Is The Export-Lead Growth Hypothesis Valid For Canada?: Titus Awokuse
Is The Export-Lead Growth Hypothesis Valid For Canada?: Titus Awokuse
Is The Export-Lead Growth Hypothesis Valid For Canada?: Titus Awokuse
University of Delaware
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FREC SP02-01
March 2002
Titus O. Awokuse*
Department of Food and Resource Economics, University of Delaware
Abstract
Empirical evidence linking exports to economic growth has been mixed and
inconclusive. This study re-examine the export-led growth (ELG) hypothesis for Canada
by testing for Granger causality from exports to national output growth using vector error
correction models (VECM) and the augmented vector autoregressive (VAR)
methodology developed in Toda and Yamamoto (1995).
Application of recent
developments in time series modeling and the inclusion of relevant variables omitted in
previous studies help clarify the contradictory results from prior studies on the Canadian
economy. The empirical results suggest that a long-run steady state exists among the
models six variables and that Granger causal flow is unidirectional from real exports to
real GDP.
JEL Classification: F43, C32
_____________________________________________________
* Author can be contacted at the Department of Food and Resource Economics,
University of Delaware, Newark, DE 19716, USA. Email: [email protected].
1. Introduction
The nature of the relationship between exports and national output growth has
been one of the most debated in the recent past, yet with little consensus. Central to this
debate is the question of whether strong economic performance is export-led or growthdriven.
between export and growth has important implications for policy-makers decisions
about the appropriate growth and development strategies and policies to adopt. The fact
that strong correlation exists between exports and real GDP growth has been well
documented in the literature. But previous empirical studies have produced mixed and
conflicting results on the nature and direction of the causal relationship between export
growth and output growth. Although most studies focus on the causal link between
exports and output growth in developing countries (Michaely 1977; Balassa 1978; Chow
1987), some researchers have examined the export-led hypothesis with emphasis on
industrialized countries (Marin 1992; Serletis 1992; Henriques and Sadorsky 1996;
Yamada 1998). However, very few empirical studies have been done in the recent past to
investigate the export-led growth (ELG) hypothesis for Canada (Serletis 1992; Henriques
and Sadorsky 1996).
Using data from selected industrialized countries, Marin (1992) examines the
causal link between exports and productivity and finds that the ELG hypothesis cannot be
rejected for Germany, Japan, the United Kingdom, and the United States. But Marins
(1992) study did not include Canada. Only two recent studies are found that use
Canadian data. The first study by Serletis (1992) examines the ELG hypothesis by using
single equation techniques to analyze Canadian annual data (exports, imports, and GNP)
from 1870 to 1985. Serletis (1992) finds empirical support for the ELG hypothesis in
Canada. More recently, Henriques and Sadorsky (1996) also focused on the export and
output growth relationship for Canada using just three variables (GDP, exports, and terms
of trade). They employ a multivariate cointegration estimation methodology that
accounted for potential feedback and simultaneity effects between the three variables. In
contrast to Serletis (1992) earlier result, Henriques and Sadorsky (1996) find that
changes in GDP precede changes in exports.
The lack of consistent causal pattern between exports and output growth in the
studies on Canada may be due to one or more of the following modeling issues. The
causal models in these studies may be mis-specified because of: i) the omission of an
important variable such as capital, labor, and foreign output shocks; ii) traditional
Granger causality F-test in a regression context may not be valid if the variables in the
system are integrated since the test statistic does not have a standard distribution (Toda
and Philips 1993); and iii) temporal aggregation issues from use of annual time series
may yield erroneous causation results (Bahmani-Oskooee and Alse (1993).
This paper contributes to the literature on the export-output growth nexus in the
following ways. First, previous studies on the dynamic linkages between exports and
output growth are extended through the application of recent advances in time series
statistical techniques: i) vector error correction modeling (Toda and Philips 1993), and ii)
augmented level VAR modeling with integrated and cointegrated processes of arbitrary
orders (Toda and Yamamoto 1995; and Dolado and Lutkepohl 1996).
These two
methodological procedures are useful because they allow tests of Granger causality
between exports and output growth while accounting for the long-run information often
ignored in systems that requires first differencing and pre-whitening prior to inference. In
contrast to previous studies on Canada that used annual data in their analysis, this study
uses a higher frequency quarterly time series data on Canada from 1961:1 -2000:4.
