Contributions of Exports, Fdi and Expatriates’ Remittances to Real Gdp of Bangladesh, India, Pakistan and Sri Lanka

This paper re-examines the effects of exports, FDI and expatriates’ remittances on real GDP of Bangladesh, India, Pakistan and Sri Lanka. Annual data from 1976 through 2006 are utilized. The Autoregressive Distributed Lag (ARDL) procedure is implemented for cointegration of variables with different orders of integration. The results reveal close similarities of long-run and short-run dynamics of the variables between Bangladesh and India. The same apply to Pakistan and Sri Lanka in terms of their short-run dynamics with no significant long-run causal flows. JEL Classifications: F10, F21, F22, F24 INTRODUCTION The issue of economic growth asymmetry across countries continually draws academic interest and intellectual curiosity. What really contributes to this asymmetry has puzzled the minds of economists and politicians for centuries. The new millennium raises more questions and concerns about this issue. As a result, there is a growing need to study it with more rigor and depth. Many less developed countries (LDCs) have adopted outwardand forward-looking policies to promote economic growth and employment. The roles of exports, foreign direct investment (FDI) and the concominant remittances of emigration are recognized as important economic growth-enhancing factors (Afzal, 2004; Hulugalle et al., 2005). Although the adoption of such policies by LDCs is expected to exert positive influences on overall GDP, it is uncertain how much is contributed by surging exports, FDI, and remittances. The empirics of their effects on GDP generate mixed and ambiguous inferences across countries over different sample periods and across different developing countries. Therefore, this paper re-examines the roles of these causal variables in promoting real GDP of Bangladesh, India, Pakistan and Sri Lanka. These four developing countries of South Asia have been selected because of emphasizing active policies of export promotion and diversification, increasing manpower exports and enticing FDI to boost economic growth as important members of SARC (South Asian Regional Cooperation). The remainder of the paper is organized as follows: section II reviews some of the related literature. Section III outlines the empirical methodology. Section IV reports the empirical results. Finally, section V offers conclusions and policy implications. Southwestern Economic Review 142 SOME RELATED LITERATURE REVIEW The existing literature studying the impacts of exports, FDI, and remittances on economic growth is vast. The effect of each variable on economic growth has generally been investigated in a bi-variate context for many countries using various sample periods and econometric procedures. Studies that focused on exports and FDI promotion have shown promising results in their contributions to economic growth in LDCs (Balassa, 1985; Sengupta and Espana, 1994; Yue, 1999). The benefits associated with exports and FDI have lent support to the export-led growth hypothesis (ELGH) and FDI-led growth hypothesis (FLGH) respectively. These theories are based on the idea that exports and FDI are key variables in determining economic growth. Federici and Marconi (2002) point out that many of these studies confuse causation and association. As a result, they expressed serious reservations about their influences on economic growth. The studies examining the relationship between exports and GDP have found strong support for ELGH, which conclude that export promotion can greatly benefit LDCs by generating “greater capacity utilization, economies of scale, improving allocation of scarce resources, and technological progress (Smith, 2001).” A crosssectional study by Smith (2001) on the Four Tigers of South-East Asia (South Korea, Singapore, Hong Kong, and Taiwan) found that outward-oriented policies have allowed these countries to sustain high rates of economic growth since the 1960s until 1997-98 financial crises. A study by Ghimay and others (2001), consisting of 19 LDCs, found a long-run relationship between exports and economic growth in 12 of the 19 countries. Export promotion also attracted investment and increased GDP in 15 countries. Some Southeast Asian countries found little impact of exports on overall GDP. Mamun and Nath (2003) found a "long-run unidirectional causality from exports to growth in Bangladesh, but no short-run effects on GDP." A study on Costa Rica found both longand short-run effects from export promotion, but the effects had a limited impact (Smith, 2001). Studies on FDGH have discovered that FDI promotion can greatly benefit LDCs by introducing new technology and skills, increasing employment creation, surging domestic competition and expanding access to international marketing networks (Mallampally, 1999; Sauvant and Athukorula, 2003). These benefits were found in the case of Morocco, where