TRADE OPENNESS AND ITS EFFECTS ON ECONOMIC GROWTH IN SELECTED SOUTH ASIAN COUNTRIES: A PANEL DATA STUDY
The study investigates the causal link between trade openness and economic growth for four South Asian countries for period 1972-1985 and 1986-2007 to examine the scenario before and after the implementation of SAARC. Panel cointegration and FMOLS techniques are employed for short run and long run estimates. In 1972-85 short run unidirectional causality from GDP to openness is found whereas, in 1986-2007 there exists bi-directional causality between GDP and openness. The long run elasticity magnitude between GDP and openness contains negative sign in 1972-85 which shows that there exists long run negative relationship. While in time period 1986-2007 the elasticity magnitude has positive sign that indicates positive causation between GDP and openness. So it can be concluded that after the implementation of SAARC overall situation of selected countries got better. Also long run coefficient of error term suggests that short term equilibrium adjustments are driven by adjustment back to long run equilibrium.
NTERNATIOANL trade plays an important role in the development of any economy and assumed to be an engine of growth . Trade is taking place not only in terms of commodities but also in terms of technology, flows of ideas and knowledge spillover.
International trade affects economy through different channels. It creates employment, generate capital formation that leads to better living standards in terms of higher level of GDP and GDP per capita. Over the past few years, the world trading system is becoming progressively open and competitive. Tariffs are reducing in both developed and developing countries and restrictions are eliminating. Economies are trying to adopt outward-looking economic policies, also looking for the ways to promote growth and employment through expanding export production and attracting inward investment.
The concept of trade openness and free trade is highly debated topic in economics. It is always assumed to be a very important source of economic growth. Trade openness can promote growth through several ways. It creates massive benefits, increase investments as a result of enlarged markets and economies of scale, flow of information, technology and knowledge spillovers. As, it creates efficient utilization of resources, improved technological efficiency and trade facilitation that returns in higher foreign exchange which is used to expand the less developed sectors of the economy. It is also supported by many economists in different studies. Some studies concluded that openness played effective role mostly in developed countries  whereas many studies concluded that openness can play significant role in less developed countries as well .
South Asia is economically one of the less developed regions of the world which accommodates more than 20 per cent of the world's population that is 1,542.95 million with the average GDP per capita of US $1,565. The South Asian economies mostly followed protectionist trade policies during their initial phases of development. The prime principles behind the restrictive trade regimes were protection of the domestic industries from foreign competition and conservation of foreign exchange for balance of payments support . Also, South Asia is assumed to be less integrated region of the world in terms of the trade of commodities, capital and ideas  whereas, Intraregional trade is very low for South Asia i.e. intraregional trade is less than 2 percent of GDP, compared to more than 20 percent for East Asia .
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