In addition to employing recently developed time series modeling techniques and
use of higher frequency data, this study also expands on the three variables used by
Henriques and Sadorsky (1996) to include labor, capital, and foreign output shock.
Using VECM and Toda and Yamamotos (1995) augmented VAR procedure, our results
suggest that changes in real exports precede changes in real GDP. Furthermore, our
inclusion of additional variables appear to be justified, as capital, labors, and foreign
output shocks are statistically significant in the models. Our finding of evidence in
support of ELG hypothesis for Canada is consistent with Serletis (1992) results, but
different from Henriques and Sadorsky (1996) findings.1 The rest of this paper is
organized as follows. Section 2 discusses the analytical framework and methodological
issues while section 3 presents empirical findings and section 4 summarizes the papers
findings.
2. Analytical Framework and Methodological Issues
2.1. Exports and Output Growth Nexus
In the literature, causality from exports to real output is denoted as ELG hypothesis while
the reverse causal flow from real output to exports is termed growth-driven exports. ELG
hypothesis reflects the view that export-oriented policies help stimulate economic
growth.
(1)
where Y represents real GDP growth, K, L, X, TT, Y* represent real capital, labor, real
exports, real terms of trade, and a foreign output shock respectively. The export-output
growth causal link is a long-run behavioral relationship whose analysis requires
estimation techniques appropriate for long-run equilibria. Therefore, the variables in the
system must be tested for cointegration, prior to testing for Granger causality. This paper
will apply recent advances in time series techniques by estimating VECM and level VAR
models with integrated and cointegrated processes of arbitrary orders (Toda and
Yamamoto 1995; and Dolado and Lutkepohl 1996).
improvement over simple correlation coefficient analysis, it has been shown to be weak
in modeling multivariate cases because it: i) is sensitive to the choice of endogenous
variables in the cointegrating regression; ii) makes a priori assumption of a single
cointegrating vector in the system; and iii) tends to yield biased parameter estimates in
small samples (Banerjee, et al 1990). Johansen (1988) and Johansen and Juselius (1990)
maximum likelihood (ML) procedure is a very popular alternative to the Engle-Granger
method. The main attraction of this procedure is that it tests for the possibility of multiple
cointegrating relationships among the variables. Johansen and Juselius (1992) modeled
time series as reduced rank regression in which they computed the ML estimates in the
multivariate cointegration model with Gaussian errors. The model is based on the error
correction representation given by
p 1
X t = + i X t i + X t 1 + t
(2)
i =1
length, and t is i.i.d. p-dimensional Gaussian error with mean zero and variance matrix
(white noise disturbance term). The coefficient matrix is known as the impact
matrix and it contains information about the long-run relationships.
Equation (2) resembles a VAR model in first differences, except for the inclusion
of the lagged level of Xt-1, an error correction term, which will contain information about
the long run among variables in the vector Xt. This way of specifying the system contains
information on both the short- and long-run adjustment to changes in Xt through the
estimates of and respectively. The VECM equation above allows for three model
specifications. (a) If is of full rank, then Xt is stationary in levels and a VAR in levels
is an appropriate model. (b) If has zero rank, then it contains no long run information,
and the appropriate model is a VAR in first differences (implies variables are not
cointegrated). (c) If the rank of is a positive number, r and is less than p (where p is
the number of variables in the system), there exists matrices and , with dimensions
ln(1 )
i = r +1
(3)
The second test statistic is known as the maximal eigenvalue test which computes the
null hypothesis that there are exactly r cointegrating vectors in Xt and is given by:
max = -T ln(1-r).
(4)
The distributions for these tests are not given by the usual chi-squared distributions. The
asymptotic critical values for these likelihood ratio tests are calculated via numerical
simulations (see Johansen and Juselius 1990; and Osterwald-Lenum 1992).
limitations because of its dependence on pre-tests for cointegration and its inapplicability
to mixed orders of integration processes.
potentially biased pre-tests for unit roots and cointegration, common to other
formulations.
