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Is export-led growth hypothesis still valid for sub-Saharan African countries? New evidence from panel data analysis

Is export-led growth hypothesis still valid for sub-Saharan African countries? New evidence from... Purpose – This study examines the causal relationship between exports and economic growth in sub-Saharan African (SSA) countries during the period 1980 to 2017. The study also examines whether the causality between these two macroeconomic variables depends on the countries’ stage of development as proxied by their per capita income. Design/methodology/approach – The study uses a panel cointegration test and panel Granger-causality model to examine the link between exports and growth. The study also incorporates external debt as an intermittent variable in a bivariate setting between exports and economic growth, thereby creating a dynamic multivariate panel Granger-causality model. Findings – Although the study found the existence of a long-run relationship between exports and economic growth, the study failed to find any export-led growth response in both low-income and middle-income countries. Instead, the study found evidence of a bidirectional causality and a neutrality response in middle- income and low-income countries, respectively. The study, therefore, concludes that the benefits of an export- led growth hypothesis may have been oversold, and that the strategy may not be desirable to some low-income developing countries. Practical implications – These findings have important policy implications as they indicate that the causality between exports and economic growth in SSA countries varies with the countries’ stage of development. Consistent with the contemporary literature, the study cautions low-income SSA countries against over-relying on an export-led growth strategy to achieve a sustained growth path as no causality between exports and economic growth has been found to exist in those countries. Instead, such countries should consider pursuing new growth strategies by building the domestic demand side of their economies alongside their export promotion strategies in order to expand the real sector of their economies. For middle- income countries, the study recommends that both export promotion strategies and pro-growth policies should be intensified as economic growth and exports have been found to reinforce each other in those countries. Originality/value – Unlike the previous studies, the current study disaggregated the full sample of SSA countries into two subsets – one comprising of low-income countries and the other consisting of middle-income countries. In addition, the study uses a multivariate Granger-causality model in order to address the emission- of-variable bias. To our knowledge, this may be the first study of its kind in recent years to examine in detail the causal relationship between exports and economic growth in SSA countries using an ECM-based multivariate panel Granger-causality model. Keywords Granger causality, Economic growth, Exports, Sub-Saharan Africa Paper type Research paper 1. Introduction The relationship between exports and economic growth has attracted numerous studies in recent decades. The thrust of the debate has been whether exports drive economic growth or © Nicholas M. Odhiambo. Published in European Journal of Management and Business Economics. European Journal of Management Published by Emerald Publishing Limited. This article is published under the Creative Commons and Business Economics Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works pp. 77-93 of this article (for both commercial and non-commercial purposes), subject to full attribution to the Emerald Publishing Limited e-ISSN: 2444-8494 original publication and authors. The full terms of this licence may be seen at http://creativecommons. p-ISSN: 2444-8451 org/licences/by/4.0/legalcode DOI 10.1108/EJMBE-06-2020-0156 whether it is the growth of the real sector that drives exports. While the former view is referred EJMBE to as the export-led growth (ELG) hypothesis, the latter is popularly known as the growth-led 31,1 export (GLE) hypothesis. According to the ELG hypothesis, real GDP growth does not only rely on the increase in the amounts of labour and capital, but also on the growth of exports through a multiplier effect. This makes export one of the engines of economic growth. Moreover, an increase in exports as a result of export-oriented