive production externality. The correlation coefficient
is 0.43 between GDP and the export share of GDP, and 0.33 between growth
rate of GDP and growth rate of exports. Thus, the correlation results for the
full sample seem to provide tentative support for the export-led growth
hypothesis. However, this support is weakened by the results for individual
policy regimes. In particular, the correlation coefficients for the post-
TABLE 2
CORRELATION RESULTS FOR EXPORTS AND GDP
Variables Full Pre-liberation Post-liberation Post-liberation

sample: period: regime I: regime II:
1961-62 to 1961-62 to 1972-73 to 1982-83 to

1991-92 1971-72 1981-82 1991-92
Export and non-export 0.828 0.766 0.779 0.855

(7.95)
GDP and share of export 0.428 0.868 0.732 0.859

in GDP (2.55)
Growth rate of GDP and 0.331 0.410 0.306 0.417

growth rate of export (1.88)
Growth rate of GDP and 0.313 0.418 0.348 0.455

weighted growth rate
of export
Notes: Figures in parentheses show computed t-statistics. The critical t-value at the per cent level
of significance is 2.04. t-statistics for the sub-periods are not reported due to the small size
of the sample.
liberation regime II, when an EOI policy was followed, are quite similar to
those of the pre-liberation regime when an ISI policy was followed. This
finding seems to suggest that the nature of the policy regime may not be a
crucial factor in determining the effects of exports on economic growth.
However, one should not be tempted to reject the export-led growth
hypothesis as the correlation analysis does not take into account the effects
of other factors on economic growth.
IV. ANALYTICAL FRAMEWORK

This section presents the analytical framework of the study. For a small
open economy like Bangladesh it seems realistic to assume that it is
domestic supply rather than foreign demand which imposes a binding
constraint on the growth of the export sector.6 Hence, in modelling the effect
of exports on economic growth we focus on the supply side of the economy.
There are two channels through which exports affect economic growth.
These are the externality effect and the productivity differential effect. The
export sector operates in a highly competitive environment and to succeed
in global competition it invests in advanced production techniques,
workers' training and infrastructure. The non-export sector receives indirect
benefits from the export sector in two ways: the demonstration effect and
the public good characteristics of some export activities. The non-export
sector can replicate the management practices, improved production
techniques and marketing strategies of the export sector and it may get
ready access to public infrastructure (transport and communication
facilities) developed for the export sector. These indirect non-priced
benefits to the non-export sector are referred to as the positive production
externalities of the export sector. An expansion of a sector with positive

production externalities increases GDP, ceteris paribus.
Factor productivity in the export sector may differ from that in the non-
export sector for several reasons. First, export industries use improved
technology and skilled workers. Second, factors of production are not
perfectly mobile between the two sectors due to institutional constraints as
well as differential skill requirements across sectors. In the absence of
perfect mobility of factors, the value of the marginal product of each input
in the export sector is likely to be higher than that of the non-export sector.
The productivity gap would be larger if the skill composition of the work
force differed between sectors. Thus, export expansion may raise the total
factor productivity in the economy through its favourable effect on the
efficiency of resource allocation.
It is assumed that the production function differs across sectors but
remains constant within a sector over time. The allocation of resources
between the export and non-export sectors is non-optimal due to the
presence of non-priced externalities and imperfect mobility of factors of
production.7 Adopting Feder's [1982] theoretical framework, the supply
side of the economy can be expressed as:
Y=N+X (1)
N = F ( KN, L N , X) (2)
X = H(KX,LX) (3)
Equation (1) states that the gross domestic product (Y) is the sum of the
non-export sector output (N) and the export sector output (X). % and K x
are the sector-specific capital stock, and L N and L x are sector-specific
labour employment. Taking the total differential of equations (2) and (3), we
get:
dN = F K dK N + F L dL N + F x dX (4)
dX = H K dK x + H L dL x (5)
where, F ; and Hj (i =K, L) are the marginal productivities of input i in the

non-export and export sectors respectively; F x represents the marginal

externality effect of X on N. Invoking the assumption that the productivity
of each input in the export sector differs from that of the non-export sector
by a factor 8, i.e., H, = (1 + 8) F; and substituting equations (4) and (5) into
the identity dYs dN + dX, we obtain:
dY = F K dK N + F L dL N + F x dX + (1+ 8)F K dK x + (l+8)F L dL x (6)
or
dY = FL.L (f) + FK M-) + M - + Fx

