Modelling Trade, Investment, Growth and Liberalisation: Case Study of Pakistan

The role of trade in economic development as an engine of economic growth has been at the centre of hot policy debates over the past four decades. History supports the success of import liberalisation policy in the United States of America (USA) in the 1940s, Japan in 1960s and the exports promotion achievements of Asian Tigers in the 1970s and 1980s [Yen (2009)].1 There is no doubt that increased movement of goods and services across international borders over the past few decades has helped developing countries to achieve faster and sustainable growth. Many researchers argued that free trade has a key ingredient in facilitating transfer of technology from developed to developing countries [Heokman and Javorcik (2006) and Harding and Javorcik (2012)]. Theoretical literature suggest that trade liberalisation enhances economic growth and development through the specialisation and technological developments. The theoretical link between international trade and economic development can be traced back to the earlier writings of Classical Economists (Adam Smith and David Ricardo) and Neoclassical Economists (Heckscher and Ohlin) in the early part of nineteenth century. The Classical Economists hypothesised that nations gain from trade, and World production would grow when trading nations specialise according to the principles of comparative advantage. On the other hand, the Neo-classical Economists argued that countries will tend to specialise in those products that use abundant resources intensively in the production process. As a consequence, factors prices will tend to equalise across trading nations if production technologies remain identical throughout the world (Stolper-Samuelson approach).