policies can also indirectly stimulate economic growth through the efficient allocation of resources, greater capacity utilisation and exploitation of economies of scale (Awokuse, 2003). Apart from stimulating technological enhancement due to foreign market competition, exports also play a critical role in enabling investment and technological transfer, which accelerates the process of globalisation (see Keesing, 1967; Bhagwati and Srinivasan, 1975; Dervis, 1979) [1].An increase in exports also provides foreign exchange, which can be used for importing capital goods and intermediate goods, thereby leading to higher capital formation, which, in turn, leads to higher economic growth (McKinnon, 1964; Balassa, 1978; Buffie, 1992). Indeed, the remarkable performance by a number of Asian countries can be attributed to the beneficial effects of exports on economic growth (see Salim and Hossain, 2011; Awokuse and Christopoulos, 2009; Lee and Huang, 2002; El-Sakka and Al-Mutairi, 2000) [2]. Although exports can significantly contribute to economic growth, some studies have argued that there is a danger in over-relying on exports to boost economic growth, especially in developing countries. This is mainly because the market for the exports of developing countries is limited by the capacity of industrialised countries. Hence, stagnation in demand in developed countries may lead to overinvestment and excess capacity in developing countries (see Blecker, 2002; 2003; Felipe, 2003). Moreover, some recent studies have argued that the benefits of an export- led growth hypothesis may have been oversold, and that the strategy may not be desirable to some low-income developing countries; hence, a new development paradigm is needed. According to Pillay (2011), there is a need for a shift towards a domestic demand-led growth strategy, while maintaining exports as countries still need exports to pay for their imported inputs and some finished goods that cannot be produced locally (see Pillay, 2011,p. 9). As opposed to the ELG hypothesis, the GLE hypothesis postulates that an increase in economic growth could also lead to an increase in exports through a realisation of economies of scale and a reduction in the cost of production (see Bahmani-Oskooee, 2009). Previous studies have also argued that an increase in GDP is likely to lead to a corresponding increase in trade, unless an anti-bias trade is created by the growth-induced supply and the corresponding demand (Bhagwati, 1988). The GLE hypothesis has also been supported by the neoclassical trade theory. According to the neoclassical trade theory, economic growth, through its effects on the supply of the economy (factor endowments), may create more demand for exports within a country, thereby affording a country a strong export production base (Mahadevan, 2007). Although a number of studies have been conducted on the relationship between exports and economic growth, especially since the 1960s, the majority of these studies have mainly been conducted on Asia and Latin America, thereby leaving many SSA countries with little or no coverage at all (see, for example, Ahmad et al., 2018; Ali and Li, 2018; Shakeel and Ahmed, 2020; Dinç and Gokmen, 2019; Kalaitzi and Chamberlain, 2020, among others). Even where such studies have been conducted, the findings on the causal relationship between exports and economic growth remains mixed at best and controversial at worst. In addition, some of these previous studies have fundamental methodological weaknesses. It is against this background that the current study aims to examine the causal relationship between exports and economic growth in 21 sub-Saharan African countries using a panel Granger-causality model. In order to address the omission-of-variable bias, which has been reported in some of the previous studies, the current study uses a multivariate panel Granger-causality model to examine this linkage. In order to examine whether the causality between exports and economic growth depends on the countries’ stage of development as proxied by their per Exports and capita income, the study disaggregated the full sample of SSA countries into two subsets – economic one comprising of low-income countries and the other consisting of middle-income countries. growth in SSA To our knowledge, the studies that are closest to the current research are based on the work done by Ee (2016) and Ahmad and Kwan (1991). However, the current study differs fundamentally