Exports and Economic Growth Nexus: The Case of Pakistan

The theoretical association between trade and economic growth has been discussed for over two centuries. However, controversy still persists regarding their real effects. The favourable arguments with respect to trade can be traced back to the classical school of economic thought that started with Adam Smith and subsequently enriched by the work of Ricardo, Torrens, James Mill and John Stuart Mill in the first part of the nineteenth century. Since then the justification for free trade and the various and indisputable benefits that international specialisation brings to the productivity of nations have been widely discussed in the economic literature [Bhagwati (1978) and Krueger (1978)]. The suitability of trade policy-import substitution or export promotion—for growth and development has been also debated in the literature. In 1950s and 1960s, most of the developing countries followed import substitution (IS) policies for the economic growth. The proponents of the IS policy stress upon the need for developing countries (LDCs) to evolve their own style of development and to control their own destiny [Todaro and Smith (2003), p. 556]. Since the mid-1970s, in most developing countries, there has been considerable shift towards export promotion strategy (EP). 1 This approach postulates that export expansion leads to better resource allocation, creating economies of scale and production efficiency through technological development, capital formation, and employment generation.