IMPACT OF EXPORTS ON ECONOMIC GROWTH

OF BANGLADESH
SARABUL ISLAM SAJBIR
FR-037-124
Department of Economics
University of Dhaka

Abstract:

Many economists assert that exports positively affect the economic growth of countries. This assertion was
not examined econometrically in Bangladesh perspective. Hence, the goal of this analysis was to test the
impact of exports on Bangladeshi economy. To test this objective, this analysis took into account the time
series data from the period of 1972 to 2018 and used two kinds of variables that are dependent and
independent variables. Here, the gross domestic product was regarded as dependent variable, whereas
Exports of goods and services and Gross capital formation were considered as independent variables.
Meanwhile, the multivariate econometric procedure was used to examine the impacts of export on
economic growth of Bangladesh. As reported by analytical results, export has indeed kept positive impact
on economic growth of Bangladesh at 1%, 5% as well as 10% level of significance. The R- squared of the
estimated model was 99% which showed that the estimated model had a very good-fit of the data. The
estimated model was tested for multicolinearity problem. BG & D-W tests were respectively done in order
to find out whether autocorrelation problem existed or not . Ramsey's RESET test was done to find out
specification bias. White's Heteroscedasticity test was done to be sure about homoscedasticity. Finally, to
witness whether there was any structural break, Chow Test was introduced in this paper.

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Introduction:

The market value of final goods and services produced by an economy is called gross domestic product or
GDP. The increase in the market value of the produced goods and services over a period of time is the
phenomenon that is called economic growth. In other words, economic growth is measured as the
percentage increase in real GDP as the valuation of the goods and services or GDP has to be adjusted for
inflation.
Economic growth depends on a broad number of issues. One of the major determinants of growth however
is the export, that is the shipment of domestic goods and services to foreign countries. Indeed export is one
of the main propulsive forces to economic growth. In today’s borderless economy where free trade among
countries is being implemented, this notion is very much verifiable. It will be needless to say that increase
in export not just comes with economic growth, but it also affects several other things. Export tends to
improve the balance of payment (BoP) which is an important indicator of economic performance of a
country. Again, exports increase foreign exchange reserves and also contribute in creating employment.
Export is a prospective weapon of budding the economy of Bangladesh and plays an essential task in
achieving the country's socio-financial purposes including poverty lessening goals. In a labour based
country like Bangladesh, export can appear as a significant aspect to constructphysical capital, generate
employment prospect, develop productive capability and help incorporate the home economy with the
global economy.

In developing countries, export is the main force that drives growth. Bangladesh is a developing country
whose large portion of annual budget depends on export. Among the goods that Bangladesh exports,
Garments, Textiles, Pharmaceuticals, Leather and Leather Products are the main ones. Bangladesh is the
second largest exporter of Ready-made Garments (RMG) in the world. The RMG sector accounts for three
quarters of total export revenues. Exports of Bangladesh have increased substantially over the last few
years. In 2012, the total export of Bangladesh amounted to 150 Billion BDT which rose to about 240
Billion BDT in 2018. Consequently, GDP growth rate increased from 6.5% in 2012 to an all-time high of
7.9% in 2018. Based on this statistics, this analysis assumes that export has a correlation with economic
growth of Bangladesh. Nevertheless, this relation was not demonstrated econometrically. Accordingly, this
analysis is going to investigate the relationship between export and the economic growth of Bangladesh
through econometric expertise.

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Literature Review:

(Humpage, 2000) in his study claimed that there is a positive relationship between imports and economic
growth. Though, the trend of influence between imports and economic growth is less definite. According
to his analysis, the direction of causality seems to run mostly from income to imports at quarterly
frequencies.

(Vohra, 2001) explored the relation involving export and growth in Malaysia, India, Pakistan, Philippines,
and Thailand for the year 1973 to 1993. The observed results showed that the exports have an affirmative
and significant impact on growth when countrieshave already achieved some level of economic
development.

