Globalization is a procedure of communication and combination among the people, companies, and governments of different nations, a process motivated by international trade and investment and supported by information technology. This process has effects on the environment, culture, political systems, economic development and prosperity, and human physical well-being in civilizations around the world.
Economic globalization is characterized by increased trade and investment, liberalization (free trade), denationalization of public services and de-regulation of many government institutions. Economic globalization is also related with increasing disparities in wealth and power both between nations and between different groups within nations as well as between public and private sectors. Environmental globalization recognizes that an environmental incident or impact that happens in one region or country is not restricted to that area but has the potential to affect the entire world’s health and wellbeing.
Similarly, communicative globalization refers to the rapid growth of communication technologies such as internet, telephone, cellular phone, satellite and so on.Capacity to link people, information and ideas around the global impact on culture, both positively and negatively.
Most economists believe that the opinion that reducing barriers to economic integration have a positive effect on economic growth and poverty reduction. This view is often termed the “openness hypothesis”, which interprets liberal regimes of international transactions as a major cause of higher rates of economic growth and poverty reduction. As the struggle for reducing trade restrictions under the umbrella of the World Trade Organization (WTO) demonstrates, the supposed role of free trade is the most provocative problem. During the last decades, many developing countries have followed a strategy of import substituting industrialization (ISI) with high trade barriers. Proponents of the openness school of thought see the reluctance to reduce tariff and non-tariff trade barriers in these economies as a major impediment to economic growth and poverty reduction.
Globalization is multidimensional and influences all features of life, economic, social, cultural and political. Globalization in tastes is leading to globalization in products and globalization in production and labor markets is leading to increasing outsourcing of parts, components, and services. Determined by the failure of the centralized economies and the success of the market based economic systems and spurred on by the strategic imperatives of the multilaterals such as the World Bank and the International Monetary Fund the drive towards market liberalization has rapidly accelerated the pace of globalization during the past decade. The formation of the World Trade Organization has formalized the trading system and provided, in principle, a structured framework for ensuring a level playing as global well as a mechanism for dispute resolution. Theoretically globalization opens up markets and ensures competition thereby removing inefficiencies and leading to greater growth. The market forces ensure that specialization takes place in areas of comparative advantage. Thus for labor abundant economies this means increased employment as well as growth. Poor countries are generally labor abundant and capital scarce. Thus globalization, in theory, provides an effective means of poverty reduction through enhanced employment of labor.
THE CONSEQUENCE OF GLOBALIZATION Globalization means different things to different people. Mainly, the general views about globalization can be categorized into three main perspectives that are technological, development, and societal respectively.
THE TECHNOLOGICAL PERSPECTIVE Today we witness phenomena that no futurist dreamed of half a century ago. It is clearly the availability of cheap, rapid and reliable communications that permits such phenomena, just as this is the key to the integration of the international capital market. With globalization instigating cost effective strategies and technologies channelized big MNCs (Multinational Corporations) to switch operations to cheaper developing countries. Companies like GE Capital Services have been outsourcing in India for simple jobs such as collection of money from delinquent credit card users. British Airways along with other airlines like Swissair have large centers for programming and handling everything from computer messages to air ticket bookings today.
Technology has been the other principal driver of globalization. Advances in information technology, in particular, have dramatically transformed economic life. Information technologies have given all sorts of individual economic actors-consumers, investors, businesses-valuable new tools for identifying and pursuing economic opportunities, including faster and more informed analyses of economic trends around the world, easy transfers of assets, and collaboration with far-flung partners.
Hence, the information and communication technology (ICT), and internet in particular, has been instrumental in integrating, providing potential for bridging time and space, income and knowledge gaps to catalyze the chemical process of globalization. This created a chain reaction of transfer of skilled and semi-skilled IT experts export into US and Europe from the developing countries especially from India and to some extent from Pakistan as well.
The Development Perspective It touches the heart of dichotomy which today globalization phenomenon faces. It tries to find the clues of the increasing divide between the rich and the poor, the existing cleavage between the haves and have-nots, under the umbrella of one world concept of integrated markets and capital flows. Above all it challenges the greatest protagonists of globalization, the global institutions of World Bank, IMF, and even WTO one hand. The question is not to reap the benefits of globalization, but a greater one, that is how the share these benefits between the developed, developing and least developed countries in an equitable manner.