)(??)
where, L = L X +L N , I = dK x +dK N , and ((8/1+8) + F x ) is the sum of the
productivity differential and the production externality effects. The term,
X/Y(dX/X) can be interpreted as the weighted export growth, that is, the
export growth rate weighted by the share of exports in GDP. The model
states that the annual growth rate of GDP is linearly dependent on the
annual growth rate of the labour force, the annual investment-GDP ratio,
and the weighted growth rate of exports. As noted earlier, F L and F K
represent the marginal productivity of labour and capital respectively in the
non-export sector of the economy. The coefficient of the weighted export
growth rate can be interpreted as the social marginal productivity gap
between the export and the non-export sector relative to the private maiginal
productivity in the export sector.8 Marginal productivity of a factor for the
whole economy can be found by rewriting equation (6) as:
dY = FKdK + F L dL + 8 F K dK x + 8 F L dL x + F x dX (8)
Economy-wide marginal productivity (MP) of a factor depends on its

productivity in the non-export sector, the extent of the productivity
differential and the allocation of the factor between the two sectors. We
derive the following expressions for MPs from the above equation?
(9)
(10)
where I x /I is the share of export sector investment in total investment and

dL x /dL is the proportion of additional employment created in the export
sector. The marginal productivity of an input for the whole economy would
be the same as that of the non-export sector if there was no productivity

differential (8 = 0) between the export and the non-export sector or if
additional inputs were employed only in the non-export sector In general,
the marginal productivity of capital for the whole economy will be
(8(Ix/I))l00 per cent higher than the marginal productivity of capital in the
non-export sector.
Empirical Issues
A preliminary investigation of the data suggests that in abnormal years
(periods of war, natural calamity and political instability), GDP growth rates
were negative or close to zero but the investment-GDP ratios were large. In
abnormal years, a large part of public investment, mainly financed by
foreign donors, was used to rebuild the economic infrastructure and
production plants destroyed by natural and man-made calamities, rather
than to augment the pre-disaster stock of capital. In order to address this
empirical issue, equation (7) is augmented by including an interaction
variable D • I/Y, which is the product of the dummy variable for the
abnormal years (D) and the investment-GDP ratio.
Furthermore, equation (7) implicitly assumes that the state of
technology, the skill composition of the labour force and the characteristics
of the socio-economic institutions remained unchanged over the sample
period, 1961-92. Strictly speaking, none of the above factors was constant
during this period. In Bangladesh, the last three decades have witnessed the
gradual adoption of the High Yielding Varieties (HYV) technology in
agriculture; the emergence of the garment industry which uses industry-
specific skills; a significant increase in the adult literacy rate and an
expansion of the underground economy through the institutionalisation of
corruption. Reliable time series data on each of the above factors are not
available for the full sample period.10 As a second-best option, the empirical
model is modified by including a trend variable (T), which is expected to
partially capture the composite effects of these factors. Thus, we adopt the
following empirical specification:
Y = Po + Pii + P2(-7-) + P 3 ^ .x) + W.y + frT+e (11)
where e represents a random error which is normally distributed with mean

zero and variance a 2 ; the dot (') indicates the annual growth rate. Expected
signs of the coefficients are: Pj > 0, P2 > 0, P3 > 0, P 4 < 0, The sign of P 5
is a priori indeterminate.
V. EMPIRICAL RESULTS
The OLS Results
Initially, we apply the OLS estimator to estimate both the basic model (7)
and the augmented equation (11). The OLS results are presented in Table 3.
The first row of the table shows that the basic model performs poorly. All
but the weighted export growth rate have statistically insignificant effects
on the growth rate of GDP and the investment-GDP ratio has a negative
coefficient. The modification of our initial specification by including an
interaction dummy and a trend variable increases the R2 from 0.16 to 0.36.
A partial F-test also justifies the inclusion of these additional regressors in
the initial empirical specification. Both population growth and weighted
export growth have the expected significant positive effects on GDP
growth. The coefficient of the interaction dummy is negative and highly
significant and its absolute value is larger than that of the investment-GDP
ratio. This means that the marginal productivity of capital in the non-export
sector is positive in a normal year and negative in an abnormal yean
However, the former is not statistically different from zero.
The OLS result on the coefficient of the investment-GDP ratio is
puzzling. This coefficient measures the marginal productivity of capital and
is found to be insignificantly different from zero, which is unexpected in a
capital-scarce economy like Bangladesh." Hence, we conducted diagnostic
tests on the OLS residuals to verify whether they satisfy the assumptions of
the classical linear regression model. The residual diagnostics indicate that
large and small residuals occur in clusters. This finding seems to imply that
the variance of the current error depends on the size of the last period's
error. In other words, the conditional error variance, Var[et/et_{\ follows an
auto-regressive process. This observation induces us to apply a formal test
for the Autoregressive Conditional Heteroscedastic (ARCH) process.12 A
Lagrange Multiplier (LM) test for the first-order ARCH process is
conducted. The null hypothesis is that the error variance does not follow an
autoregressive process, that is, the volatility of GDP growth in the current
period is independent of the last period's volatility of GDP. The LM statistic
follows a%2 distribution with 1 degree of freedom. The last column of Table
3 shows that for both OLS equations, the computed y} is greater than the
critical x 2 = 3.84 at the 5 per cent level of significance. Hence, the null
hypothesis of no ARCH effect is rejected.
The ARCH Results