from these two studies in various ways. For example, Ee (2016) used fully modified OLS (FMOLS) and dynamic ordinary least square (DOLS) to test the export-led growth hypothesis, while the current study uses an ECM-based multivariate panel Granger- causality model to examine the short-run and long-run causality between exports and economic growth. In addition, in the current study, two panels of SSA countries are used, namely low-income and middle-income panels. Ahmad and Kwan (1991), on the other hand, used a bivariate Granger-causality model, while the current study uses a multivariate ECM- based Granger-causality model, which reduces the omission-of-variable bias and captures the short-run and long-run causal dynamics. The rest of the paper is structured as follows. Section 2 reviews some of the empirical literature on the relationship between exports and economic growth in developing and developed countries. Section 3 deals with the methodology, empirical analysis and discussion of the results. Section 4 concludes the study. 2. Literature review Previous studies on the relationship between exports and economic growth vary significantly between those that are in favour of the export-led growth (ELG) strategy and those that are in favour of growth-led export (GLE) strategy. Theoretically, the export-led growth (ELG) strategy hinges on whether a country should focus on export promotion or import substitution. In the main, the proponents of export-led growth theory support export promotion policy instead of import substitution policy. According to a comprehensive study by World Bank (1987), export-promotion strategy is the best strategy for less developing countries (LDCs) that intends to industrialise and transform their economies into more developed economies (see Tang et al.,2015). This view argues that growth could be achieved better through ELG strategies. A case in point is the growth rate that has been achieved by the Asian economies, such as Hong Kong, Singapore, South Korea, Taiwan, Malaysia and Thailand that were found to have been supported by the export promotions strategies. Over a period of 30 years, these countries were found to have doubled their standards of living every ten years (see Giles and Williams, 2000). According to the proponents of ELG theory, export growth leads to an increase in the demand for the country’s output, which leads to an increase in real output. An increase in acountry’s exports may inter alia lead to an increase in the specialisation of export goods, which may, in turn, boost the country’s productivity level and eventually leads to output growth (see Giles and Williams, 2000). In addition, the outward-oriented trade policy resulting from the ELG strategy may also give access to advanced technologies, learning by doing gains and better management practices, which may lead to further efficiency gains (see Giles and Williams, 2000; Hart, 1983; Ben-David and Loewy, 1998). Apart from the ELG, recent studies have shown that there is also a potential for growth-led export (GLE). Bhagwati (1988),for example, argues that an increase in GDP generally leads to a corresponding expansion of trade, unless the pattern of growth-induced supply and corresponding demand creates an anti-trade bias. Neoclassical trade theory also stresses the causality that runs from home-factor endowments and productivity to the supply of exports (see Findlay, 1984). On the empirical front, there are a number of studies that have been conducted to examine the causal relationship between exports and economic growth in both developed and developing countries. However, the findings of such studies remain at best inconclusive and often contradictory. Broadly speaking, previous studies on this subject can be divided into four groups. The first group includes studies, whose findings are consistent with a EJMBE unidirectional causal flow from exports to economic growth. These studies include, amongst 31,1 other, studies such as Boame (1998) for the case of Ghana; El-Sakka and Al-Mutairi (2000) for Iraq, Morocco, Saudi Arabia and Syria; Fountas (2000) for Ireland; Awokuse (2003) for Canada; Shirazi and Manap (2005) for Pakistan; Siliverstovs and Herzer (2006) for Chile; Jordaan and Eita (2007) for Namibia; Narayan et al. (2007) for the case of Papua New Guinea in the short run and Fiji in the long run; Dash (2009) for India; Rangasamy (2009) for South Africa; Uddin et al. (2010) for Bhutan; Ramona et al. (2010) for