The Societal Perspective This includes the condition of human rights, women empowerment, gender sensitization, civic education, status of women in the society, political status becoming more democratic, freedom of speech, rule of law, equal access to resources and level of education.
Globalization is also a key to future environmental changes. Globalization is having a major impact on population migration, population distribution, particularly through accelerating urbanization trends, and growth of mega-cities. These population changes are in turn impacting on security, governance, poverty, health and environmental factors.
In addition to this, the core of the developing world problems is lack of education, which puts restrains for nations and societies alike to reap the benefits offered by globalization genuinely.
The History of Globalization Globalization is not new, though. For thousands of years, people-and, later, corporations-have been buying from and selling to each other in lands at great distances, such as through the famed Silk Road across Central Asia that connected China and Europe during the Middle Ages. Likewise, for centuries, people and corporations have invested in enterprises in other countries. In fact, many of the features of the current wave of globalization are similar to those prevailing before the outbreak of the First World War in 1914.
But policy and technological developments of the past few decades have spurred increases in cross-border trade, investment, and migration so large that many observers believe the world has entered a qualitatively new phase in its economic development. Since 1950, for example, the volume of world trade has increased by 20 times, and from just 1997 to 1999 flows of foreign investment nearly doubled, from $468 billion to $827 billion. Distinguishing this current wave of globalization from earlier ones, author Thomas Friedman has said that today globalization is “farther, faster, cheaper, and deeper.”
This current wave of globalization has been driven by policies that have opened economies domestically and internationally. In the years since the Second World War, and especially during the past two decades, many governments have adopted free-market economic systems, vastly increasing their own productive potential and creating myriad new opportunities for international trade and investment. Governments also have negotiated dramatic reductions in barriers to commerce and have established international agreements to promote trade in goods, services, and investment. Taking advantage of new opportunities in foreign markets, corporations have built foreign factories and established production and marketing arrangements with foreign partners. A defining feature of globalization, therefore, is an international industrial and financial business structure.
Globalization is deeply controversial, however. Proponents of globalization argue that it allows poor countries and their citizens to develop economically and raise their standards of living, while opponents of globalization claim that the creation of an unfettered international free market has benefited multinational corporations in the Western world at the expense of local enterprises, local cultures, and common people. Resistance to globalization has therefore taken shape both at a popular and at a governmental level as people and governments try to manage the flow of capital, labor, goods, and ideas that constitute the current wave of globalization.
Like many other closed economies, globalization was not a choice but a compulsion for Pakistan (officially, Islamic Republic of Pakistan). Globalization is a process of global economic integration, which includes freedom to market forces and freedom to factors of production. In other words it’s a process of creating a boundary- less world. Interdependence and interconnectedness are the basic pillars of globalization. It eliminates all forms of trade barriers to provide an open market. But globalization as such, shall have impact on cultural, political, legal and technological environment hence, globalization shall be defined as a process of integration of societies of all countries in fact, it is a process towards a new economic order, a monotonous world.
WTO As a Part of Globalization Globalization is often used to refer to economic globalization, that is, integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology
The World Trade Organization (WTO) is an international organization designed to supervise and liberalize international trade. Therefore the term globalization and WTO are different WTO is just an organization that promotes globalization in trade between various countries however globalization is vast and global trade is just one part of it.
The Positive Aspect of Globalization Globalization is the new catchphrase in the world economy, dominating the globe since the nineties of the last century. People relied more on the market economy, had more faith in private capital and resources, international organizations started playing a vital role in the development of developing countries. The impact of globalization has been fair enough on the developing economies to a certain extent. Globalization has a positive side as well. Supporters of globalization argue that it is good and beneficial. Some of their arguments are listed below.
Globalization brought along with it varied opportunities for the developing countries.
Globalization gave a fillip for better access to the developed markets.
Due to globalization, technology transfer promised better productivity and thus improved standard of living.
