Export Growth, Export Instability, Investment and Economic Growth in India: A Time Series Analysis

By Kaushik, Krishan K.; Arbenser, Lawrence Nii et al. | The Journal of Developing Areas, Spring 2008 | Go to article overview

Export Growth, Export Instability, Investment and Economic Growth in India: A Time Series Analysis


Kaushik, Krishan K., Arbenser, Lawrence Nii, Klein, K. K., The Journal of Developing Areas


ABSTRACT

This paper uses Johansen's co-integration analysis and a vector error-correction model to investigate the relationship between economic growth, export growth, export instability and gross fixed capital formation (investment) in India during the period 1971- 2005. The empirical results suggest that there exists a unique long-run relationship among these variables and the Granger causal flow is unidirectional from real exports to real GDP. For example, ceteris paribus, a 1% increase in exports raises GDP by an estimated 0.42% in the long run. The short term dynamic behavior of income growth function was investigated by estimating an error correction model in which the error correction term was found to be correctly signed and statistically significant. The policy implication is that government should continue to pursue export oriented measures if India is to secure greater levels of income and more rapid and sustained economic growth in the coming years.

JEL Classifications: C32, F10, O11

Keywords: Export Instability, Investment, Economic Growth, Co-integration

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The relationship between exports and economic growth, including the direction of causality between the two variables has been a subject of much debate in the international economics literature over the past two decades. The empirical approach to the debate has taken two forms. One is the production function regression model approach (Michaely, 1977; Feder, 1983; Kavoussi, 1984; Balassa, 1978, 1985; Ram, 1985, 1987; Salvatore and Hatcher, 1991; Yaghmaian, 1994). Though the production function approach assists in investigating one of the export growth nexus, a causal relationship has neither been verified nor refuted. The main criticisms are related to the reversal of causation, simultaneity, and "spuriousness" of the results.

The second approach, which seeks to overcome these empirical problems, uses new time series techniques, such as unit roots and co-integration analysis to test the causality between exports and economic growth in either a bivariate or a multivariate framework (Jung and Marshall, 1985; Chow, 1987; Hsiao,1987; Sheehey, 1990; Dodaro, 1991; Bahmani-Oskooee and Alse, 1993; Ghartey, 1993; Sharma and Dhakal, 1994; Doraisami, 1996; Ghatak et al., 1997; Chandra, 2002 and 2003). The majority of these studies employ Granger (1969) and Sims (1972) causality tests in a bivariate framework. While these tests are computationally easy, the omission of other relevant variables could result in spurious causality (Granger, 1969; Lutkepohl, 1982; Sims, 1972). On the other hand, Wickens (1996) drews attention to the difficulty of structural interpretation of a cointegrating vector if the model is misspecified by the omission of an endogenous variable. More recently Caporale and Pittis (1997) have shown that such an omission can result in an invalid reference about the causality structure of a bivariate system. Love and Chandra (2004), using a time series index of openness retrieved from the real exchange rate distortions, examined its relationship with growth in India. The results indicate that while greater openness exercises a positive influence on growth, the effect of investment is insignificant. Sharma and Panagiotidis (2004), utilizing Johansen's and non-parametric techniques, failed to find support for the hypothesis that exports Granger-cause GDP. The same held for the relationship between exports and investment. The study further concluded that relatively big shocks in real exports do not generate significant responses.

In addition to the concern over the impact of export growth on economic performance there has been concern over the impact of export instability on economic growth. Ever since Coppock (1962), and more recently MacBean (1966), Glezakos (1973), Knudsen and Parnes (1975) and Lim (1976), the relationship between export instability and economic growth has been extensively studied. …

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