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Modern Growth Theories and Trade Liberalization: Measurement of Effects of Technology Transfer on Pakistan's Economy.

Byline: Dr. Muhammad Saleem Rahpoto and Dr. Rizwana Chang


This study works on the issues of liberalization effects on growth, various theories of growth and bond among liberalization from theoretical and estima- tion perspectives. Estimation proposes critical examination of renowned econo- mists, their estimation procedure and variable selection is highlighted. This study in the light of Lucas, Barro, Romer and Edwards work develop variables for analysis and used time series which have not used by the scholars especial- ly with reference to Pakistan and its neighboring countries.

Empirical literature in 1990's depicts the importance of the trade as major policy variable. Trade openness affects efficiency and growth increase market size, leads to technological spillover, economies of scale through research and development, higher profit to investors. Major objective of study is to explore the bond among liberalization and growth, convergence in Pakistan and its neigh- boring countries affects of knowledge gap (used for convergence) in selected countries, role of trade distortion and intervention in determining growth process. The variables have depicted the expected signs and most of them are sig- nificant at conventional levels. Moreover, R2 in all the estimated regression is considerably high indicating that the empirical model is capable of explaining variability in growth rate of GDP per capita. Moreover, the F statistics values are also significant which shows the efficiency and correctness of model.

Key Words: Modern Growth Theories Trade Liberalization, Trade Openers, Trade Distortion Trends.


Economic liberalization is getting important in recent literature throughout the world. Firms which have different technological capabilities in same indus- trial sector or which have different type of institutions in same regions may respond in a diverse manner to the competitive environment developed for the exclusion of barriers to entry during liberalization period. Liberalization may be effects asymmetrically; some firms may have advantage while others may not, leading to developing within industry deviation in industrial execution.

Father of Economics Adam Smith (1776) who firstly pointed out that International trade has positive effects on economic growth. This idea dominat- ed till World War II. Protectionist EG had found substances in Latin America during 60's. Failure of those experiments and relationship of quick EG with the liberalization of IT and the consequent, specialization in different countries, resultant many studies based on the neoclassical growth theories give decisive role to IT as driving force EG.

Trade liberalization has occupied an important place in literature debate for a prolonged period. Indeed, the vigor and interest characterizing the debate reflect its importance and continued elusiveness in setting the main contentious issue on the theoretical and empirical fronts. Trade openness is one of the most important determinants of the economic growth, is becoming popular with each passing day.

Historically, if we analyze the different periods, from import substitution policies to modern time's the dominance of the World Trade Organization (WTO). It is observed that different trade policies were followed in different time periods. The import substitution period 1960s and 1990s, the liberalization became the fashion of the time.

The import substitution got the spur from the infant industry argument and was promoted by the Rual Prebisch (1950).2 Throughout this epoch, most econ- omists follow the protectionist thought and devoted massive time to design models that reliance deeply on the import substitution design.

While over the time various economists have altered their viewpoint and empirically studied the consequences of other trade strategies3. The researchers used different methodological standard and historical and statistical evidences argued that there are plentiful evidences recommending that more open and out- ward oriented economies had performed better then the countries pursuing pro- tectionism.

At the moment after the breakdown of the import substitution phenomena and by the development of new generation of growth theories which based upon economies of scale, human development and endogenous technological progress. These expansions have yet again caused trade liberalization into focus. It has produced new evidences of fundamentals which show the way to believe that trade and other policies variables are very important and they sig- nificantly affect long run economic growth.6

Solow (1956) and others developed new growth models which enlightened that technological changes are exogenous and unaffected by a country integra- tion to world trade. Trade policy reforms are very important and influence the long run economic growth of a country via technological change.

Hence, the new growth theories strengthen the idea that the trade as a major source for managing higher and faster growth rates. Moreover, it is also empiri- cally confirmed by Barro (1991) and Gundlach (1997) that those countries which are more open tend to congregate too quick towards their steady state growth path as compared to those which are following protectionist trade regime.