The Toda and Yamamoto (1995) procedure uses a modified Wald (MWALD) test to
test restrictions on the parameters of the VAR(k) model. This test has an asymptotic chisquared distribution with k degrees of freedom in the limit when a VAR[k+d(max)] is
estimated (where d(max) is the maximal order of integration for the series in the system).
Two steps are involved with implementing the procedure.
determination of the lag length (k) and the maximum order of integration (d) of the
variables in the system. Measures such as the Akaike Information Criterion (AIC) and
Hannan-Quinn (HQ) Information Criterion can be used to determine the appropriate lag
structure of the VAR. Given the VAR(k) selected, and the order of integration d(max) is
determined, a levels VAR can then be estimated with a total of p=[k+d(max)] lags. The
second step is to apply standard Wald tests to the first k VAR coefficient matrix (but not
all lagged coefficients) to conduct inference on Granger causality.
relationships among the six variables in the system, the short-run dynamics is also
explored by performing multivariate Granger causality tests for the VECM. F-statistics
and probability (in parentheses) for Granger causality tests from the VECM specification
are presented in Table 3. Also included in Table 3 are the t-statistics for the error
correction terms (ECT) from each of the six equations. Emphasis is placed only on the
relationships between Canadian real exports and real GDP.
system, at least one channel of Granger causality is active: either in the short-run through
the joint tests of lagged-differences or a statistically significant ECT. This latter channel
is provided by the VECM specification and is only significant in the two equations for
real GDP and foreign output shocks. A significant ECT coefficient implies that past
equilibrium errors pay a role in determining current outcomes. The short-run dynamics
are captured by the individual coefficients of the differenced terms. It is noted that the
ECT coefficient for the real GDP equation is statistically significant while the ECT
coefficient for the real exports equation is not significant. This implies that export growth
did Granger cause the growth in real GDP (but not vice versa) in the long-run.
Similarly, in the short-run, the ELG hypothesis is also supported since the test
that real GDP does not Granger-cause real exports could not be rejected at the 5% level.
10
The empirical evidence strongly suggests that real exports Granger-causes real GDP at
the 1% level of significance. In support of our inclusion of other variables omitted in
other studies, changes in capital and labor do influence real GDP growth. This finding
for labor and capital, which was omitted in previous studies on Canada, is consistent with
the augmented aggregate production function assumed earlier.
11
Also of
importance in Table 4 is the result that real exports does not Granger-cause real terms of
trade. This contrasts with the conclusion from Henriques and Sadorsky (1996) that their
result suggests that historically Canada may not be the small open economy that it is
often though of. The result of the present study is consistent with the ELG hypothesis
and supports the widely held view that Canada is a small open economy.
3.4 Structural Stability Results
Evidence from test plots for the recursive residuals and CUSUMSQ for the six
equations suggest that structural breaks may have occurred at the following points: 1973:4
and 1992:2. Chow test results confirm structural instability for all six equations at 1973:4,
but the hypothesis of no structural break at 1992:2 could not be rejected.3 The break point
at 1973:4 is plausible because it coincides with the OPEC oil price shocks of late 1973 that
had impacts on productivity in the world economies. Given the results from the tests for
structural break, the VAR system was re-estimated over two sub-samples: 1960:1-1973:4
and 1974:1-2000:4. The F-statistics and p-values for the resulting Granger-causality tests
over the two sub-periods are generally consistent with those reported for the full sample.
The notable difference is the finding of a bi-directional causal flow between productivity
and exports in the early sub-sample (1961:4-1973:4). This result supports the view that in
the post-1974 period the Canadian economy has become increasingly dependent on
exports abroad, especially to the United States.
12
4. Concluding Remarks
employing recently developed time series estimation techniques and including previously
omitted relevant variables. To determine whether Canadian data are consistent with
export-led growth or growth driven exports, two alternative methodological procedures
were used to test for Granger causality: VECM and the augmented level VAR model
with integrated and cointegrated processes of arbitrary orders developed by Toda and
Yamamoto (1995). The analysis focused on the dynamic causal relationship between
exports, capital, labor, terms of trade, foreign output shock, and output growth using
quarterly Canadian data (1961:1-200:4).
