Jim Love

Testing export‐led growth in South Asia

Purpose – The purpose of this paper is to test the export-led growth hypothesis for South Asia, a diverse region consisting of one large country, India, surrounded by a number of medium and small countries such as Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives. Design/methodology/approach – To test this, the study employs cointegration and error-correction modelling, using data from the International Financial Statistics of the IMF. Findings – The study produces fairly mixed results, and does not find any conclusive evidence in favour of export-led growth. While India, Maldives and Nepal exhibit export-led growth, Bangladesh and Bhutan show the opposite result of growth-led exports. In Pakistan and Sri Lanka no causality in either direction was found. The mixed nature of the results is further confirmed by taking a common time period since 1980. Practical implications – South Asia is one of the poorest regions of the world; so success or otherwise of export-led growth is of great interest for policy purposes. For example, the finding of export-led growth for the largest economy of the region, India, is particularly heartening as, by opening up its markets further to the other countries of the region, it can fuel growth in the entire region. Originality/value – This study tries to fill an important gap in the literature as it is the first comprehensive study of the region as a whole.

AN INDEX OF OPENNESS AND ITS RELATIONSHIP WITH GROWTH IN INDIA

Time-series work on trade policy and growth is handicapped by the difficulty of measuring trade policy. Established definitions of trade orientation such as bias or the effective rate of protection are difficult to operationalise in a time-series context because of enormous data requirements. This paper tries to fill an important gap in the literature. For the first time it constructs a time-series index of openness for India based on the real exchange rate distortion, and then, using Johansens maximum likelihood approach, examines its relationship with growth in India. It is found that while greater openness exercises a positive influence on growth, the effect of investment, contrary to conventional wisdom, is insignificant. This is in line with the Young-Currie-Kaldor view of endogenous growth which sees capital accumulation more as an effect than a cause of growth. This view is based on Adam Smiths famous dictum that the division of labour is limited by the size of the market. In this demand side approach, increasing returns result from greater specialisation, which in turn depends on the size of the market. The robustness of the results is reconfirmed by using the ARDL approach.

The relationship between the black market and official exchange rates: an examination of long-run dynamics in India

This study is the first to use Johansens cointegration approach for India in the analysis of the long-term dynamics between the black and official exchange rates for the period 1953-1993. The study also estimates the long-run elasticity of the official rate with respect to the black market rate. As monthly data over 40 years are used, and a more robust methodology is employed, the results are likely to be more reliable as compared with the earlier work on India. The results of our study suggest that while there is a long-term relationship between the two rates, the direction of causality is from the black rate to the official exchange rate. This is plausible in the Indian context where policy has generally lagged behind events in the black market. The hypothesis of a constant black market premium is rejected, implying that there is a mismatch between the percentage change in the official exchange rate and the percentage change in the black market rate.