The LM test results suggest that the classical linear regression model is
incompatible with the data and the OLS is no longer the most efficient
estimator. Hence, we adopt the estimation technique developed by Engle
TABLE 3
THE OLS RESULTS: 1962-92
(DEPENDENT VARIABLE: ANNUAL GROWTH RATE OF GDP)
Equation Equation (7): no interaction Equation (11): with interaction

dummy, no trend variable dummy and a trend variable
Constant -O.025 -0.059

(-0.38) (-0.97)
L 2.721 4.148**
(1.27) (2.02)
I/Y -0.010 0.229

(-0.04) (0.89)
(X/Y)X 1.037** 1.521**

(2.17) (3.22)
D.I/Y - -0.422*
(3.22)
T - -O.001*
(-1.47)
R2 (F-value) 0.16 0.36

(1.67) (2.79)
DW 2.39 2.51
LM 8.68 10.96
Notes:
Numbers in parentheses are t-statistics.
DW is the test statistic for first-order autocorrelation in the error term.
LM is the test statistic for the first-order ARCH process in the error term.
** The coefficient is statistically significant at the five per cent level.
* The coefficient is statistically significant at the ten per cent level.
[1982] which involves the maximum likelihood estimation (MLE) of the

model with an ARCH process. The results for the modified GDP growth
equation (11) and the corresponding error variance equation are presented
below (t-statistics are in parentheses).
The Growth Model:
Y = -0.045 + 0.351(//T) + 2.589L + 0.957(X/Y. X) - 0.301(Z). I/Y) - 0.0017/ (12)

(-0.99) (1.92) (1.69) (2.88) (-2.83) . (-1.75)
Log-likelihood function= 66.51, DW= 2.52, Q-statistic= 9.37 at lag 8.

Error Variance Equation:
aj = 0.0004 + 0.598e?_! (13)

(2.46) (1.69)
where, aj is the variance conditional on past error, that is, a} =

Var[et Iet_^\ and numbers in parentheses are t-statistics.14 The estimated
variance equation satisfies the stationarity condition since the coefficient of
e^_l is less than unity. Both the Durbin-Watson (DW) and Ljung-Box-Pierce
(Q-statistic) statistics suggest the absence of an autocorrelation problem.15
The ARCH model yields more efficient parameter estimates than the OLS
estimates. For all explanatory variables, we obtain theoretically expected
coefficients with smaller standard errors.
The marginal productivity of capital in the non-export sector is 0.35 in a
normal year and 0.05 (= 0.35-0.30) in an abnormal yean The population
growth rate variable obtains a coefficient of 2.59 with a t-statistic of 1.69.16
With regard to the impact of exports, the result suggests that if weighted
exports grow by one per cent, GDP increases by 0.96 per cent. Put
differently, the sum of the productivity differential and externality effect is
0.96. Our model cannot isolate the productivity differential effect (5/1+8)
from the externality effect (F x ). For a plausible range of F x values, we
calculate the corresponding values of factor productivites for the export
sector as well as for the whole economy. Table 4 presents these estimates.
For example, when the marginal externality effect is 0.2, the marginal
productivity of capital is 1.44 in the export sector and 0.90 in the whole
economy.
The total contribution of exports to economic growth can be estimated
as the product of weighted export growth and its coefficient. Figure 1 shows
that, for most years, the contribution of exports to economic growth was
positive. In particular, we observe that the contribution of exports to the
growth rate of GDP was more pronounced during 1982-90 when the
government pursued policies of trade liberalisation and deregulation of the
economy. Although the process of economic reform continued in the early
1990s, the contribution of exports to the growth rate of GDP was close to
zero in 1990-91 and 1991-92 because of intense political turmoil in these
years.
The coefficient of the trend variable is negative and statistically different
from zero, which seems to suggest that positive effects of technological
improvement and human capital accumulation on economic growth were
outweighed by the negative effects of corruption, political turmoil and the
adoption of inappropriate technology. The persistent dependence of
Bangladesh on concessional foreign loans over the post-liberation period
TABLE 4
PREDICTED MARGINAL PRODUCTIVITY OF CAPITAL
FOR POSSIBLE VALUES OF THE EXTERNALITY EFFECT
Possible Values Productivity Marginal Marginal Marginal

for Marginal gap between the productivity in productivity in productivity in

Externality Export and the Non-Export the Export the Whole
Effects Non-Export Sector Sector Sector Economy
(Fx) (5)i (FK)2 (HK)3 (MPK)4
0.1 5.993 0.351 2.455 1.403