Empirical evidence from Granger causality tests based on both alternative models
indicate that changes in real exports precede changes in real GDP. Furthermore, our
inclusion of additional variables was justified, as capital, labor, and foreign output shocks
are statistically significant in the models. In addition to finding support for the ELG
hypothesis in the short-run, the results from cointegration analysis and levels VAR also
provide support for ELG in the long-run.
validity of the ELG hypothesis are similar to results from Serletis (1992) for Canada and
Marin (1992) empirical findings for other industrialized nations such as the United
13
Canadian dollar and improved access to U.S. and other foreign markets, this finding is
plausible and consistent with prior expectations that increasing Canadian exports
stimulates economic growth.
VAR
innovations
(see
Bessler,
et
al
2002).
14
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15
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17
-2.52(1)
-2.54(4)
-1.49(1)
-2.56(1)
-2.62(5)
-2.23(1)
First differences
GDP
EXP
TOT
K
L
IP
-7.18(1)
-5.72(3)
-7.55(1)
-6.65(1)
-4.57(4)
-5.87(1)
PP (k)
-2.75(1)
-1.63(3)
-1.37(1)
-2.48(1)
-2.72(3)
-3.04(1)
***
***
***
***
***
***
-9.93(1)
-36.59(3)
-10.62(1)
-8.19(2)
-10.99(3)
-6.60(1)
***
***
***
***
***
***
Notes:
***, **, and * denote that a test statistic is significant
at the 1 %, 5%, and 10% signigificance level, respectively.
The critical values for the tests at the 1%, 5%, and 10%
significance level, respectively, are -3.51, -2.89, and -2.58
respectively. Values in parentheses are lag lengths.
18
# of Cointegrating
Vectors
r=0
r1
r2
r3
r4
r5
Trace
Statistics
112.86**
66.09
38.80
21.14
8.47
3.31
-max
C(5%)
94.15
68.52
47.21
29.68
15.41
3.76
Statistics
46.77**
27.29
17.66
12.67
5.16
3.31
C(5%)
39.37
33.46
27.07
20.97
14.07
3.76
Notes:
Critical values used are taken from Osterwald-Lenum (1992)
** indicates rejection at the 95% critical values
19
5.0736
(0.407)
3.4490
(0.6311)
7.1604
(0.209)
2.7518
(0.7382)
10.5266
(0.0616)
EXP
TOT
F-Statisitics
24.3867
9.4106
(0.0002) (0.0938)
1.4809
(0.9153)
5.0241
(0.413)
9.5095
7.7207
(0.0904) (0.1723)
6.8499
5.9292
(0.232) (0.3132)
5.8072
8.5824
(0.3254) (0.1269)
16.4925
(0.0056)
1.9249
(0.8594)
1.5497
(0.9073)
14.2087
(0.0143)
9.0227
(0.1082)
14.1324
(0.0148)
2.7519
(0.7382)
2.3077
(0.8051)
8.0635
(0.1528)
11.7277
(0.0387)
IP
6.9763
(0.2224)
10.8223
(0.055)
6.3932
(0.2698)
1.9868
(0.851)
11.6272
(0.0403)
-
Lagged
ECT
t-statistic
[ 4.63125]
[-0.99646]
[ 1.62995]
[ 1.67959]
[ 0.26676]
[ 3.19124]
Notes:
Figures presented in final column are estimated t-statistics testing the null that the lagged error correction
term (ECT) is statistically insignificant for each equation. All other estimates are asymptotic Granger
F-statistics. Values in parentheses are p-values.
20
GDP
Dep.
Variables
GDP
EXP
TOT
K
L
IP
5.6633
(0.4619)
6.9814
(0.3226)
11.5921
(0.0717)
2.9371
(0.8167)
23.1542
(0.0007)
EXP
TOT
9.3199
(0.1564)
6.4550
(0.3742)
6.7598
(0.3436)
11.6992
(0.069)
12.4330
(0.053)
IP
8.8916
(0.1798)
12.9240
(0.0443)
8.3179
(0.2157)
3.7550
(0.7098)
11.9449
(0.0632)
-
Notes:
The [k+d(max)]th order level VAR was estimated with d(max)=1 since the order of integration is 1.
Lag length selection of k=5 was based on AIC and HQ information criteria test results.
Reported estimates are asymptotic Wald statistics. Values in parentheses are p-values.
21
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