Gross and Helpman (1991) and Edwards (1992) have taken a different per- ception of emphasizing the role of trade openness in smaller countries to adopt technology developed in the advanced nations at a faster rate and thus to grow faster than others having a low degree of openness. What is particularly inter- esting about this model is that under plausible conditions liberalized economies will grow faster than more restricted once even in the long run.

Despite all these developments the relationship among trade openness and growth is yet not be fully resolved. The generalization of results form dynamic equilibrium growth setting presents some problems. Only endogenous growth models have attempted to solve this dogma.

Other side the empirical work on the subject is scare and it has been difficult to compose adequate and strong measurements of trade dependence while using time series data. Moreover, robustness of the results and the cross sectional data limitations are problems in this process.

Researchers have expounded bidirectional approaches to tackle the extent of trade orientation. Few have chosen indexes of trade orientation in subjective form, which is difficult in comparable across countries.9

The second group of researchers have selected decomposing the conse- quences of trade orientation on economic performance in two stages. The first stage, it is assumed for liberalized trade regime encouraged exports via reduction of anti export bias. In the second stage the researchers tested exports asso- ciated with a higher rate of output growth10. Both approaches has not proven sat- isfactory results due to contradictory results.11

More recent studies on the endogenous growth theories have measured open- ness as export shares or import shares like Romer (1990s), and these also have not tried to capture the extent to which commercial policy obstruct trade. These studies are seriously affected by the difficulty in measuring the trade orienta- tion. The empirical literature in the 1990s depicts the importance of the trade as a major policy variable. It seems that some sort of consensus has emerged, as most of the researchers have started conceding the trade as an important com- ponent of the commercial policy.

According to discussed theories, trade openness can effect the level and effi- ciency of growth in numerous ways such as

i. An open trade regime can increase market size, hence leads to technological spillovers effects;

ii. there are economies of scale in the research and development sector;

iii. a large international market provides higher profit to investors; and

iv. there is no replication of research and development efforts across the countries.

Thus, openness increases the efficiency of investment Wacziarg, (1998). The second channel is the productivity channel. To the extent that open trade regimes lead to greater exposure to worldwide stock of productivity enhancing knowledge, than openness leads to increased growth. Ben David and Loewy (1995) have said that upsurge in the trade will, in general, lead to greater diffu- sion and faster growth and hence, hence faster per capita income growth.

Whatever are the channels, empirical estimates of the impact of trade on growth and welfare are quite substantial12 Dollar (1992) estimates a cross coun- try index of distortions in the real exchange rate, and concludes that outward oriented countries grow faster. The rigorous measure of exchange rate and the focus on developing countries distinguish this study. Edward (1992), "Estimates the impact of international trade on growth, employing various indexes of open- ness, and found a positive correlation between openness and growth". Levine and Renelt (1992), "find that, free international trade indirectly affects growth through investment. The countries which have low trade barriers invest more and therefore grow faster".

Sachs and Warner, (1995), "also confirms the positive and significant relationship between free trade and growth". Vamvakidis (1997), 1998) "finds a robust impact of openness on growth, and provide evidence that economies have grown faster, on average, in both the short run and the long run, after broad liberalization".

Empirical evidence of this research also reveals that counties with open, large, and more developed neighboring economies grow faster than those with closed smaller, and less developed neighboring economies.

Anyhow, in the case of Pakistan and its neighboring countries, there exists hardly any study, which takes the case of trade liberalization and the issue that how it is influencing their growth process. Iqbal and Zahid (1998) although have discussed the sources of macro growth in Pakistan's perspective. Anyhow, this study is not taking into account the measure for trade liberalization, orien- tation and distortion issues, which is the need of the time. This study is also con- taining the problem of smaller data sets, the problem of cross section analysis, lack of robustness in the results, variable omission and measurement problems.

Thus, there are good reasons to believe that the series of above mentioned empirical studies in the consensus period have further strengthened the idea that trade liberalization (openness) have a considerable contribution in the determi- nation of growth.

