Exports, Growth and Causality:An Application of Co-Integration and Error-correction Modelling

This paper investigates the direction of causation between exports growth and economic growth. This issue has been widely investigated in the past in the context of the suitability of export promotion versus import substitution as development strategies. The traditional practice has been to utilise the Granger causality test to examine the direction of causality. Recent developments in econometric techniques have highlighted at least two shortcomings in the application of the standard Granger causality test. These include the stationary properties of the series and the co-integration of variables included in the analysis. The present paper, while investigating the direction of causation between exports growth and economic growth and using the Granger causality test, has taken into account these two shortcomings. The paper finds a stable, long-run two-way relationship between exports (as well as manufactured exports) and output, but a one- way stable relationship between output and primary exports. Furthermore, the paper also finds a bi-directional causation between exports (both primary and manufactured) growth and economic growth. Based on these findings, it is recommended that export promotion policy with a major emphasis on manufactured exports must be vigorously pursued to achieve a higher rate of economic growth.