0.2 3.115 0.351 1.444 0.898
0.3 1.916 0.351 1.023 0.687
0.4 1.257 0.351 0.792 0.572
0.5 0.842 0.351 0.646 0.499
0.6 0.555 0.351 0.546 0.448
0.7 0.346 0.351 0.472 0.412
0.8 0.186 0.351 0.416 0.384
0.9 0.060 0.351 0.372 0.362
1 -0.041 0.351 0.337 0.344
Notes:
1. Computed from the relation, ($3 = 5/1+5 + F x where, {J3 is the coefficient of weighted export
growth.
2. F K is the coefficient of the investment-GDP ratio.
3. H K = ( 1 + 5 ) F K
4. MP K = F K (1 + 5(IX/T)) where, I x /I = 0.094. It is assumed that the investment share of the
export sector is same as the output share of the export sector
has led to adoption of inappropriate technology and investment projects

with low returns. By mid-1986, the outstanding medium- and long-term
foreign debt of Bangladesh increased to US$6.14 billion which was eight
times the value of merchandise exports in 1985-86. The terms of foreign
indebtedness were very favourable, with an annual average interest rate of
only 1.5 per cent, an average repayment period of 39 years and a grace
period of nine years [Khan and Hossain, 1989: 25\. The availability of
foreign loans on these generous terms induced the government to undertake
projects which were incompatible with the factor price structure of
Bangladesh. Furthermore, the diffusion of publicly subsidised HYV
technology in agriculture was successful in increasing land productivity but
not labour productivity over the period 1967-91 [Islam and Taslim, 1996].
This type of development strategy constrained the scope of alternative
technological innovations or adoptions in the agricultural sector In the non-
agricultural sector, structural reform took place in a distorted way. State-
owned enterprises were sold below their market value to private business.
Nationalised financial institutions were encouraged to make loans on
concessional terms to individuals with high-level political connections but
FIGURE 1
CONTRIBUTION OF EXPORT GROWTH TO GDP GROWTH
0.20 T
s
O
OH
Q
O
o
d
o
w
o Post-liberation
regime II
-0.15
YEAR
no business experience. Despite deregulation of the economy, import-

competing industries have not yet been able to achieve any significant
improvement in technical efficiency. Thus, the negative coefficient of the
trend variable is not inconsistent with these stylised facts in Bangladesh.
We now compare our finding on exports and growth with that of other
studies. Table 5 presents the coefficients of export growth found in some
representative studies. The first four studies use simple export growth
(AX/X) as an independent variable in the GDP growth equation, while the
rest of the studies use weighted export growth ((X/Y).(AX/X)). The
coefficient of the simple export growth rate (coefficients with superscript
'a') represents the partial elasticity of GDP with respect to export, and it lies
between 0.10 and 0.57. On the other hand, the coefficient of the weighted
export growth rate (coefficients with superscript 'b') lies between 0.42 and
1.97. Our ARCH model provides a coefficient of 0.957, which seems to be
a plausible estimate as it lies within the range of previous estimates.
TABLE 5
ESTIMATED EFFECTS OF EXPORTS ON ECONOMIC GROWTH
Study Nature of the Study Coefficient of Export

Growth in Models of
GDP Growth
Kavoussi [1984: A cross-sectional analysis of 73 0.105a

247] developing countries, 1960-78
Ram [1985: 419] A cross-sectional study of 73 LDCs, 0.148a

1970-77
Balassa [1985: 33] A cross-sectional study of 43 developing 0.161 a

countries, 1973-78
Tyler [1981: 128] A cross-sectional study of 55 middle-income O.57Oa

LDCs, 1960-77
Feder [1982:128] A cross-sectional study of 31 LDCs, 1964-73 0.422b
Ram [1987: 64] A study of 88 developing countries, 1960-82 1.552b
Greenaway and A time series study on Pakistan, 1971-85 1.971b

Sapsford [1994:
161]
Present study A time series study on Bangladesh, 1962-92 0.957D
Notes: a The coefficient of the growth rate of exports, X
° The coefficient of the weighted growth rate of export, X/Y. X
Specification Tests
The Hausman specification test was conducted to examine whether or not
the growth model is subject to simultaneity bias. The null hypothesis of the
exogeneity of exports is tested by implementing the Hausman test in two
steps. The first step involves a regression of the export variable on
instrumental variables" (which determine the demand for exports), and the
remaining exogenous variables of the GDP growth model. In the second
step, the GDP growth equation (11) is augmented by adding estimated
residuals from the first step as a regressor. This augmented equation is
estimated and a t-test is conducted for the coefficient of the residual series.
The relevant t-statistic (1.28) suggests that the null hypothesis of the
exogeneity of exports cannot be rejected at the five per cent level of
significance. In other words, the Hausman test confirms that GDP growth
has no contemporaneous influence on exports. Thus, our empirical finding

on the impact of exports on economic growth is not subject to simultaneity
bias.
Although the Hausman test confirms that GDP growth has no

contemporaneous effect on exports, it says nothing about the potential non-
contemporaneous impact of GDP growth on exports. In order to examine
this latter possibility, the Granger-causality test is employed. To test the
hypothesis that export growth (x) leads to (or Granger-causes) economic
growth (y) we estimate the following equation:
m N
+ + a x
yt = «0 X ^t-i 2 i t-i + zt
and to test the hypothesis that economic growth Granger-causes export

growth we estimate
x, = Xn
where, e^ and r| t are random error terms. We use the likelihood ratio test that
compares the values of the maximised likelihood functions under the null
(Ho) and alternative (Hj) hypotheses. The null hypothesis that export
growth does not Granger-cause GDP growth is rejected at the 2.5 per cent
level of significance.18 This finding complements our results from the
structural model. We do not find any statistically significant evidence in
support of reverse causality which indicates that GDP growth does not lead
to export growth. This result strengthens our finding from the Hausman test.
VI. SUMMARY AND CONCLUSION