As, the world economies are moving rapidly towards more open trade regime World Trade Organization (WTO), and many developing countries seem to have discarded import substitution policies in favor of more outward oriented polices, one would expect the benefits from free trade to have grater potential in the future.

1.2 Hypothesis of study

i. Trade Liberalization (openness) has positive effects on economic growth in Pakistan and its neighboring countries.

ii. Technology transfer has positive effects on growth in Pakistan and its neighboring countries.

iii. Trade distortion has positive effects on growth in Pakistan and its neighboring counties.

iv. FDI positively moving growth of Pakistan and its neighboring countries. v. Human Development has positive effects on growth of Pakistan and its neighboring countries.

vi. Political instability has negative effects on growth Pakistan and its neighboring countries.

vii.Government size has positive effects on growth of Pakistan and its neighboring countries.

Model Specification

However, our model emphasis on Pakistan and its neighboring to check trade policy may affect or not on the speed at which technological improvements take place.

These are assumptions applied for the development of model:

1. Knowledge accumulation which is reported Edward (1992) through two sources like.

a) a purely local knowledge deplete out from indigenous technological improvements (pure innovations) and,

b) a knowledge distorted from rest of world inventions.

Although, first source of knowledge has a bond with indigenous innovations but we assumed that the external inventions have significant impact on the local source of technical advancement in Pakistan and its neighboring countries. In the study, it is hypothesized that technical knowledge of developed world has considerable impressions on domestic knowledge enhancement.

It is assumed that transfer of knowledge from advanced countries belongings positively on the openness of the developing economies.

2. Measures of Openness

In the international trade theories two types of measures of openness have been used; incidence based measure of individual indicators and outcome based measures. Incidence based measures are the direct indicators of trade policy such as tariff rate, quantitative restrictions, export taxes, and foreign exchange restrictions. The prob- lems with this an approach is the changes in one indicator are not easily weighted against the changes in other. Thus, if average tariffs rise, but export taxes also falls, then it is not clear whether the regime has become more neutral.

Due to the flaws in the incidence-based measures of individual indicators, outcome based measures are widely used because they implicitly cover all the sources of trade distortion and based on data which are more promptly available.

3. Openness Ratio

The openness ratio in its simplest form is the ratio of imports plus exports as a fraction of GDP.

4. Pitchet Index

This is obtained by regressing the trade intensity, defined as the ratio of imports plus exports to GDP, total population, total area, GDP per capita, GDP per capita square. The regression equation is mentioned as under.

TI= ao + a1 POP + a2 AREA + a3 GDPPPC + a4 ( GDPPC)2 + e (15) The residuals from the above regression will be taken to measure the degree to which the ration deviates from what it would "normally" be.

5. Measure of Distortions in Prices

To find distortionary effect only one measure used here to capture the effect in price. Since the Dollar (1992) has developed this index, it is known as the best index for measuring the distortions in the economy as compare to Leamer Index (1988). Dollar developed index is used to measure the price distortions. This index is a modified version of an early developed index of relative price levels given by Summers and Heston for international comparison of prices.

RPLi = 100 ei Pi / Pus (16) Where is nominal exchange rate between country I an United States (US) and Pi and Pus are their respective price levels. This index, in effect, measures the degree of real exchange rate distortions. The assumption is that if purchas- ing power parity holds, then the absence of trade barriers and in the absence of non traded goods, RPL = 100. Deviation from 100 represents either the effects of trade barriers or the effect of non-traded goods. In order to remove the effects of non traded goods that following regression will be estimated.

RPLi = a0 + aI GDPCi + a DENSi + e I (17) Where, GDPPC is GDP per capita and DENS is population density, these

variables are proxies for endowments of capital, land and labor. The assumption is that relatively labor abundant countries will have relatively low prices for non- traded goods, since these tend to be labor intensive. The ratio of actual to predicated RPLi given the degree of distortion (Dollar).