(Subrata, 2002) studied that export promotion doesn't have any noteworthy impact on economic growth
for least income or high income countries. Developing export oriented countries like India etc are the
beneficiaries from export.

(Tang, 2006) denoted with the help of Granger Causality test that there is no long run relationship between
exports & real GDP. The study showed that there was no short run as well as long run causality between
expansion of export & growth in China.

(Awokuse, 2007), investigated the role of both imports as well as exports to economic growth in Poland,
Czech Republic and Bulgaria by using a neoclassical expansion modeling outline and multivariate co-
integrated Vector Auto-Regression (VAR) methods. The findings specified that the function of exports as
the engine of growth may be ambiguous or at best incomplete

(Yuhong, Zhongwan, & Changjian, 2010) performed co-integration analysis by means of the data of
import, export and economic growth. The outcome recommended that growth of import significantly
promoted economic expansion of China, while that of export performed the reverse one.

(Elbeydi, Hamuda, & V.Gazda, 2010) established the connection between export and economic growth
in Libya. Time series data for the time period 1980-2007 were used. Results showed that income, exports,
relative prices are co-related. He examined that there is bi directional causality in the midst of exports and
income growth. In conclusion, the consequences point out that the export promotion policy has a
contribution to the economic growth in Libya.

(Mishra, 2011) used co-integration and VECM (Vector Error Correction Model) to explain that causality
runs from growth in GDP to growth in exports for India. He used time series data between the time period
1970 to 2009. The paper provides verification that a long term relationship is visualized among the two
variables.

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Research Methodology:

Ordinary Least Square (OLS) method was in use to experiment the impact of exports on economic growth
of Bangladesh since the assessment of this method is easy compared to other econometric estimation
method. The OLS method is acknowledged as the best linear unbiased estimator .This study deemed the
subsequent testing procedures such as the identification of econometric model& the validation of
suggestive descriptive statistics of the variables . It was forthcoming that we used the log-log model as our
experiment was based on economic growth.

Data Collection:

To witness the fundamental relationship between exports of goods & services and economic growth in
perspective of Bangladesh, time series data from 1972 to 2018 was obtained from World Development
Indicator by World Bank. Data analysis was done using Stata 14.1.

Econometric Model:

We observed GDP as our dependent variable since it indicates economic growth and explanatory variable
as exports of goods & services. We further added a control variable as in Gross Capital Formation in
current LCU for productive analysis. The affiliation between dependent and independent variables were
resulted the following function:

GDPt= f ( EXPt , GCFt )

After conversion of the econometric model into a log-log econometric model, the following regression
function was:

lnGDPt = lnβ0+ β1lnEXPt + β2lnGCFt + Ut

Where,
GDPt = GDP (current LCU)
EXPt = Exports of Goods & Services (current LCU)
GCFt =Gross Capital Formation (current LCU)
Ut = Stochastic Disturbance Term
β = Coefficients

The adjusted R – squared & the R- squared were in use to examine the goodness of fit of the estimated
regression model. The sign and parameters were used to verify the individual involvement of independent
variables on dependent variable. The t – test was functioned to ensure the statistical significance of
coefficients of the variables. Whereas the F – statistic was used to check the overall significance of the
measured independent variables on the dependent variable.

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Descriptive Statistics:

The subsequent table illustrated the arithmetical positions of the variables in descriptive statistics.

Table 1: Descriptive statistics of the variables used in the econometric model ( in Millions )
Variables Mean Standard Minimum Maximum
Deviation

GDPt 3744214 4953912 37729 19758152

EXPt 589548 883934 2141 2970857

GCFt 996642 1472800 1772 6028302

Source: Estimated from the data collected from WDI, World Bank

Over the period, the country’s GDP has been on an average 3744214 million tk per year while it
experienced with maximum GDP of 19758152 million tk and minimum of 37729 million tk. High standard
deviation of GDP by 4953912 tk towards its average indicates less uniformity of GDP distribution over the
period.