A common problem facing policy-makers in LDCs like Bangladesh is how
to efficiently allocate scarce resources to increase the productive capacity of
the economy. Under our analytical framework, the essence of the problem
is how to determine an optimal allocation of resources between the export
and non-export sector of the economy. In order to address this important
policy issue, this study put forward two basic questions: (1) Is the factor
productivity in the export sector greater than that of the non-export sector?
(2) Does the export sector generate positive production externalities for the
non-export sector?
If the sum of the productivity differential and externality effects is
positive, then any marginal reallocation of resources from the non-export
sector to the export sector will increase economic growth. This is obviously
an empirical issue and this paper is an attempt to investigate this issue. The
unique features of this study, in the context of Bangladesh, are the use of a
well-structured theoretical framework, application of the ARCH model and

utilisation of a relatively large sample (1961-92) for analysis. The major
findings of this article are:
• The weighted growth rate of exports has a positive effect on economic

growth; that is, the sum of the productivity differential and externality
effects of the export sector is positive. This finding is not sensitive to the
specification of the model and the estimation technique. If weighted
exports grow by one per cent, GDP increases by 0.957 per cent. The
regression analysis also indicates that the contribution of exports to
economic growth was more pronounced during 1982-90, when the
government pursued policies for the liberalisation of the economy. The
error variance equation associated with the ARCH model suggests that
the volatility in GDP growth is finite. This means that any volatility in
GDP growth, originating from natural disaster or random human
behaviour, diminishes over time.
• The marginal productivity of capital in the non-export sector is higher in

a normal year (0.35) than in an abnormal year (0.05). Under the
assumption that the export sector generates a marginal externality effect
of 0.2, we find that marginal productivity of capital is 1.44 in the export
sector and 0.90 in the whole economy.
• The population growth rate (a proxy for labour force growth) has a
theoretically expected positive effect on economic growth.
Overall, our study seems to support the export-led growth hypothesis.

This study has obvious implications for the allocation of resources between
the export and non-export sectors. As the sum of the productivity
differential and the externality effects is close to unity, any marginal
reallocation of resources from the non-export to the export sector will
enhance the productive capacity of the economy. The recent change in the
structure of exports towards labour intensive non-traditional products (for
example, garments and fish) also indicates that export expansion will
positively affect employment. Further research should be directed to
quantify the impacts of export expansion on employment and income
distribution. Analysis needs to be conducted at the disaggregated level to
identify the effects of the composition of exports on GDP, employment and
income distribution. If the data become available, other important
determinants of economic growth in Bangladesh such as skills of the labour

force and the extent of corruption should be included in the growth model.
final version received February 1998
NOTES
1. This approach is formally developed by Feder [1982].

2. Strictly speaking, the predicted effect on GDP is consistent with the theory of comparative
advantage if the non-export sector includes importables and excludes non-tradables. In our
model specification the non-export sector includes both importables and non-tradables.
However, it does not create any methodological problem because we do not impose any a
priori restriction on the potential effect of export growth on GDP growth.
3. Consequently, the export sector changed significantly both in size and structure during the
1980s. The share of export in GDP increased to around 12 per cent in 1989-90 and the share
of primary export in total merchandise export decreased from 43 per cent in 1972-73 to 23
per cent in 1989-90. Newly industrialising countries in South-East Asia were losing the
competitive edge in labour-intensive products due to rapidly growing labour costs, which
partially contributed to the growth of labour-intensive exportables in Bangladesh such as the
garment industry.
4. To our knowledge there exists no published study which investigates the impact of export
growth on GDP growth in Bangladesh under a well-structured empirical framework.
5. Further studies by Balassa [1985], Ram [1987] and Greenaway and Sapsford [1994]
complement the major findings of Feder [1982].
6. We recognise the importance of export demand in determining the structure of exports.
Protectionist measures of foreign countries and business cycle fluctuations have obvious
effects on foreign demand for particular commodities such as clothing, footwear, leather
products, etc. However, an investigation of the export structure is beyond the scope of this
study.
7. There are reasonable assumptions in the context of Bangladesh. First, leading export-
oriented industries such as garments, leather and jute manufacturing use sophisticated
technology relative to that of leading non-export industries, such as food grains, housing and
non-traded services. Bangladesh can be viewed as a typical Lewis-Fei-Rains 'dual economy'
where most industries in the non-export sector use traditional technology while major
industries in the export sector use modern technology imported from abroad. Second, factors
of production are not perfectly mobile across sectors in Bangaldesh. Skill requirements in the
export sector differ from those in the non-export sector. More specifically, export-oriented
industries are largely based on skills which are acquired primarily through on-the-job
training rather than through general secondary or tertiary education. The non-export sector,
on the other hand, is primarily based on skills acquired either through intergenerational
transmission of skills (for example, commercial activities in the urban informal sector and
subsistence activities in the rural sector) or through the completion of general college or
university education. Thus, skills used in one sector may not be readily transferable to the
other sector. Furthermore, in a hierarchical society such as Bangladesh, individuals often
forego higher wages to enjoy the non-pecuniary benefits of working in white-collar
occupations, for example, higher social status. Individuals may prefer to work in the family
business with a subsistence reward instead of working in blue-collar occupations as wage
workers. These preferences simply reflect a strong positive relation between occupational
status and social status. Hence, one cannot expect perfect mobility of labour across sectors
in the presence of this cultural constraint.
8. To further clarify the meaning of the coefficient of weighted export growth we write:
1 + 8+ Fx
~ H:
where, SMPi = Hi + FxHi. The social marginal product of factor i (i = K, L) in the export
sector (SMP i ) takes into acocunt both the direct effect of factor i on GDP through its effect
on exports (Hi) and the indirect effect of factor i on GDP through its externality effect on the
non-export sector FxHi.
9. Dividing both sides of equation (8) by dK and setting dL = dX = dL x = 0, we find the