Baliamoune-Lutz (2004) concluded that FDI had positive effects on economic growth as well as a bidirectional relationship between exports and FDI. This means that another benefit associated with the promotion of FDI is that it can promote exports and vice versa. On the other hand, a regression analysis on Sri Lanka found that FDI has a positive but weak effect on GDP and a unidirectional causality flowing from GDP to FDI. This suggests that GDP has a greater impact in attracting FDI (Anthukorala, 2003). Research examining the impacts of exports and FDI on GDP within the same model has also concluded ambiguous results. For example, a study on Turkey found that economic performance was consistent with ELGH, but did not confirm FLGH because no spillover effects from FDI to output were found (Alia and Dcal, 2003). In the Latin American countries of Argentina, Brazil, and Mexico, the empirical data did not support the ELGH, but did find that FDI promotes economic growth and trade (Alguacil, et al., 2000). Dritsaki and Adamopoulos (2004) discovered a unidirectional causal relationship from FDI to GDP and a bidirectional causal relationship between exports and GDP of Greece. Yao (2006) found a strong relationship among exports, FDI, and GDP for Contributions of Exports, FDI and Expatriates’ Remittances to Real GDP Of Bangladesh, India, Pakistan and Sri Lanka 143 China. He found that the devaluation of the Yuan led to export and FDI promotion, stimulating growth. This study also found that FDI and exchange rates have a "simultaneous relationship with GDP." This means that currency devaluation may enhance economic growth by attracting FDI and encouraging exports. Over the past several years, the amount of migrants' remittances has increased substantially. In 2005 alone, remittances totaled to $160 billion dollars. The impact of remittances can depend on several factors, such as the "skills among employment of migrants, policies of remittance-receiving and source countries, investment climate, and size and geographic locations of countries are a few (World Bank, 2006). The World Bank report has found that remittances can impact a variety of macroeconomic variables, as well as have direct and indirect effects on other economic factors. The report also mentions several positive effects associated with international migration, including a reduction in poverty and income inequality, increase in per capita income, promotion of entrepreneurial activities, and strengthening of financial development in cash-dependent countries (Page and Adam, 2003; Hulugalle, and Maimbo, 2005; World Bank, 2006). A cross-sectional study (Page and Adam, 2003) conducted on 74 low-and middle-income developing economies found a reduction in poverty and income inequality, as a share of a country's GDP. Statistically, the study found that on average 10% increases in remittances lead to a 1.6% decrease in poverty. A time series study on Ghana found similar evidence that remittances decrease severity of poverty. The study did find one exception to the positive effects of the variable, in which international remittances reduce poverty more than internal migration. The author reasoned that the impact of the two types of remittances varied on different households (Adams, 2006). Some other studies have found that remittances spur growth by encouraging entrepreneurial activity and strengthening of financial development in cash-dependent countries (Hulugalle and Maimbo, 2005). Remittances are found to be more procyclical in less developed financial markets than in their counterparts, meaning the impact of remittances is larger in less developed financial systems (Giuliano and Arranz, 2005). Chami et al., (2003) found negative effects of remittances on economic growth in the cross-sectional paper on 101 developing countries. They argued that remittances resulted in incentives leading to moral hazard problems, which severed economic growth. The study also stated that remittances move countercyclically in a majority of countries causing negative effects in individual economies. Another study (WorId Bank, 2006) found that large inflows of remittances cause appreciation of exchange rates resulting in decreasing exports and contracting economic growth. This study found this to be true in 22% of the countries. Many researchers believe that adverse effects are more probable in small economies where dependence on remittances is higher. Other variables that remittances may impact negatively include interest rates, balance of payments, and other macroeconomic variables (World Bank, 2006). In Syria and Eygpt, inflation has also increased due to remittance inflows (Wahba, 1996). EMPIRICAL METHODOLOGY The steps involved in empirical methodology are briefly outlined as follows; Southwestern Economic Review 144 First, the simple ADF test, as outlined by Dickey and Fuller (1981), is implemented by estimating the following regression for each variable.