Globalization has created the concept of outsourcing. Work such as software development, customer support, marketing, accounting and insurance is outsourced to developing countries like India. So the company that outsourced the work enjoys the benefit of lower costs because the wages in developing countries is far lower than that of developed countries. The workers in the developing countries get employment. Developing countries get access to the latest technology.
Increased competition forces companies to lower prices. This benefits the end consumers.
Increased media coverage draws the attention of the world to human right violations. This leads to improvement in human rights.
Globalization opens up markets and ensures competition
Removes inefficiencies and leading to greater growth.
Ensures specialization takes place in areas of comparative advantage.
For labor abundant economies this means increased employment as well as growth.
Globalization and Its Impact on Pakistan Economy Like all other countries, Pakistan has been a part of this globalization process. Pakistan has changed many of its policies regarding its contribution to the international stage. There have been significant changes in Pakistan’s economic and foreign policy, which are all part of the efforts to be a part of the globalization process. A large proportion of the Pakistani population has viewed these changes with growing skepticism. It remains to be seen whether this process of globalization leaves Pakistan better off or not.
The late Mahbubul Haq had very aptly summarized the debate on globalization by observing that “Globalization is no longer an option, it is a fact. Developing countries have either to learn to manage it far more skillfully or simply drowning the global cross currents.”
The sectorial average annual percent growth indicates that Pakistan remained mostly dependent on agriculture, reflecting low skill and technology intensity. In industry, manufacturing and service sectors, it is placed at the bottom in terms of growth rates.
In the case of Pakistan, a large share of the central Government expenditure has been financed by foreign aid. Further, political interference, lack of transparency in public expenditure management and weak institutional capacity have also affected the quality of public expenditure.
In the social sectors, Pakistan compares unfavorably to other countries with similar levels of per capita income. Investment in education and health care sectors will increase the possibility of Pakistan entering a virtuous cycle of high growth and improved living conditions for the population. The big landowner/ feudal domination are quite visible on the economic and political scenes of Punjab and Sindh, NWFP and Baluchistan. The social, cultural and traditional taboos have further restricted the role of women in society, particularly in education and health. Similarly, the mortality rate and total fertility rates are also not favorable.
PAKISTAN’S EXPERIENCE WITH GLOBALIZATION Pakistan liberalized its economy as part of the structural adjustment conditionality of the IMF program and World Bank lending. Pakistan’s expansion in trade has not been as spectacular as that of some of the fast globalizers. Pakistan’s exports merchandize exports have not kept pace with that of the rest of the world.
Pakistan’s experience with globalization between 1990 and 2002 has not been great. Pakistan’s share in the world merchandize exports has fallen from 0.16 to 0.15. China’s share in world merchandize exports went up from 1.80 to 5.04. Malaysia’s share in world merchandize exports has increased from 0.85 to 1.44.
PAKISTAN’S TRADE SECTOR While the size of the trade sector relative to GDP has grown from about 28 percent in 1980 to about 31 percent in 2003 it has been subject to large year to year variations.
The trade sector has on an average grown only slightly faster than the growth of the economy. The overall growths of the economy and the social sector development indicators, particularly for the decade of 1990s, do not show any significant gains from the liberalization process. Poverty which was declining till the early 1990s started to increase thereafter till the end of the decade. The increase in the openness of the economy did not translate significantly into any enhancement of growth and subsequent decline in poverty
Pakistan’s trade sector did not grow significantly during the 1990s despite the liberalization because of
â€¢ Narrow range of export markets and export products;
â€¢ Modest short-term demand responsiveness for major Pakistan export categories;
â€¢ Small foreign direct investment in tradable sectors;
â€¢ Anti-export bias in the trade policies of Pakistan;
â€¢ Inadequate infrastructure in certain potential growth sectors;
â€¢ Absence of trade risk mitigation structure to support the entry of new exporters and
â€¢ Inadequate development of non-traditional markets
GROWTH RATE OF EXPORTS AND IMPORTS GLOBALIZATION AND RE-INDUSTRIALIZATION IN PAKISTAN Originating from free-trade doctrine, some opinions claim that Pakistan, under globalization, should forget about possibilities of a new wave for industrialization altogether. Though controversial, the claim also argues that the East Asian ‘Gang of Four’ days are over, and globalization – meaning flow of foreign direct investment (FDI) and openness – will determine whether the country can industrialize or not. Such arguments also advise that Pakistan should try to attract FDI through the policies of liberalization, deregulation, and privatization. Most importantly, the government has to be cut-to-size and be kept out of markets in the process.
