Trade Openness Transmission Channels for Pakistan

Abstract

Trade openness is a very popular economic policy among developing countries. At the moment over 95% of the world trade is being done among the members of the World Trade Organization (WTO 2013). Trade liberalization is not only related to the trade of goods and services but liberalization of the entire economy. There are a number of studies which investigate the effect of trade openness, however, research on the transmission mechanism between trade openness and Economic growth is very rear. The objective of the paper is to check that trade liberalization policy affects GDP growth through some channel variables. The study assumes five-channel variables, i.e., Budget Deficit, Foreign Direct Investment, Gross Fixed Capital Formation, Exchange Rate and Manufactured Exports. First trade openness policy affects these variables, which then affect GDP growth. For this purpose, we have taken the case of Pakistan and use data for the period 1978 to 2018 and check the hypothesis through VAR methodology. The granger causality confirms that there is no channel variable involve in the trade liberalization policy which affects growth.