Keeping in view above discussion about the methodology, this study is a con- tinuation to ascertain the work empirically proved by known economists D.Romer (1990) and Lucas (1988). This study is on age from other methodolo- gies on the new endogenous growth theories because it is also capturing the impact of trade policy variables like trade distortions and trade interventions indexes which applied by Sabatin Adward and omitted by others. The methodol- ogy describes the channel by which trade impacts on the growth via the domes- tic increased innovation, the technological development accruing in the South Asian countries and rest of the world. Finally, it shows that by controlling other variables whether trade will lead to converging South Asian countries to the advanced economies.

Moreover, it is mentioned that catch up affect, distortions impact and intervention affect on economic growth in selected South Asian countries is addition to work on these economies. So it can be counted as contribution of the appropriate methodology for explaining convergence through trade.

4.2 Variables and equations.

4.2.1 Gross Domestic Product Percapita (GDPPC)

The variable GDP per capita (GDPPC) accomplished from WDI. The GDP at 1996 constant prices is taken and is divided by total population to get GDP per capita.

GDP PER CAPITA=(GDP(%/TOTAL POPULATION) (18) This formula of growth rate is used to attain the growth rate

Growth rate= (GDPt- GDPt-1)/ GDPt-1 (19) Gross Domestic Investment (GDI)

Values derived from WDI at constant 1995 prices and its growth rate also calculated.

Knowledge Gap (GAP) using GDP at 1995 base year prices. This is proxy variable used for finding catch up affect. This is achieved form ratio of initial GDP to current GDP

GAP= (Initial GDP/ Current GDP) (20)

The Research and Development (RD) used as proxy for finding the catch up affect. This variable included no of Scientists, Engineers and Technicians per million for constructing RD.

4.2.2 Trade orientation and growth (TOP)

For this we used suitable indexes of openness and trade interventions. The indexes are difficult to construct in developing countries. Special form of trade restriction tariffs used for protection. Non Trade Barriers (NTBs) are sometimes used as indexes of the acuteness of the of non-tariff controls. This study design variable which is used for policy options and presenting their net results. The ratio of exports and imports are used for openness variable (TOP). This is used as a proxy for commercial policy because the availability of time series data on exports and imports. Explicit and implicit commercial policy accounts very important factors such as quotas and exchange controls.

Dollar (1992) The Dollar index is used for measuring the trade distortion.

Foreign Direct Investment (FDI) is very important source of knowledge, technology, and capital transfer.

This variable of population density (DENS) is used in the construction Dollar index.

All the data in US ($) Dollars and it is taken on constant 1996 base year prices. The variables which are different from the 1996 year base value, they are brought at 1996 base value. The purpose of this exercise is to get the same base for all the variables used to find the better results.

The variables constructed from WDI 2006 are, GDP, GDI, Total Population, Imports of Goods and Services, Exports of Goods and Services, Official exchange rate, Total Expenditures, Scientists, engineers, technicians in R and D (per million people), Land area (sq km), population density and FDI.

4.2.3 Nominal Exchange Rate, Consumer price indexes (CPI) are taken from IFS two issues. General Index of Stocks is attained from 50 years of Pakistan's Statistics, published by Federal Bureau of Statistics, Government of Pakistan.

All these variables are normalized by dividing them by total population that equalizes the unit value of explanatory variables to that of dependent vari- able (GDP per capita). It is a step towards attaining equivalent and comparable value contained results.

4.2.4 Model Equations

The model is build on Production function where we convert it into econometric model as

The model is derived form production function such as by Cobb Douglus.

Y=f (K,L) At (21) Y = output

K = capital

L = labour

At = Technological change

While we have taken here technology change as exogenous which we have convert as endogenous to see the technology change effect discussed by Edward (1992). Then it would become as

Y = f (K, L, At) , GDI, t , u (22) This equation shows the technology change as endogeneous and GDI, t , u GDI= Gross domestic investment

t = Index of trade intervention

u = Error term

Here we use the Edward equation and develop other equation for chang- ing effects analysis where we included new variables and elimination of used variable one by one to check the effects of each variable.