Estimated Econometric Model:

The following regression equation demonstrates the outcome of expected model based on data &
methodology.

lnGDPt = 4.504716+ 0.2141lnEXPt +0.573lnGCFt

Since this equation is estimated log-log model, estimated partial slope coefficient 0.2141 implies, over the
period of time, holding gross capital formation constant, a 1 percent increase in exports of goods and
services induced on an average to increase GDP by 0.2141percent. while as 0. 573 refers, over the period
of time, holding export constant, a 1 percent increase in gross capital formation led on an average to an
increase in GDP by 0.573 percent. We can allude 0.2141 and 0.573 respectively output(GDP) elasticities
of export and gross capital formation. The positive signs of two coefficient ensures the positive relation
between exports and GDP, gross capital formation and GDP.

Table 2: ANOVA table for multi-variable regression model

Source of Variation SS df MSS
Due to regression 115.0806 2 57.5403002
(ESS)
Due to residuals .468582067 43 .010897257
(RSS)
TSS 115.549182 45 2.56775961
Source: Estimated from the data collected from WDI, World Bank

Where,
ESS= Explained Sum of Squares
RSS= Residual Sum of Squares
TSS= Total Sum of Squares
df= Degrees of Freedom

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 Table 3: The Regression results
Explanatory
Coefficients t - value P – value
Variables

lnEXPt 0.2141 4.23 0.0000

lnGCFt 0.5730037 10.86 0.0000
F – Statistics 5280.26 0.0000
R-squared:0.9959 Adjusted R-squared: 0.9957
Source: Estimated from the data collected from WDI, World Bank

From statistical point of view, the estimated regression model fits the data much well: that is more than 99
percent variation in logs of GDP is explained by the logs of exports and gross capital formation ( lnEXPt &
lnGCFt ). The Value R square of 0.9959 implies this. Whereas value of adjusted R square of 0.9957 tells us
that after taking into account the number of regressors the estimated model explains 99.57 percent
variation in logs of GDP. The high values of R square and adjusted R square is because of taking time
series data.
Our prior expectation from the theory of GDP, developed by Simon Kuznets, measured using expenditure
method as GDP = C+I+G+(X-M), is there prevails a positive relationship between GDP and exports and
between GDP and gross capital formation, broadly known as Investment. That is, an increase in volume of
economy’s exports would lead to an increase in its GDP. So would occur as result of an increase in gross
capital formation or private investment.
Our estimated model accords with this priori. Because t values and p values for corresponding t values of
both estimated slope coefficients implies that they are individually significantly different from zero. Over
the period, holding gross capital formation constant, a 1 percent increase in exports of goods and services
induced on an average to increase GDP by 0.2141percent while as holding export constant, a 1 percent
increase in gross capital formation led on an average to an increase in GDP by 0.573 percent. Value of F
statistics ensures overall significance of model.

Fig: Scatterplot Matrix between lnGDPt &lnEXPt

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From the scatterplot matrix, we can visualize an upward-sloping positive relationship between logs of
GDP & logs of Exports of goods & services. If we had connected all the points, we would've found SRF
(sample regression curve).

Test for Multicolinearity :

Auxiliary regression: Considering regression of one of the explanatory variables on others as an

auxiliary regression to original model, Lawrence R. Klein developed a rule of thumb: if R-Square of
original model is less than R-Square, then multicollinearity may be troublesome. Here, we regress
‘lnEXPt’ on ‘lnGCFt’ that gives R-squaredauxiliary of 0.978, which is less than R-squaredoriginal , 0.99 . so, we
conclude there might be some extent of collinearity between two explanatory variables, but not severe.

