© AESS Publications, 2011 Page 183Asian Economic and Financial Review, 1(3), pp.182-1972011
and employment. Second, foreign exchange or foreign reserves earned through exports growthallows the country to import the capital goodsthat further leads to increase in productioncapacity of the country. Finally, increasedcompetition and volume of exports in theinternational markets accelerate thetechnological advancement in production processthat causes to obtain economies of scale. On thetheoretical basis, said channels strongly supportfor exports-led growth hypothesis.Exports oriented policies increase output,employment opportunities and domesticconsumption. This causes to enhance the demandof output produced. Improved exports sector widens the market share of firms that enables thefirms to attain economies of scale and inresulting lower unit costs (Olorunfemi andOlowofeso, 2006). It is an exports sector thatenables a country to trade with rest of the worldalong its lines of comparative advantage andspecialization. Generally, it causes to lead theefficient allocation of domestic resources.Similarly, this efficiency can be improved by theexposure to international competition. Thisencourages the firms to utilize moderntechnology and produces quality productsmeeting the demand of international customers(Olorunfemi and Olowofeso, 2006). Positiveexternalities of exports are also pointed byKessing (1967), Balassa (1978) and Krueger (1980) such as greater capacity utilization,economies of scale, incentives for technologicalimprovement and well-organized managementdue to foreign market competition.
Kaldor (1967) analyzed the causal relationship between productivity growth and output growth,including some factors like economies of scale,learning curve effects, division of labour andnew industrialization process. Further, hedocumented that the industrial development isworked as main determinant of output growth, inthe context of productivity growth. He alsoinvestigated the causal relationship betweenoutput growth, via productivity growth toexports growth. Kunst and Marin (1989) alsofound bidirectional causality, when productivityincreases due to promotion of scale economiesthat causes to enhance exports. A contributorywork was done by Sharma and Dhakal (1994);Bhagwati (1988) on the relationship betweenexports growth and economic growth. Theyargued that there is a possibility of existence of bidirectional causality between exports andeconomic growth. They also discussed the causalrelation between international trade and outputand inferred that trade promotes output andincome level which facilitates more expansion intrade volume, causes a process of a virtuouscircle of growth and trade. Balassa (1984); Lucas(1990) and Sparout and Weaver (1993)investigated exports and output growthregression analysis based on the neoclassicalgrowth accounting techniques of productionfunction and found significant and positiverelationship between exports growth variable inthe growth accounting. They concluded thatexports growth Granger cause output growth. Onthe other hand, Jung and Marshal (1985),Bahmani-Oskooee et al. (1991) and Holman andGraves (1995) strongly supported for bidirectional causality between exports growthand economic growth.The pervious work done before the eighties hadnot paid a serious attention on the time seriescharacteristics of the variables such as differentstationarity levels. It is commonly accepted thatnon stationary data set produces misleadinginformation among the concerned variables. The previous work on exports-led growth hypotheses(ELG) is extensively based on the cross-countrycomparison (for example, Michaely, 1997 andBalassa, 1978). These studies strongly supportthe exports-led growth hypotheses. In thedevelopment of causality tests (Granger, 1969and Engel and Granger, 1987), correlationtechniques failed to measure direction of causality. After the development of unit roottests (Dickey and Fuller, 1979) and cointegrationtechniques, (Phillips and Durlauf, 1986; Phillips,1987 and; Phillips and Perron, 1988), checkingthe stationarity properties of the variables have become common routine. Thus, starting in the1980s, most of the studies based on thecointegration techniques to find out the long runrelationship between exports and economicgrowth. Finally, the relationship between exportsand economic growth has been checked throughtraditional cointegration techniques and error-correction method. These types of modelincludes Bahamani-Oskooee and Alse (1993),Sengupta and Expana (1994), Ghatak and Price(1997), Ekanayake (1999), Richards (2001) and Ngoc et al. (2003) were used to examine long-