GDPPCi = a0 + a1 GDIi + a2 GAPi a3 TOPi + ui (23)

GAP = Knowledge Gap between Pakistan its neighboring countries with rest of the world

TOP= Trade orientation and growth

GDPPCi = a0 +1GDIi + a2GAPi a3 DOLLARi+ ui (24) DOLLAR= The Dollar index is used for measuring the trade distortion GDPPCi = a0 + 1 GDIi + a2GAPi a3 PITCHETi+ ui (25) PITCHET= This index is measuring the impact of distortions in the trade flows. GDPPCi = a0 + 1 GDIi + a2 GAPi a3 RDi+ ui (26) RDi= reearch and development which measured on the basis of doctors and engineers per thousand

GDPPCi = a0 + 1 GDIi + a2 GAPi a3 TOPi+a4 FDIi + ui (27) FDI = foreign direct investment

GDPPCi = a0 + 1 GDIi + a2 GAPi a3 TOPi+a4 POLi + ui (28)

POL = Political Instability, dummy for measuring the political instability

GDPPCi = a0 + 1 GDIi + a2 GAPi a3 TOPi+a4 GENEX i + ui (29) GENEX = General Stock Exchange Index, taken as a proxy for measuring political instability

GDPPCi = a0 + 1 GDIi + a2 GAPi a3 TOPi+a4 PRIMi + ui (30) PRIMi= enrolment in primary school

GDPPCi = a0 + 1 GDIi + a2 GAPi a3 TOPi+a4 GOVEXi + ui (31) GOVEXi= Government expenditure

Results and Discussion

Almost all the equations have produced satisfactory and significant results. The variables have depicted the expected signs and most of them are significant at conventional levels. Moreover, the R2 in all the estimated regressions is con- siderably high indicating that the empirical model is capable of explaining vari- ability in growth rate of GDP per capita. Moreover, the F Statistics values are also significant which shows the efficiency and correctness of the model.

Relationship between openness and intervention indexes and economic growth is discussed then important variables which have major contribution towards growth are discussed, like human capital, Foreign Direct Investment, Political Instability and government size.

5.2.1 The effect of Openness and Intervention indexes.

The estimated equation (32) has expected sings. The variables are statis- ticaly significant except investment (GDI) from Srilanka. Anyhow, it is also maintaining the expected positive sign. The reason to be insignificant could be that the countries that have pursued the inward looking policies or policies that have not encouraged local investment through suffocating regulation, it has caused distortionary effects on the investment and make it less effective, as compared to other South Asian countries. Sinha and Sinha (1996) have extract- ed the same results for Myanmar, India and Bangladesh. The results mentioned in the table 1 takes the case where trade openness (TOP) variable is used as indi- cator of commercial policy. Moreover, the detailed openness indexes series cal- culated for all the selected South Asian counties.

As stated above, the results of table 1 depict statistical significant relationship between growth and all the explanatory variables, except investment variable (GDI) for Srilanka, which a lso possesses the expected positive sign. India has the largest coefficient for the GDI as compared to other South Asian countries while Srilanka have the lowest. This result is consistent with the previous studies of growth conducted by Levine and Renelt (1992).

The trade openness variable (TOP) is also found statisticaly significant as per expectation for the all the countries in the sample. Bangladesh is taking the lead while Pakistan, India and Srilanka are following the former. It is obvious from these findings that trade is one of the most important sources for the eco- nomic growth. The openness factor promotes growth through increased avail- ability of technologies accompanying knowledge spillovers.

Hence, the most important thing that this study has extracted is that coeffi- cient of openness is positive and significant at conventional levels, providing sup- port to the notion that countries with open trade, with other things given, tended to grow faster as compared to other countries with open trade, with other things given, tended to grow faster as compared to other countries less open countries.

Overall, all the regression of this equation is presenting a satisfactory look, as almost all the variables are statisticaly significant. The R2 is high and F Statistic is also significant, which show the appropriate specification of the model.

Table 1 Openness and Economic Growth DEPENDENT VARIABLE: GDPPC






















F Stat###3604.25###523.7803###7537.083###135.3787


Note; The numbers in the parentheses are t values.

