How the Cost of Marine Insurance and General Insurance affects

the trade openness and the Economic Growth of a country: A Case

from Pakistani Non-life insurance Industry

Sajid Mohy Ul Din (14297)

MS: Master of Sciences

A thesis submitted in Partial Fulfillment of the requirements for the degree of

MS

Department of Management Sciences

Iqra University, Islamabad Campus

2013

I
 ABSTRACT

Economists hold that trade deficit in long run can drag down economic growth. Worlds

financial crisis of 2007-09 resulted into squeezed demands for foreign goods/services; therefore,

export-oriented countries are looking for new markets to enter. Globalization provides

opportunities for international trade meanwhile it involve numerous commercial (i.e.

Bankruptcy, Insolvency, Natural disasters, Economic conditions etc) and Political (Currency

exchange rate, War, Confiscation etc) risks. Cross-border trade is not without risk and insurance

facilitates the cross border trade, which subsequently contributes into economic growth. Pakistan

is a developing country, having persistent trade deficit, increasing population, low per capita

income, low industrial efficiency, and energy crisis. Exports are deteriorating year by year and

manufactures are unable to compete in the international market due to high cost of production

owing to energy crisis and high inflation rate. Furthermore, poor law and order situation and the

war on terror increased the risk of theft/damage/lost of goods during transportation. These factors

have deteriorated the economic environment of the country. To hedge the risk, companies insure

themselves under different private and government marine insurance contracts. These contracts

cover almost all the commercial and political risks, supporting the international trade.

Trade openness and general insurance industry are very important for economic growth. On the

other hand, marine insurance is vital for trade, but none of the single study empirically checked

the relationship between marine insurance, general insurance industry, trade openness, and

economic growth. The objective of this study is to investigate the long-term and short-term

relationship between marine insurance, non-life insurance, trade openness, and economic growth

in Pakistan for the period 1982 to 2009. This study employs the ARDL and VECM to check the

long-term and short-term relationship between variables while OLS and Granger Causality used

II
to check the impact of marine insurance on trade openness and the direction of relationship. The

results reveal that there exists positive long-term relationship between non-life insurance and

economic growth. However, trade openness negatively affects economic growth in the longer

run. Similarly, marine insurance is significant and negatively affecting the trade openness in the

longer run and the relationship is bi-directional in nature. Marine insurance have significant and

negative impact on trade openness of Pakistan, so policymakers should devise strategies to

somehow minimize the negative impact of cost of marine insurance on international trade. This

can be done by providing export subsidies in the short run while restore the peace in the country

to lower down the cost of insurance in the longer run.

Due to resources limitation, author performed time series analysis to check the relationship

among marine insurance, general insurance, trade openness, and economic growth. Future

researcher can perform similar analysis on the panel data of developing countries.

III
 Declaration Form

I Sajid Mohy Ul Din, hereby, declare that the thesis titled How Cost of Marine Insurance and

General Insurance affects trade openness and Economic Growth: A Case from Pakistani

Non-life insurance Industry submitted by me in fulfillment of the requirement for the degree

of MS. This thesis represents research carried out at Iqra University Islamabad Campus and aims

at encouraging discussion and comments. The observations and viewpoints expressed are the

sole responsibility of the authors. It does not necessarily represent position of Iqra University

Islamabad Campus or its faculty. I also understand that if evidence of plagiarism is found in my

thesis at any stage even after award of the degree, the work may be cancelled and the degree

revoked.

Sajid Mohy Ul Din

Registration # 14297

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 DEDICATION

I would like to dedicate this thesis to my beloved parents who have been a great source of

inspiration throughout my life, have provided a lot of moral support to me, and enabled me to

become what I am today. My brothers and sisters also supported and encouraged me to never

give in. I would also like to dedicate this thesis to my honorable teachers (Dr. Syed Amir Shah

and Dr. Kashif ur Rehman) who gave me precious knowledge.

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 ACKNOWLEFGEMENT

I am extremely thankful to almighty Allah for the courage and opportunity. I am also thankful to

my thesis advisor, Dr. Khurrum S. Mughal, whos continuous guidance help me get passed all

hurdles and complications that I encountered during the course of this research. His persistent

believe in me instilled in me a desire as well as courage to carry out this research with utmost

honesty and dedication.

I would also like to thank Dr. Kashif ur Rehman, as a pattern who guiding me through

understanding the research process in a better way. Moreover, I would also like to extend a hand

of gratitude to Dr. Syed Amir Shah, whose expertise of research work enabled me to understand

and carry out this research.