expression for MP K . A similar procedure is used to find MP L .
10. Based on various sources, we were able to construct a time series for the primary enrolment
ratio (a proxy for human capital accumulation) for the full sample range. This variable was
found to be statistically insignificant in explaining economic growth of Bangladesh and was
consequently omitted from our final econometric model.
11. Possible economic explanations for this result are the misallocation of resources in the public
sector and public investment on infrastructure. The contemporaneous effect of the latter kind
of investment on growth may not be significant.
12. Heteroscedasticity is often associated with the cross-sectional, rather than time series data.
However, analysing time series data on inflation, Engle [1982] observed that large and small
prediction errors occur in clusters, i.e. error variance follows an autoregressive process which
violates the assumption of homoscedasticity.
13. Initially we estimated both versions equations (7) and (11) of the growth model under the
ARCH framework. After investigating the results, we accept the modified GDP growth
equation (11) because a likelihood ratio test provides justification for including the
interaction dummy and the trend variables in the model.
14. Critical values of the t-statistics are 1.7 at the five per cent level and 1.32 at the ten per cent
level.
15. The Ljung-Box-Pierce Q-statistic follows a χ2 distribution with L degrees of freedom, where
L is the maximum order of autocorrelation (p) tested. In our case, L=8 and the null
hypothesis is: p1 = p2 = ... = p8 = 0. The computed value of the test statistic is 9.37, while
the critical value of χ2 at the 5 per cent significance level is 15.51. Thus, the null hypotheses
of no autocorrelation can not be rejected.
16. Recall from equation (7) that this coefficient is the ratio of marginal productivity of labour
to average productivity of labour. Using the sample mean of per capita GDP (TK 3671) as a
proxy for average productivity, we derive an annual marginal productivity of a labourer of
only TK 9508. Note that the labour force data for the whole sample period are not available
for Bangladesh. Hence, we are faced with two alternatives: one is to generate labour force
data from the available data pools using an arbitrary growth formula, and the other is to use
population growth rate as a proxy variable. The former yields a labour force growth series
with little fluctuation over time and use of this artifically-generated variable may not be
desirable in a regression equation. Therefore, this study uses the population growth rate as a
proxy for the labour force growth rate, following the tradition in the literature [Feder, 1982;
Balassa, 1985; Ram, 1987; Greenaway and Sapsford, 1994].
17. The instrumental varaiables employed here are the annual growth rate of world income and
the difference between foreign and domestic inflation rates. Data are collected from various
issues of the International Financial Statistics, IMF.
18. An empirical investigation of the lag-structure leads us to choose a lag order of 4 in all cases.
The likelihood ratio test statistic is: LR = 2[L(H1) - L(H0)]. The LR has an approximate χ2
distirbution with J degrees of freedom. In our case, J=4. Under the null hypothesis, export
growth does not Granger-cause GDP growth, we obtain LR = 2[64.30 - 59.72] = 9.16. For
the null hypothesis that GDP growth does not Granger-cause export growth, we obtain LR =
2[87.11 - 83.80] = 6.62. Note that right-tail critical values of χ2 distribution with 4 degrees
of freedom are 9.49 and 11.14 at five per cent and 2.5 per cent levels of significance.
REFERENCES
Alamgir, M. and L. Berlage, 1972, An Analysis of National Accounts of Bangladesh 1949/50 -