Romania; Samad (2011) for Algeria; Saad (2012) for Lebanon; Tsaurai and Odhiambo (2012) for Zimbabwe; Dritsaki (2013) for Greece; Abdulkarim (2014) for Saudi Arabia; Bilas et al. (2015) for Croatia; Ee (2016) for the case of selected sub-Saharan African (SSA) countries; Ali and Li (2018) for China and Pakistan; Ahmad et al. (2018) for ASEAN5 economies; Dinç and Gokmen (2019) for the case of Brazil in the short run; Kalaitzi and Chamberlain (2020) for the case of the United Arab Emirates in the short run; Kim et al. (2019) for Myanmar; Shakeel and Ahmed (2020) for a panel of five South Asian countries in the long run. Unlike the first group, the second group of studies supports a unidirectional causal flow from economic growth to exports. These include studies, such as Oxley (1993) for the case of Portugal; Ahmad and Harnhirun (1996) for the case of ASEAN Countries; Henriques and Sadorsky (1996) for Canada; Baharumshah and Rashid (1999) for Malaysia; El-Sakka and Al- Mutairi (2000) for the United Arab Emirates; Hatemi-J and Irandoust (2000) for the case of Denmark; Panas and Vamvoukas (2002) for the case of Greece in the long run; Shan and Tian (2002) for Shanghai; Reppas and Christopoulos (2005) for the case of 22 less developed Asian and African countries; Cetintas and Barisik (2009) for 13 transition economies; Abbas (2012) for Pakistan; Igbal et al. (2012) for Pakistan; Shihab et al. (2014) for Jordan; Bonga et al. (2015) for Zimbabwe; Gokmenoglu et al. (2015) for Costa Rica; Popovici and Calin (2016) for Romania; and more recently, Kalaitzi and Cleeve (2018) for the case of the UAE in the long run. Apart from the first group and the second group of studies, there is a third (middle-ground) group, which posits that both exports and economic growth Granger-cause each other. In other words, this group argues that there is bidirectional causality between exports and economic growth. Studies whose findings are consistent within this view include studies, such as Kwan and Cotsomitis (1991) for the case of China during the period 1952–1985; Bahmani-Oskooee and Janardhanan (1993) for the case of LDCs; Shan and Sun (1998) for China; El-Sakka and Al-Mutairi (2000) for Algeria, Bahrain, Egypt, Jordan, Mauritania and Oman; Hatemi-J and Irandoust (2000) for the case of Finland, Norway and Sweden; Wernerheim (2000) for Canada; Abdulnasser (2002) for Japan; Awokuse (2005) for Korea; Shirazi and Manap (2005) for Bangladesh and Nepal; Jordaan and Eita (2009) for Botswana; Elbeydi et al. (2010) for Libya; Tsen (2010) for China; Rahmaddi and Ichihashi (2011) for Indonesia; Sallem and Sial (2015) for Pakistan; Sunde (2017) for South Africa; Guntukula (2018) for India; Kalaitzi and Cleeve (2018) for the case of the UAE in the short run; Dinç and G€okmen (2019) for Brazil in the long run; and more recently, Shakeel and Ahmed (2020) for a panel of five South Asian countries in the short run. Despite the overwhelming causal relationship between exports and economic growth reported in the above-mentioned studies, there is the fourth group (i.e. neutrality group) whose empirical findings show that there is no formidable causal relationship between exports and economic growth and that any perceived relationship could be merely mechanical in nature. Although this view is somewhat unpopular, it is currently gaining traction in the empirical literature. Some of the studies whose findings are in one way or the other consistent with this view include those of Ahmad and Kwan (1991) for the case of 47 African Countries; Jin and Yu (1996) for the USA; Abdulnasser and Manucher (2000) for the case of Greece and Turkey; Ahmed et al. (2000) for the case of Bangladesh, Pakistan and Sri Lanka; El-Sakka and Al-Mutairi (2000) for Kuwait, Libya, Qatar, Sudan and Tunis; Shirazi Exports and and Manap (2005) for Sri Lanka and India; Tang (2006) for China; Tang (2006) for China; economic Shirazi and Manap (2005) for Sri Lanka and India; more recently, Kalaitzi and Chamberlain growth in SSA (2020) for the case of the United Arab Emirates in the long run. Table 1 gives a summary of previous empirical findings on the causal relationship between exports and economic growth in both developed and developing countries, based on these four groups of studies. 