However, on the opposite side, forceful voices originate from at least two quarters, which at a certain level are mutually supportive approaches to long-term economic development. Broadly speaking, one is new institutionalize political economy and the second is new growth and new trade theory
The moral of the story is that industrialization under globalization for long-term economic development is too important an activity to be left to blind forces of FDI and openness.
All three sectors, first (government), second (business), and third (civil society) must work together towards achieving national development objectives and strengthen national institutions. Each sector can contribute a set of competitive advantages.
GDP GROWTH RATE Pakistan’s experience also shows that in the decade of 1990s, significant trade liberalization was accompanied by a steady decline in the GDP growth rate, from 6.1% in the 1980s to 4.5% in the 1990s. Similarly, wide-ranging policy changes and incentives to encourage foreign investment did not lead to any significant increase in investment, apart from larger investment in the private power sector in the mid-1990s in response to a very attractive incentive package. In fact, overall investment declined from about 19% of the GDP in 1989-90 to only 15% in 1999-2000. Even on the export front, the trade performance has not been satisfactory. Despite substantial reduction in tariff rates, removal of virtually all non-tariff barriers and successive devaluations of the currency (leading to an annual depreciation of about 10% in the exchange rate, from Rs 24 in 1990 to PRs 60 per dollar in 2000), the growth in exports in the 1990s was only 4.5% per annum, compared to 19% in the 1970s and 8.5% in the 1980s.
GROWTH RATES OF GNP PER CAPITA Real Gross National Product (GNP) per capita is a useful aggregate measure of annual income per person, net of growth in population and prices. Data shows that in 1947 real GNP per capita was PRs. 1,476 which has multiplied three and a half fold to PRs. 5,128 in 2001. In other words, an average Pakistani today commands purchasing power that is three and half times greater than in 1947 [Social Development in Pakistan, Annual Review, 2001] in constant prices of 1980-81.
FOREIGN TRADE AND INVESTMENT LIBERALIZATION Import liberalization in Pakistan has been a rather gradual process, as exemplified by the gentle downward trend in the average import tariff rate.
The decline in import duties as a revenue source can be seen from the fact that their contribution to total taxes has fallen from 50.4% in 1987-88 to 15.9% in 2000-01 [Social Development in Pakistan, Annual Review, 2001].
CAPITAL FLOWS FDI involves the long-term interest of one entity resident in one economy in an enterprise resident in an economy other than that of the foreign investor (United Nations Conference on Trade and Development [UNCTA], 1998). FDI had shown a 16 percent growth during the post 1988 decade.
1977-78 to1987-88 1988-89 to1998-99
Growth in FDI
(US $ million) – 16.0
DEGREE OF OPENNESS The degree of openness has increased; both exports and imports have been contributing factors [Kemal, 2001]. However, the drawback is that the degree of openness has widened the balance of payment deficits, and this problem will continue unless third world country like Pakistan is provided enhanced access to the international market.
DEGREE OF OPENNESS ƒ˜ AVERAGE TRENDS IN UNEMPLOYMENT But in-spite of that deficit there is a significant increase in growth rate of output, trade and FDI inflows but the important question is: To what extent increase in these growth have helped the growth of employment in Pakistan?
_______________________________ Years Unemployment ________________________________ 1980-90 3.5 1991-95 5.4 1996-2000 6.0 1991-2000 5.7 1999-2000 6.2 2000-2001 1 6.7 _________________________________ Thus, despite increase in growth rate of output, trade and FDI. The unemployment rate, increased from an average of 3.5% during 1981-90 to 5.7% during 1991-2000, went up further to 6.7 percent in 2000-01, official statistics, as presented in the Pakistan Economic Survey (Statistical Supplement) for the year 2000-01, actually report unemployment in 2000-01 to be higher at 7.8 percent. Survey (Statistical Supplement) for the year 2000-01, actually report unemployment in 2000-01 to be higher at 7.8 percent.