1968/69, Research Report Series No.7, Dhaka: Bangladesh Institute of Development
Economics.
Balassa, B., 1985, 'Exports, Policy Choices and Economic Growth in Developing Countries after
the 1973 Oil Shock', Journal of Development Economics, Vol.18, No.2, pp.23-35.
Bangladesh Bureau of Statistics, 1993, Twenty Years of National Accounting of Bangladesh,
Dhaka: Statistics Division, Ministry of Planning.
Chowdhury, A. and I. Islam, 1993, The Newly Industrialising Economies of East Asia, London:
Routledge.
Clarke, R. and C. Kirkpatrick, 1992, 'Trade Policy Reform and Economic performance in
developing countries: Assessing the Empirical Evidence', in R. Adhikari, C. Kirkpatrick and
J. Weiss (eds.), Industrial and Trade Policy Reform in Developing Countries, Manchester:
Manchaster University Press.
Darrat, A. F., 1986, 'Trade and Development: The Asian Experience', Cato Journal, Vol.6, No.2,
pp.695-700.
Dornbusch, R., 1991, 'Policies to Move from Stabilization to Growth', Proceedings of the World
Bank Annual Conference on Development Economics 1990, World Bank.
Dornbusch, R., 1992, 'The Case for Trade Liberalization in Developing Countries', Journal of
Economic Perspectives, Vol.6, No.1, pp.69-85.
Edwards, S., 1992, 'Trade Orientation, Distortions and Growth in Developing Countries',
Journal of Development Economics, Vol.39, No. 1, pp.31-57.
Edwards, S., 1993, 'Openness, trade liberalization and growth in developing countries', Journal
of Economic Literature, Vol.XXXI, pp.1358-93.
Engle, R., 1982, 'Autoregressive Conditional Heteroscedasticity with Estimate of the Variance of
United Kingdom Inflation', Econometrica, Vol.50, pp.987-1008.
Esfahani, H., 1991, 'Exports, Imports and Economic Growth in Semi-Industrialised Countries',
Journal of Development Economics, Vol.35, No.1, pp93-116.
Feder, G., 1982, 'On exports and economic growth', Journal of Development Economics, Vol.12,
No.1/2, pp.59-74.
Ghartey, E.E., 1993, 'Causal Relationship between Exports and Economic Growth: Some
Empirical Evidence in Taiwan, Japan and the US', Applied-Economics, Vol.25, No.9,
pp.1145-52.
Greenaway, D. and D. Sapsford, 1994, 'What Does Liberalisation Do for Exports and Growth?',
Weltwirtschaftliches Archiv, Band 130, pp.152-73.
Gunasekera, D. and R. Tyers, 1991, 'Imperfect Competition and Returns to Scale in a Newly
Industrialising Economy', Journal of Development Economics, Vol.34, pp.223-47.
Harris, R., 1983, Trade, Industrial Policy and Canadian Manufacturing, Toronto: Ontario
Economic Council.
Helleiner, G., 1986, 'Outward Orientation, Import Instability and African Economic Growth: an
Empirical Investigation', in S. Lall and F. Stewart (eds.), Theory and Reality in
Development, London: Macmillan.
Henriques, I. and P. Sadorsky, 1996, 'Export-Led Growth or Growth-Driven Exports? The
Canadian Case', Canadian Journal of Economics, Vol.XXIX, No.3, pp.540-55.
Islam , T. and M. Taslim, 1996, 'Demographic Pressure, Technological Innovation and Welfare:
The Case of the Agriculture of Bangladesh', Journal of Development Studies, Vol.32, No.5,
pp.734-70.
Jung, W. and P. Marshall, 1985, 'Exports, Growth and Causality in Developing Countries',
Journal of Development Economics, Vol.18, No.2, pp.l-12.
Kavoussi, R. M., 1984, 'Export Expansion and Economic Growth. Further Empirical Evidence',
Journal of Development Economics, Vol.14, No.1/2, pp.241-50.
Khan, A.R. and M. Hossain, 1989, The Strategy of Development in Bangladesh, London:
Macmillan.
Lal, D. and S. Rajapatirana, 1987, 'Foreign Trade Regions and Economic Growth in Developing
Countries', World Bank Research Observer, Vol.2, No.2, pp.189-217.
Leamer, E. E., 1985, Vector Autoregressions for Causal Inference? Carnegie Rochester Series on
Public Policy 22, Amsterdam: North Holland.
Lopez, R., 1991, 'How Trade and Macroeconomic Policies Affect Economic Growth and
Capital Accumulation in Developing Countries', Working Paper Series No.625, Country
Economics Department, Washington, DC: World Bank.
Michaely, M., 1977, 'Exports and Growth: An Empirical Investigation', Journal of Development
Economics, Vol.4, No.1, pp.49-53.
Rahman, M.A., 1993, Export and Economic Development of Bangladesh, Dhaka: Young
Economists' Association.
Ram, R., 1985, 'Exports and Economic Growth: Some Additional Evidence', Economic
Development and Cultural Change, Vol.33, No.2, pp.415-25.
Ram, R., 1987, 'Exports and Economic growth in Developing Countries: Evidence from Time
Series and Cross-Sectional data', Economic Development and Cultural Change, Vol.36,
No.1, pp.51-72.
Rodrik, D., 1992, The Limits of Trade Policy Reform in Developing Countries, Journal of
Economic Perspectives, Vol.6, No.1, pp.87-105.
Romer, P., 1989, 'Capital Accumulation in the Theory of Long Run Growth', in R. Barro, (ed.),
Modem Business Cycle Theory, Cambridge, MA: Harvard University Press.
Roy, D.K., (1991), 'Determinants of Export Performance of Bangladesh', The Bangladesh
Development Studies, Vol.19, No.4, pp.27-48.
Tyler, W. G., 1981, 'Growth and Export Expansion in Developing Countries: Some Empirical
Evidence', Journal of Development Economics, Vol.9, No.l, pp.121-30.
World Bank, World Tables, 1984-85, 1987 and 1988-89, Oxford: Oxford University Press.
APPENDIX
TABLE Al
VARIABLE DEFINITIONS AND THE DATA
Variable name Definition
GDP (Y) Gross domestic product in Taka at 1984-85 constant prices
Labour (L) Population in the mid-year is used as a proxy for labour
Investment (I) I is the sum of private and public investment, measured at 1984-85
constant price and expressed in Taka
Export (X) Export includes receipts on account of merchandise (f.o.b.) and non-factor
services. The former comprises the market value of goods including non-
monetary gold and the latter includes shipment, passenger and other
transport services and travel, as well as current account transactions not
separately reported. X is measured at 1984-85 constant price and
expressed in Taka.
Sources:
(i) Alamgir and Berlage (1972) for the period 1960-61 to 1968-69
(ii) World Bank (various issues of World Tables) for the period 1969-70 to 1971-72
(iii) BBS (1993) for the period 1972-73 to 1991-92