Significant at 1 % Significant at 5% Significant at 10% C = Constant Term GDI = Gross Domestic Investment GAP = Knowledge Gap TOP= Trade Openness.

5.2.2 Trade Distortion Index

In Table 2 the results of equation 33 are reported, by including the trade distortion index. This index is developed by David Dollar (1992) which is used to measure the degree of real exchange rate distortions. The value of the index above 100 will imply the trade distortions. The empirical value of this index for South Asian countries, the average value of this index, lies above 100 that is 142, 144, 185 and 237 for India, Pakistan, Bangladesh and Sri lanka, respective- ly. This result shows that Sri lanka has the larges level of exchange rate distor- tions as compared to other South Asian economies. The overall average value higher level of this index for the whole region is 152, which also exhibit that overall higher level of exchange rate

The results of investment (GDI) and knowledge gap (GAP) are also not affected by the inclusion of this variable Dollar in the equation and these vari- ables have maintained their expected signs.

Overall this result shows that Pakistan and its neighboring countries economies have high trade barriers in terms of overvalued exchange rate, which could be deterrent to their exports as

Well as to economic growth. These results are consistent with the study conducted by Dollar (1992). But our results of the value of the average exchange rate are different to that of Dollar's. He had calculated lower exchange rate dis- tortion magnitudes for South Asian countries, which is below than 100. Anyhow there are different time framework and sample size. One of the reasons for the Dollar values to be low is that he has used small for which time period was observed from 1976 to 1985. It shows that his data set was limited to only nine yeas, which is not reasonable for calculating the correct results of distortions. While our data set (1960-2005) is far larger and more reliable than Dollar's and is in better position to explain the pattern of exchange rate distortions. So our results are taking into account the larger scenarios and are providing better guidelines.

Overall, almost all the variables are statistical significant and presented the expected sings. The R2 for all the countries is also high, which shows that the model well explains the results between trade policy variable and economic growth. The DW values are also at their conventional levels.

In short, form these evidences, conclusion may be drawn that trade distortions are negatively affecting the growth process of the Paksiatn and its neighboring coun- tries. It is causing to slowdown the pace of catching up process. The exchange rate distortion index is also depicting the over valuation in the exchange rates. While Srilanka have the highest level of distortions in its exchange rates as compared to other South Asians countries. so there is need to implement market based exchange rate regime, which could provide support to the smooth growth process.

Table 2 Results for Growth Equation 33 Distortions and Economic Growth Dependent Variable: GDPPC






















F Stat###3721.7###995.9687###2169.354###120.4022


Note: The values in parentheses are t values.

Significant at 1% Significant at 5% Significant at 10 % C= Constant term GDI = Gross Domestic Investment GAP= Knowledge Gap Dollar = Dollar price Distortion Index

5.2.3 Trade Intervention Index

In Table 3, the regression results of equation 34 include another trade intervention index known as Pitchet Index. This index is measuring the impact of distortions in the trade flows. The sings of all the variables in the equation remain intact even after the inclusion of this variable. The investment variable (GDI) is statically significant for all the countries, except for Srilanka. While this variable is significant for Pakistan, India, and Bangladesh, respectively. One of the possible interpretations of the said case could be that by the inclusion of intervention index might have decreased the supply of imported goods in the economy and also due to the distortion effects, it have become insignificant.

Our results support the notion that in a open economy, in which domes- tic production requires domestic and imported inputs, trade distortions caused by government policies like tariffs and exchange controls, lower growth signif- icantly over a long period. As, it impedes the supply of imported inputs, there- by, decreasing the productivity of capital accumulation and hence, leading to reduction in the growth rate.

However, the results of catching up variable knowledge gap (GAP) remain ineffective by the inclusion of trade distortion index. The GAP variable for all the countries is still highly statistical significant and possessing larger magnitudes of the coefficients i.e.,-3.4019, 2.230 and -1.943 fro Srilanka, Pakistan, India and Bangladesh, respectively. It shows that even in the presence of the trade distor- tions these economies are converging to their steady state. Although, these are not converging with that pace which rate they otherwise would be.