The Effect of Globalization on the World Economy Industrialization required raw materials and industrialized countries could not always supply all of those raw materials themselves. They therefore turned to other countries, including underdeveloped countries, for raw materials. This created a pattern of every increasing globalization. As globalization produced a world economy in the 18th, 19th, and 20th centuries, local economies around the world changed the way they produced and distributed raw materials. They specialized in the things they were best at, imported everything they needed to import, and shared ideas and technology.
Increased trade led to ever increasing network interdependency in the countries of the world. When Britain looked to other countries to satisfy their demand for coal, those countries began to rely on the revenues they could gain by exporting coal. Those countries, in turn, could use those revenues to buy British goods or import raw materials that they need for their own industrialization. As countries traded with each other more regularly and more extensively, they stopped producing them things they could import more cheaply and concentrated on producing the things they made well. In time, individual countries lost their abilities to produce certain goods completely, relying on other countries exclusively to meet that demand.
That process of specialization also had an important effect on the raw materials were produced. As countries specialized, they found that they actually produced more value of goods than they had when they produced many different types of goods. Specialization also meant that countries known to be particularly skilled at producing one or two products became world leaders in the manufacture of those products.
As other countries wanted to branch out into producing and producing those goods, they could use the technology and expertise developed by that country to help them. Even relatively underdeveloped countries often found at least one important commodity they could offer the world. This connected them to the world economy and pulled them away from subsistence agriculture.
As trade between far-flung parts of the world produced a global economy, ideas and technology were exported just as easily as raw materials. As countries had more and more contact with each other, they shared their cultures including their political philosophy. This is how Smith and Marx came to be read all over the world. Globalization meant that people could no longer think only in terms of their local area, they had to consider the outside world as well. Some areas were more receptive to new ideas, but no area could shut out new ideas completely.
Because of globalization, most of the countries of the world no longer concentrated on local markets. Their focus became on regional or even world markets. It also changed the way they produced goods domesticity including which goods they produced at all. Just because a country might have the resources and ability to produce a particular commodity no longer meant that they would necessarily produce it. If someone else in the world could produce it more cheaply and with a higher quality, they might just concentrate on what they were better at producing.
Effect Of Trade Openness On Economic Growth Economics Essay
The relationship between trade openness and growth is a highly debated topic. If economy moves from autarky to free trade then we see that economy will grow more. The basic theorem is that some trade is better than no trade. So export and import is very important for economic growth. We are exporting agriculture products and importing machinery and raw material that use in production.
The practical literature shows that trade openness or liberalization affects output growth. Most of the studies have concluded that the openness of the trade system has positive relation with GDP growth [Ahmed, Yusuf and Anoruo Emmanuel (2000), Edwards, S., (1998), Edwards, S., (1992), Harrison, A., (1996), Iscan, Talan (1998), Santos Paulino (2002), Wacziarg R., (2001), Yanikkaya Halit (2003)].
Do open economies grow faster than closed economies? Almost all practical growth Studies have provided a positive answer to this question. The reason for this strong Bias in favor of trade liberalization is partly based on the conclusions of a wide range of empirical studies, which claimed that outward-oriented economies consistently have higher growth rates than inward-oriented countries. It is also partly due to the tragic failures of import-substitution strategies, especially in the 1980s and overstated expectations from trade liberalization.
Pakistan has gradually liberalized its trade system especially after 1988, when the government accepted the first IMF Structural Adjustment Program. After 1995, this policy gained greater momentum and WTO related compliances have induced Pakistan to reduce import duties and eliminate various subsidies.