Exports and Econ Growth in BD Begum Shamsuddin

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Exports and Econ Growth in BD Begum Shamsuddin

Încărcat de

Drepturi de autor:

Formate disponibile

This article was downloaded by:[Hiroshima University]

On: 20 June 2008

Journal of Development Studies

Online Publication Date: 01 October 1998

PLEASE SCROLL DOWN FOR ARTICLE

Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf

SHAMSHAD BEGUM and

This study investigates the effect of exports on economic growth in

progress. In order to estimate the effect of exports on growth, we need to

II. LITERATURE REVIEW

function [Romer, 1989]. Freer trade exposes domestic firms to foreign

efficiency by exploiting both economies of scale and economies of scope.

Empirical Evaluation of Trade Policy Reform

found to be more effective in generating growth than policies that remove

not directly sensitive to economic instability.

Governments in East Asia played a vital role in creating an institutional

[Governments in East Asia have in general been able to withstand the

Cross-Country Studies on Exports and Growth

provides further support for Michaely's finding for least developed

surprising to find no significant relationship between export growth and

Time Series Studies on Exports and Growth

steady state assumptions, such as the externality effect of exports and

framework to establish a long-run equilibrium relationship between trade

data on 37 developing countries. They found support for the export-led

III. STYLISED FACTS

(1961-71), post-liberation regime I (1972-82) and post-liberation regime II

specialisation in a few primary products. The policies of a pegged exchange

Variables Pre-Iiberation Post-liberation Post-liberation Post-liberation

1961-62 to 1972-73 to 1972-73 to 1982-83 to

Mean real per capita 3014.1 4086.2 3802.2 4433.3

Mean export-GDP ratio 0.094 0.094 0.076 0.117

Mean investment-GDP 0.098 0.116 0.103 0.131

Average annual growth 0.042 0.044 0.047 0.041

Average annual growth 0.023 0.022 0.023 0.020

Average annual growth 0.027b 0.129 0.152 0.101

Average annual weighted 0.03 l b 0.013 0.013 0.014

Mean share of manufacturing — 0.399 0.376 0.407

Mean share of private — 0.558 0.573 0.540

Variables Full Pre-liberation Post-liberation Post-liberation

1961-62 to 1961-62 to 1972-73 to 1982-83 to

Export and non-export 0.828 0.766 0.779 0.855

GDP and share of export 0.428 0.868 0.732 0.859

Growth rate of GDP and 0.331 0.410 0.306 0.417

Growth rate of GDP and 0.313 0.418 0.348 0.455

IV. ANALYTICAL FRAMEWORK

externalities of the export sector. An expansion of a sector with positive

where, F ; and Hj (i =K, L) are the marginal productivities of input i in the

non-export and export sectors respectively; F x represents the marginal

the identity dYs dN + dX, we obtain:

dY = F K dK N + F L dL N + F x dX + (1+ 8)F K dK x + (l+8)F L dL x (6)

dY = FL.L (f) + FK M-) + M - + Fx

Economy-wide marginal productivity (MP) of a factor depends on its

where I x /I is the share of export sector investment in total investment and

be the same as that of the non-export sector if there was no productivity

Y = Po + Pii + P2(-7-) + P 3 ^ .x) + W.y + frT+e (11)

where e represents a random error which is normally distributed with mean

The ARCH Results

Equation Equation (7): no interaction Equation (11): with interaction

dummy, no trend variable dummy and a trend variable

Constant -O.025 -0.059

I/Y -0.010 0.229

(X/Y)X 1.037** 1.521**

(X/Y)X 1.037 1.521