Academic journal article The Journal of Developing Areas

Export-Led Growth Hypothesis: A Multivariate Cointegration and Causality Evidence for Jordan

Academic journal article The Journal of Developing Areas

Export-Led Growth Hypothesis: A Multivariate Cointegration and Causality Evidence for Jordan

Article excerpt

ABSTRACT

Empirical evidence supporting the export-led growth (ELG) hypothesis has been mixed and inconclusive. Many previous studies may have been misspecified since they tested the ELG hypothesis using bivariate models. Other studies used cointegration and error correction models in a multivariate framework, but failed to tackle the important issues of unit root testing and optimal lag length when testing for cointegration. Following Dhawn and Biswal (1999), this study examines the ELG hypothesis for Jordan in a multivariate framework by including terms of trade as a third variable and by using available annual data (1969-2005). We utilize Johansen and Saikkonen and Lütkepohl cointegration procedures and error correction modeling to test long-run and short-run relations between GDP, exports, and terms of trade. The study finds that real GDP, real exports, and terms of trade are cointegrated. The evidence suggests long-run bidirectional causality between real exports and real GDP. The results of this study suggest that promoting exports via export promotion policies will contribute to economic growth in Jordan.

JEL Classification: C32, F43, O53

Keywords: Economic Growth, Exports, Cointegration, Causality,

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

To foster economic growth and development in Jordan, the government took several measures that focused on the private sector and on export-oriented growth strategy. For example, the government started an ambitious privatization program in 1996, encompassing various sectors of the economy, e.g., public enterprises in transportation, telecommunications, and electricity. Moreover, Jordan adopted an export-oriented growth policy in 1995 when it passed the Investments Promotion Law and created the Investment Promotion Corporation (IPC) that became known in 2000 as Jordan Investment Board (JIB), an independent governmental agency responsible for boosting foreign direct investment, enhancing local investment, and increasing national exports. Investment promotion law and other investment incentives granted in the country include, among others, the exemption of export industries from custom duties on imported raw materials, exemption of import tariffs, taxes, and duties for initial capital goods, exemption of import tariffs, taxes and duties on replacement parts (up to 10 years), and no limits on the transfer abroad of profits, interest, salaries, and capital.

Jordan also established several public free zones, including the Zarqa Free Zone (1983), the Sahab Industrial Estate (1997), Queen Alia International Airport (1998), Al Karak free zone (2001), and Al-Karama free zone (2004). She also benefited from the establishment of privately owned Qualifying Industrial Zones (QIZ) in 1997. 1 QIZ allow goods manufactured in those zones free access to the US market, which has become the major destination of many Jordanian exports. QIZ exports have increased from $16 million in 1998 to $637 millions in 2003 or about 23% of Jordanian total exports (QIZ exports accounted for $587 million in 2003). Furthermore, Jordan Enterprise Development Corporation (JEDCO) was established in 2003 to replace the Jordan Export Development and Commercial Centers Corporation (established in 1972). The overall goals of JEDCO are trade promotion, export development, and enterprises and companies' development. In addition, Jordan entered into many trade agreements with Arab and non-Arab countries to allow her free access to existing and new markets. For example, Euromideterenian Partnership in 1997 among EU and Middle-East and North Africa (MENA) countries, Great Arab Foreign Trade Area (G.A.F.T.A) in 1998, which is a free trade agreement among Arab League countries, Agadir Accord in 2001 among Egypt, Morocco, Tunisia and Jordan that aims at establishing a free trade zone by 2010. Moreover, Jordan entered her two most significant free trade agreements, the Association Agreement with the European Union in 1999, and the Free Trade Agreement with the US in 2001. …

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