2. Literature Review Ynikkaya (2003) estimated the effect of trade liberalization on per capita income growth for 120 countries for the period 1970 to 1997. He used two types of trade openness measures. The first openness measure was estimated by using trade volumes which include different ratios of trade variables (exports, imports, exports plus imports and trade with developed countries) with GDP. Another measure based on trade restrictiveness estimated by calculating restrictions on foreign exchange on bilateral payments and current transactions. The results of the GMM (Generalize Method of Movement) estimates showed that first group of openness, based on trade volumes were significant and positively related with per capita growth. However, for developing countries openness based on trade restrictions were also significant and positively related with per capita growth. He therefore concluded that trade restrictions in developing countries may cause faster GDP growth.
Edward (1992) used a cross country data set to analyze the relations between trade openness (trade intervention and distortions) and GDP growth of 30 developing countries over the period 1970 to 1982. In his model he used two basic sets of trade policy indicators, constructed by Leamer (1988). The first set refers to openness and measures of trade policy (tariff and Non Tariff Barriers – NTB) which restrict imports. The second set measures trade intervention and captured the extent to which trade policy distorted trade. The results of the model, estimated by OLS, showed that all the four openness indicators were positively related with real per capita GDP growth, while trade intervention indexes were found significantly negatively associated with GDP growth. These studies support the hypothesis that countries with a more open trade system have tended to grow faster, and a more distorted trade system will tend to grow slower.
Santos-Paulino (2002) examined the impact of trade liberalization on export growth for a sample of 22 developing economies from 1972 to 1998. He used the typical export growth function, which postulates that exports volume depends upon real exchange rate and world income. Trade openness is measured in two ways. First by the ratio of export duties to total exports, as an indicator of the degree of anti-export favoritism and second by a dummy variable “timing” of the introduction of trade liberalization measures. The results of OLS estimate showed export duty significant with negative sign and the dummy variable is also significant with a positive sign. Therefore it was concluded exports grow faster in open economies.
Edwards (1998) used comparative data for 93 countries to analyze the robustness of the relationship between openness and total factor productivity (TFP) growth. He used nine indexes of trade policy to analyze the connection between trade policy and TFP growth for the period1980 to 1990. Among these nine indexes, three were related to openness, a higher value of which denotes a lower degree of policy intervention in international trade. The other six were related to trade distortions, for which higher values denote a greater exit from free trade. The results of OLS estimates found trade openness indexes significant with positive signs and trade distortion indexes were significant with negative signs. This relationship suggests that
“More open countries will tend to experience faster productivity growth than more protectionist countries.”
Ann Harrison (1996) used a general production function to analyze the relationship between openness and GDP growth. He specified GDP as a function of capital stock, years of primary and secondary education, population, labor force, arable land and technological changes. He used seven openness measures to test the statistical relationship between openness and GDP growth. The cross-section estimation results show only black market rate significant with negative sign. The country time series panel result showed that three variable, tariff and non tariff barriers with positive sign, black market rate and price distortion index used in dollar with negative sign, were found significant. Estimation for Annual data show two variables, tariff and non-tariff barriers, and black market rate, significant with negative sign. He therefore concluded that the choice of period for analysis, of relationship between trade openness measures and GDP growth, is serious.
Wacziarg (2001) investigated the links between trade policy and GDP growth in a panel of 57 countries for the period of 1970 to 1989. His study employs a fully specified empirical model to evaluate the six channels though which trade policy might affect growth. He measured openness through an index which consisted of three trade policy variables, Tariff barrier, , Non-tariff barriers and a dummy variable (liberalization status). The fixed estimate OLS results showed that three channel variables i.e., FDI inflows as share of GDP, domestic investment rate and macroeconomic policy, were significant. He therefore concluded that there is a positive relationship between trade openness and GDP growth.
Iscan, Talan (1998) analyzed the effect of trade openness on total factor productivity growth for Mexican manufacturing industries for the period 1970 to 1990. To identify the differential productivity effects of openness to foreign trade and trade liberalization, two measures (i) foreign trade variables, controlled by export share and (ii) measure of protection, control by effective rate of protection, were considered. He also used a dummy variable controlled for the date from which the liberalization of trade was started (i.e., 1986). The results of the GMM estimations showed that after liberalization productivity growth has positive and significant relationship with exports, while change in effective rate of protection was found negative but significant. It was therefore concluded that liberalization has positively affected productivity growth.