The Pitchet Index itself is having negative sign for all the countries but is statistical insignificant for all the countries, except for Srilanka, where it is moderately significant. It is exhibited that it is affecting more to Srilanka econ- omy as compared to other South Asian economies. The results are also consis- tent with the study conducted by Jong - Wha (1993).

The R2 is quite high for all countries and got the find DW values after removing the autocorrelation problem. All this shows that model is correctly specified and the explanatory variables are efficiently explaining the variation caused by them in the dependent variable. Moreover, the F Statistics have also good values, which shows the model is correctly specified, and efficiently explaining the results.

Finally, it came out that by including the trade intervention index in the model, it did not affect the significance of the other variables and their signs remain intact. The catching up hypothesis is also remained valid for all the selected countries but the interventions are making their catching up speed very low. The sensitivity analysis's performance is also quite good which is showing the robustness of the results. The results suggest that intervention level should be brought down for all these countries to make the economies more competitive and for bringing efficiency in their all sectors.

Table 3 Results for Growth Equation 35 Trade Intervention and Economic Growth Dependent Variable: GDPPC


























F Stat###1019.609###140.4278###2747.370###18.4532


Note: The values in parentheses are t values.

Significant at 1% Significant at 5% Significant at 10 % C= Constant Term GDI = Gross Domestic Investment GAP= Knowledge Gap Pitchet = Trade Intervention Index

5.2.4 Research and Development Expenditures

In table .4 provides the results of equation 36 by including research and development expenditures in place, of GAP variable. This is another proxy used for measuring the knowledge gap. We could only be able to attain the data of number of research and development professional for Srilanka and India, while the data for other South Asian countries is not available. Therefore; the study is limited to these countries only.

The results of the regression for investment variable (GDI) and trade open- ness is statisticaly significant and positive for countries, India and Srilanka. The coefficients of R and D used as a proxy for the catching up affect is negative and statically significant, suggesting that as envisaged by the model, with other things given, countries with larger technological gap will tend to catch up faster to the developed countries. Hence, the notion of catching up hypothesis seems also valid in the case of South Asian countries. The results are supporting the proposition of the new endogenous growth theories, that the developing coun- tries will grow faster than the developed countries and will catch up DCs in the long run

The results of R and D for South Asian countries indicate that India is converg- ing at faster pace than Srilanka due to larger R and D base. India had 148 Scientists and engineers per million people in 2005, while Srilanka had only 87 Scientists and engineers in 2005. Pakistan had 92 Scientists and engineers in 2005. All these Figures depict the India's edge in R and D on other South Asian countries.

The coefficient magnitudes are- 1.005 and -0.264 for India and Srilanka, respectively. It indicates that if there is one percent increase in the number of research and development professionals, it will lead to converge India at the rate of 1% and the Bangladesh at the rate of 0.2% towards the steady state. The rea- son for showing high magnitudes of convergence for India could be that it has invested a lot in the research and development. It is not only gaining grounds in the world standard defense production but also marvelously performing in the IT sector. Which is ultimately enhancing the country's ability to grow faster then other countries in the region.

Both the values of the R2 and the DW are satisfactory. Overall, results by the inclusion of this variable are according the expectations, significant and consis- tent. It is producing the robust results, as they remain unaltered anyway by the inclusion of a new variable in the analysis. Our findings are consistent and sup- portive to that of findings of Edwards (1992).

Overall, it means that more the country would have the R and D professionals and Technicians, it would have the higher technological spills over absorbing capacity, which is generated in the rest of the world.

Table 4 Results for Growth Equation 37 R and D and Economic Growth Dependent Variable: GDPPC


Variables###India###Sri Lanka
















F Stat###585.669###134.372


Note: The values in parentheses are t values.

