Trade Liberalization, Manufacturing Value Addition, and Economic Growth: Empirical Evidence in Case of Pakistan

Mirajul Haq, Khalida Perveen and Baber Amin

Abstract

Soon after independence, the economy of Pakistan was regarded as a weedy manufacturing sector. The key drive of trade policies, therefore, keeps on improving and enhancing value addition and growth of manufacturing sector. To achieve this target, the government exercised trade liberalization measures in 1970s that gained momentum in mid 1990s when the country joined world trade organization. Switching to outer-oriented trade regime poses the question of “whether trade liberalization affects economic growth through its effect on manufacturing value addition”. This paper addresses the question by testing the hypothesis “trade liberalization affects economic growth through its effects on manufacturing value addition.” The hypothesis is tested empirically by using time series data spanning from 1972 to 2012. The empirical estimation has been carried out through ARDL bound testing approach and UECM estimation technique. The estimates indicate that trade liberalization enhances manufacturing value added and consequently economic growth through its effect on manufacturing value addition