Ahmed, Yusuf and Anoruo, Emmanuel (2000) investigated long run relationship between GDP growth and openness for five South East Asian countries, The Philippines, Indonesia, Malaysia, Singapore and Thailand, for the period 1960 to 1997. They used export plus import growth rate as substitute of openness. The Johansan estimation results rejected the hypothesis that there is no co-integration between economic (GDP) growth and openness while the hypothesis that error correction term is significant could not be rejected. This Vector Error Correction estimates showed bi-direction causality.
Sinha D., Sinha T. (2000) analyzed the effects of growth of openness and investment on the growth of GDP for 15 Asian countries during 1950 to 1992. They developed a model which specified GDP growth a function of growth rates of openness (export plus import), domestic investment and population.. The Auto Regressive Model (ARMA) results show that for China, Hong Kong, Iran, Iraq, Israel, Myanmar, Pakistan and Singapore, the coefficient of the growth of openness is positive and significantly different from zero. For China, Hong Kong, Indonesia, Israel, Japan, Jordan, Philippines, Singapore and South Korea, the coefficient of the growth of domestic investment is positive and significantly different from zero. In some cases, the coefficient of the growth of population is negative but in all such cases, it is not significantly different from zero. Thus, they find support for the proposition that the growth rate of GDP is positively related to the growth rates of openness and domestic investment. However, the relationship between the growth rate of GDP and the growth rate of population is not that clear cut.
3. Model and data We will use GDP growth (annual %), Gross capital formation (annual % growth) as Investment, Exports of goods and services (annual % growth) plus Imports of goods and services (annual % growth) is equal to Trade growth, Inflation, consumer prices (annual %),Population growth (annual %).we will get data from world bank. We will use OLS method in our model GDP growth depend on trade growth (export plus import growth rate as proxy of openness), population growth and investment growth. The volume of trade (import plus export) will be used as proxy of openness. We will derive the following equation.
GDP = B0 B1 TRD B2 IN B3 I B4POP Îµ Where GDP refers to GDP growth, TRD to trade growth – proxy for openness, I to Investment growth and POP to population growth, IN inflation, while e is the error term.
The main objective of our study is to find the relation between trade growth and GDP growth.
And we will use OLS method to see that trade cause growth. Iqbal, Baig and Tahir (2002) found that policy liberalization leading to an increase in imports may lead to a growth of output. Moreover, Iqbal, Tahir and Baig (2001) argued that import of Pakistan is mostly consisting of intermediate goods (petroleum, machinery, chemicals etc.) which are favorable to output growth, so the impact of import growth on output is positive.
The result shows that GDP growth is positively related to trade growth. As the Pakistan trade increases its GDP also increase, means economic growth of country will increase. Inflation is negatively related to GDP. Whereas investment increases then GDP or economic growth will increase. And Population has positive relation with GDP growth.
When trade grows will increase GDP because with trade growth increase than production also increase and employment also increases. When country export and import will increase mean the country start increase the level of production so in this way employment will also increase. Inflation will increase than price of domestic goods will increase as result export will decrease. And country growth will also decrease. Investment positively related to GDP. When investment will increase than more new industries open and employment will also increase and so country production will also increase. As result of this GDP will increase .Population increases, more labor force is injected into market as result labor supply will increase so it is fundamentals input and as result its output will increase.
In this study the inflation have negative relation with growth. This can be explained in two ways. One when purchasing power decreases than demand will decrease and as a result GDP will decrease. So it means growth will also decrease. Second in this way that when inflation increases than cost of production will increase, prices of goods produced will increase so the demand will decrease as result output will decrease and growth will decrease.
For variable significance can be check by t-test. So our most important variable trade growth is significance mean this variable has significant effect on GDP growth. But our other variable is not showing significant relationship because of data problem. R-squared is 0.601552 which shows that our model is significant and sixty percent variations in GDP explained by explanatory variable. And Durbin-Watson stat is 2.057520.So mean there is autocorrelation in model.