Significant at 1% Significant at 5% Significant at 10 % C = Constant Term TOP = Trade Openness GDI = Gross Domestic Investment RD = No of Scientists and engineers engaged in research and development activities


When study touches econometric estimation using time series covers the most important topic of trade liberalization and its impact on economic growth. It is envisaged that foreign trade can make significant contribution to a coun- try's economic growth. Since liberalization is considered as a powerful locomo- tive of growth. There are conflicting views about it. Some growth models accent potentially negative aspects of trade and recommend that trade promotion be given less weight than production geared to local needs. Finally some models relegate the trade sector to more or less neutral role.

Although there exists some studies on growth in the literature but there are only few which are taking the important relationship between trade liberaliza- tion, globalization and economic growth. As per our knowledge there hardly exist any study on the subject matter in the South Asian countries perspective. In the very study we have measured the impact of a wide range of openness measures on economic growth by employing more robust statistically signifi- cant techniques for time series analysis in the case of South Asian countries. Besides this, the study also highlighted other sources and contributory factors to economic growth.

The previous studies on growth and convergence starting from Solow (1956) which are taking trade liberalization as exogenous policy variable and not directly affecting the economic growth. While the new studies based on endogenous growth theories that of Romer (1990), Grossman and Helpman (1991) have set a new direction to the convergence hypothesis by introducing trade as an endogenous variable.

On the basis of the new endogenous growth theory, attempt has been made to explore it validity in the Selected South Asian Countries. The aim is to test that whether this new endogenous growth theory is binding for the Pakistan and its neighboring counties.

An endogenous growth model is developed to study the above linkages, mainly the channels through which trade liberalization affects the economic growth. It has also been explored and evidence were provided by Arthur Lewis (1955), of the theory that a country with more open boundaries will have the greater imitation capacity and will imitate, the world technological changes faster as compare to other less imitative capacity countries. These technology follower countries will catch the technology leaders in the long run. Globalization overall and especially trade liberalization will play an important role in this run.

The empirical findings support the proposition that controlling other factors, trade liberalizations leads to enhance the economic growth for all the selected countries in the sample. The convergence hypothesis is also holding, as the ini- tial income variable (GAP) and Research and Development variable (RD) are depicting the expected negatives sings that confirms the notion that endogenous growth theory stand binding in thee countries. These South Asian countries exhibit the trend that they will catch the developed countries in the long run.

The inclusion of the trade distortion and intervention indexes that of Dollar and Pithcet have also depicted the expected results. It is reflected that coun- tries that have more exchange rate distortions also, have over valued exchange rates, and are growing with less pace as otherwise they would have been. Our results state the South Asian exchange rates are overvalued which are negative- ly affecting their growth rates. The trade intervention index (Pitchet) also pos- sess the negative sings that means as there would be more government inter- ventions in the trade policy, it will cause to decrease the incentives for legal channels and will encourage the smuggling, illegal trades and higher black market premium.


* All these countries may pay special attention to their foreign trade.

Especially the inter regional trade may be promoted to minimize the cost and reap the benefits of economies of scale.

* Special attention may be paid to the social sector and particularly the educa- tion to accelerate growth and technology absorption capacity. The number of technicians, scientists and engineers should be increased because it will lead to convergence to steady state at a faster pace.

* The non-development expenditures particularly the debt and the defense expenditures, be cut in order to give relief to these poverty stricken economies. The developmental expenditures should be enhanced and the pri- vate sector must be encouraged.

* There should be market-oriented reforms be brought in the foreign trade sec- tor i.e., eliminating exchanging rate distortions and reducing tariff and non tariff barriers. The tariff and non-trade barriers must be cut in order to enhance efficiency, curtailing smuggling and promoting trade within and beyond South Asian region.

In short our research provides a direction for the researchers and the policy makers explore the events for their research on South Asian countries.. In this regard more open trade regimes would provide pay off in terms of growth of real per capita income if supplemented with financial, administra- tive and institutional controls, in the South Asian economies. These findings are important for the growth of this backward and poor region.


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Assistant Professor, Department of Economics, Shah Abdul Latif University, Khairpur, Sindh, Pakistan, Associate Professor, Department of Mass Communication, University of Sindh, Jamshoro
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Date:Jun 30, 2011
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