Economic growth, export, and external debt causality: The case of Asian countries

Abstract

This paper develops a multivariate cointegration and error correction model to test the causality between exports, economic growth, and foreign debt servicing in 8 Asian countries for the period 1970-1997. The underlying series are tested as non-stationary in levels but stationary in first differences. Cointegration tests were applied to discover the possible long-term relationships between the variables. It is clearly evident from the results that no long-run equilibrium relationship exists among the relevant time-series, with notable exceptions for Bangladesh and Indonesia. These results, in general, provide weak support for a cointegration relationship between exports, economic growth, and foreign debt servicing among several Asian countries, including Pakistan. However, it is plausible that a long-run equilibrium relationship exists among the relevant time-series in the case of Bangladesh and Indonesia. These, results, however, do not exclude the possibility of a causal relationship among the time-series under consideration. The standard multivariate Granger causality test is performed for the non-cointegrating series. The ECM is tested for Bangladesh and Indonesia, for which a cointegrating relation between the causal factors cannot be rejected. The empirical results do not provide evidence that the economic growth in being significantly affected either by the export revenue growth or by the combined effort of exports and foreign debt in the South and South-East Asian countries between 1970 to 1997. The result implied that for Bangladesh, growth of external debt results in lower export revenue growth, and foreign debt servicing appeared to be negatively affecting the export-growth relationship in this poor country. Evidence for remaining countries neither supports the hypothesis of export-led growth nor the GDP growth-driven exports hypothesis in the 1971-97 period. This indicates that, neither foreign loan nor IMF-led structural programmes exert any significant impact on the economic growth in these countries in the 1971-1997 period. Rather, it implies that for these countries growth of external debt results in lowering both economic growth and export-revenue growth.