Pair-wise correlation: Also known as Zero order correlation coefficient between two regressors.
Variance covariance matrix shows that coefficient of correlation between the two explanatory
variables is -0.9892. The very high value of pair wise correlation coefficient alludes severe
multicollinearity problem in the model.

e(V) lnEXPt lnGCFt lnβ0(Constant)

lnEXPt 1.0000

lnGCFt -0.9892 1.0000

lnβ0(Constant) 0.4951 -0.6155 1.0000

Test for Autocorrelation:

Breusch-Godfrey Test: BG test is also known as Lagrange Multiplier test. Regarding the regression of
residual on original regressors and lagged values of residuals estimated Breush & Godfrey developed a test
statistic, (n-p)R2, that follows the chi-square distribution. Here, the calculated chi-square is 8.232 and
Probability of obtaining a chi-square value as much as 8.232 or greater is only 0.0041.So, the hypothesis of
no serial correlation can be rejected and can be concluded that there exists serial correlation among the
residuals.

lags(p) Chi Square df Prob > chi square

1 8.232 1 0.0041

Durbin-Watson d Test: From Durbin-Watson d test we have the same adjudication as Breusch-Godfrey
test. Here, Durbin-Watson d-statistic (3, 46) is 1.105766 and lower limit and upper limit calculated from d
table using k=3 and n=46 are respectively dL =1.201 and dH=1.474. Since, 0<d<dL , the hypothesis that
there is no serial correlation among residuals can be rejected. Also the correlation is positive.

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Test for Specification Error/Bias :

Ramsey's RESET Test: This test is conducted to see whether any important variable is omitted
from the model that have significant impact on dependent variable. Ramsey’s test statistic is
examined F(3, 40) = 4.77. Probability of having F as much as 4.77 or more is 0.0062 indicating rejection
of the hypothesis that the model has no omitted variables and no specification error. So, the fact that there
might be some other variable/s that have impact on log of GDP creates misspecification in the model.

Test for Heteroscedasticity :

White's Heteroscedasticity Test: Under the null hypothesis that the error variances are homoscedastic,
White has shown that sample size times the R2 obtained from the regression of residual squared on
explanatory variables in some forms follows the chi-square distribution. In this model, White's general test
statistic is 14.25917. p value of 0.014 assures the significance of the test statistic indicating the rejection of
null hypothesis. So, error variances are not equal for different values of explanatory variables.

Test for Structural Break :

Chow Test: Under the null hypothesis of no parameter instability, we test whether the parameters are
stable over the period considering 2000 as break point.We use interactive dummy and run the regression of
‘lnGDP’ on ‘lnEXP’ ‘lnGCF’ ‘g2’ ‘g2lnEXP’ ‘g2lnGCF’. Then result shows that the only coefficient
attached to ‘g2’ is significant, but the coefficients of ‘g2lnGCF’ and ‘g2lnEXP’ are insignificant.
Therefore, we can conclude that there is structural instability in the model but that is only due to intercept
term, not for slope coefficients.

Recommendation & Conclusion:

The objective of this study has been to test impact of exports on the economic growth specifically of GDP
growth of the economy of Bangladesh. To do the job an estimation has been conducted with the help of
data expounding exports performance of Bangladesh over the period of 1972 to 2018, considering log of
exports as main independent variable and log of GCF as control variable. Whereas log of GDP is
considered as dependent variable. Our findings confirm expanding aggregate demand of the economy, the
exports have positively significant impact on growth of GDP. That is export performance of Bangladesh
since independence has been positively corroborating its GDP growth. So our recommendation to the
policy makers for influencing economic growth is to give importance in promotion of exports. The higher
transport costs of exporting goods and services impedes the export promotion, which should be kept in
consideration. Tariff imposed by foreign government on exportable of Bangladesh, another important
factor hindering export promotion, should be withdrawn or at least minimized. There are other sorts of
barriers in improvement of export which also should be kept in account.

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https://databank.worldbank.org/data/source/world-development-indicators. (n.d.).
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and the GDP Growth of East China- Empirical Analysis Based on Causility. Modern Economy , 1.

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