Qual Quant (2012) 46:1137–1149
Long term effect of trade openness on economic growth
in case of Pakistan
Qazi Muhammad Adnan Hye
Published online: 9 October 2011
© Springer Science+Business Media B.V. 2011
Abstract The present empirical work aims to investigate the long term effect of trade
openness on economic growth in the case of Pakistan from 1971 to 2009. A composite trade
openness index is developed by using principal component analysis (PCA) and is employed
in the JJ cointegration, autoregressive distributed lag (ARDL) approach to cointegration,
dynamic OLS and variance decomposition. The results suggest the existence of a negative
and significant association between trade openness and economic growth. But new evidence
provided by this study is that there is a strong complementary between human capital and
trade openness index in terms of enhancing the real GDP.
Keywords Trade openness index · Economic growth · Human capital · Pakistan
The trade openness and economic growth nexus are extensively investigated in the litera-
ture from the last 30 years. The endogenous growth theories have stated that trade openness
stimulates the economic growth through the technological spillover channel (Romer 1990).
The available theoretical literature indicates that trade openness cause to economic growth
through the followings three channels.
First, the trade openness causes economic growth
through efﬁcient allocation of resources. Second, trade openness shifts the technology from
developed to developing countries.
The last learning by doing effect: developed countries
innovate and developing countries imitates.
The empirical literature indicates that due to not have an extensive time series data, pre-
vious empirical studies investigate the trade openness and growth nexus on cross country
See Grossman and Helpman (1991), Young (1991)andRivera-Batiz (1995).
It is negatively linked with economic growth if the local resources of the country are unable to effectively
use the technology generated by the trade openness (see Romer 1990).
Q. M. A. Hye (
Institute of Business Management (IOBM), Karachi, Pakistan