My special thanks to my family members who have always been there for me. They gave me

immense audacity and encouragement. They have been great motivating factor throughout this

period.

Sajid Mohy Ul Din

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 TABLE OF CONTENTS

Approval Sheet...I
Certificate ....................................................................................................................................2
Abstract .................................................................................................................... ii
Declaration Form ....................................................................................................iv
Dedication ................................................................................................................. v
Acknowledgement ...................................................................................................vi

CHAPTERS
1. INTRODUCTION................................................................................................ 1

1.1 Background ............................................................................................................................1

1.1.1 Evaluation of Marine Insurance .................................................................................3
1.1.2 Insurance in Pakistan .................................................................................................6
1.1.3History of Pakistans Balance of Trade .......................................................................7
1.1.4 Economic Growth and Insurance Trade ...................................................................10
1.2 Problem Identification....11
1.3Problem Statement ...............................................................................................................12
1.4 Research Question ..............................................................................................................12
1.5 Significance of Study ..........................................................................................................12
1.6 Objectives of study .............................................................................................................13
1.7 Structure of the study ..........................................................................................................13

2. LITERATURE REVIEW.15

2.1 Imports and Exports ............................................................................................................15

2.2 Factors Affecting Openness17
2.3 Economic Growth ...............................................................................................................20
2.4 Definition ...........................................................................................................................21
2.4.1 Risk ...........................................................................................................................21
2.4.2 Insurance ...................................................................................................................22
2.4.2.1 Marine Insurance ...................................................................................................24
2.4.2.1.1 Cost of Marine Insurance ....................................................................................26
2.5 Non-Life Insurance and Economic Growth . ....................................................................30
2.6 Theoretical Model ............................................................................................................32
2.6.1Economic Growth and Openness . .............................................................................32
2.6.2 Economic Growth and Insurance ..............................................................................32
2.6.3 Cost of Marine Insurance and Openness ..................................................................33

3. METHODOLOGY........35

VII
 3.1 Data Source .....................................................................................................................35
3.2 Measurement ...................................................................................................................35
3.1 Statistical Test .................................................................................................................37

4. RESULT AND DISCUSSION..38

4.1Economic Growth ..............................................................................................................38
4.2 Trade Openness .................................................................................................................48

5. CONCLUSION AND RECOMMENDATION...44

5.1Conclusion ................................................................................................... 44
5.2 Recommendation ........................................................................................ 46
5.3 Future Implication ....................................................................................... 47

REFERENCES ...................................................................................................... 48

Appendix ................................................................................................................. 53

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 LIST OF FIGURES
Figure 1: Number of Insurance Companies ............................. Error! Bookmark not defined.
Figure 2: Balance of Trade ...................................................... Error! Bookmark not defined.
Figure 2.1: Model 1.................................................................. Error! Bookmark not defined.
Figure 2.2: Model 2.................................................................. Error! Bookmark not defined.
LIST OF TABLES
Table 1: Major Exports of Pakistan ......................................... Error! Bookmark not defined.
Table 2: Insurance and Econic Growth .................................... Error! Bookmark not defined.
Table 4.1: ADF ........................................................................ Error! Bookmark not defined.
Table 4.2: ARDL ..................................................................... Error! Bookmark not defined.
Table 4.3: OLS ......................................................................... Error! Bookmark not defined.
Table 4.4: Granger Causality ................................................... Error! Bookmark not defined.
Table 4.5: Lag Selection Model ............................................... Error! Bookmark not defined.
Table 4.6: VECM ..................................................................... Error! Bookmark not defined.

APPENDIX ECONOMIC GROWTH AS DEPENDENT

Appendix A1 Unit Root Test ................................................... Error! Bookmark not defined.

Appendix A2 Results of Walt Test ..........................................................................................IX
Appendix A3 Results of OLS (Eco Growth, Trade, Insur, &
FDI)..Error! Bookmark not defined.
Appendix A4 Pesaren Et aL (2001) ......................................... Error! Bookmark not defined.

APPENDIX TRADE OPENNESS AS DEPENDENT

Appendix B 1 Unit Root

Test...Error! Bookmark not
defined.
Appendix B 2 Lag Order Selection Criteria ............................ Error! Bookmark not defined.
Appendix B 3 Results of Vector Error Correction Model ....... Error! Bookmark not defined.
Appendix B 4 Trade Openness, Marine, Exc Rate, & Inflation (OLS) .. Error! Bookmark not
defined.

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