3. Empirical analysis 3.1 Model specification – a trivariate Granger-causality model This study uses panel data and a trivariate Granger-causality model to examine the causal relationship between exports and economic growth in SSA countries. The use of this technique is deemed most suitable in this study because of the various advantages it renders. Firstly, a panel data technique has the ability to test more complicated behavioural models than a single cross-sectional or time-series data technique (see Hsiao, 2003). Secondly, panel data contains more degrees of freedom and more sample variability than cross-sectional or time-series data (Hsiao et al., 1995). Thirdly, panel data analysis generates more accurate predictions for individual outcomes by pooling the data rather than generating predictions of individual outcomes using the data on the individual in question (Hsiao et al., 1989, 1993) [3]. The Granger causality model adopted in this study is expressed as follows (see Odhiambo, 2015): q q q X X X Δy=N ¼ α þ β Δy=N þ β ΔEXPT þ β ΔDEBT it 1j it−k it−k it−k 11ik 12ik 13ik (1) k¼1 k¼1 k¼1 þ λ ECT þ ε 1i it−1 it q q q X X X ΔEXPT ¼ α þ β ΔEXPT þ β Δy=N þ β ΔDEBT it 2j it−k it−k it−k 21ik 22ik 23ik k¼1 k¼1 k¼1 þ λ ECT þ ε (2) 2i it−1 it q q q X X X ΔDEBT ¼ α þ β ΔDEBT þ β Δy=N þ β ΔEXPT it 3j it−k it−k it−k 31ik 32ik 33ik k¼1 k¼1 k¼1 þ λ ECT þ ε (3) 3i it−1 it where: y/N Real GDP per capita EXPT Exports DEBT External debt Δ First difference operator ECT Error-correction term « White noise error term i Individual country t Time period q Lag length EJMBE Author (Year) Region/Countries Study period Causality 31,1 Studies in favour of export-led growth [i.e. Exports Granger-cause economic growth] Boame (1998) Ghana 1960 to 1992 Exports →Y El-Sakka and Al- Arab countries 1970 to 1999 Exports →Y (Iraq, Morocco, Mutairi (2000) Saudi Arabia and Syria) Fountas (2000) Ireland 1950 to 1990 Exports →Y Awokuse (2003) Canada 1961:1 to 2000:4 Exports →Y Shirazi and Manap Pakistan 1960 to 2003 Exports →Y (2004) Shirazi and Manap five South Asian countries Pakistan: 1960– Exports →Y (Pakistan) (2005) 2003 India: 1960–2002 Bangladesh: 1973– Sri Lanka: 1960– Nepal: 1975–2003 Siliverstovs and Chile 1960 to 2001 Exports →Y Herzer (2006) Jordaan and Eita Namibia 1970 to 2005 Exports →Y (2007) Narayan et al. (2007) Papua New Guinea and Fiji Papua New Guinea: Exports →Y 1961–1999 Fiji: Long-run Fiji: 1960–2001 Papua New Guinea: Short- run Dash (2009) India (1992[Q1 to 2007 Exports →Y [Q4]) Rangasamy (2009) South Africa 1960q1 to 2007q3 Exports →Y Uddin et al. (2010) Bhutan 1980 to 2005 Exports →Y Ramona et al. (2010) Romania 1999 Q1 to 2009 Q4 Exports →Y Samad (2011) Algeria 1960 to 2005 Exports →Y Saad (2012) Lebanon 1970 to 2010 Exports →Y Tsaurai and Zimbabwe 1980 and 2010 Exports →Y Odhiambo (2012) Dritsaki (2013) Greece 1960 to 2011 Exports →Y Abdulkarim (2014) Saudi Arabia 1968 to 2011 Exports →Y Bilas et al. (2015) Croatia 1996 to 2012 Exports →Y Ee (2016) Selected SSA countries 1985 to 2014 Exports →Y Ahmad et al. (2018) ASEAN5 economies 1981 to 2013 Exports →Y Ali and Li (2018) China and Pakistan 1980 to 2015 Exports →Y Dinç and G€okmen Brazil 1960 to 2017 Exports→Y (in the short run) (2019) Kalaitzi and The UAE 1975 to 2012 Exports→Y (in the short run) Chamberlain (2020) Kim et al. (2019) Myanmar 1981 to 2015 Exports →Y Shakeel and Ahmed A panel of five South Asian 1980 to 2014 Exports→Y (in the long run) (2020) countries B: Studies in favour of growth-led export [i.e. Economic growth Granger-causes exports] Table 1. Oxley (1993) Portugal 1865–1985 Y →Exports Previous empirical findings on the causal Ahmad and Harnhirun ASEAN Countries 1966 through 1988 Y →Exports relationship between (1996) exports and economic Henriques and Canada 1870 to 1991 Y →Exports growth in both Sadorsky (1996) developed and developing countries (continued) Exports and Author (Year) Region/Countries Study period Causality economic Baharumshah and Malaysia 1970:1 to 1994:4 Y →Exports growth in SSA Rashid (1999) El-Sakka and Al- Arab countries 1970 to 1999 Y →Exports (the UAE) Mutairi (2000) Hatemi-J and Nordic economies Denmark: 1977.1– Y →Exports (for the case of Irandoust (2000) 1996.1 Denmark) 83 Finland: 1975.1– 1994.4 Norway: 1975.1– 1996.1 Sweden: 1980.1– 1995.2 Panas and Vamvoukas Greece 1948–1997 Y→Exports (in the long run) (2002) Shan and Tian (2002) Shanghai 1990(1) to 1996(12) Y →Exports Reppas and A sample of 22 less 1969 to 1999 Y →Exports Christopoulos (2005) developed Asian and African countries Cetintas and Barisik 13 transition economies 1995:2 to 2006:4 Y →Exports (2009) Abbas (2012) Pakistan 1975 to 2010 Y →Exports Igbal et al. (2012) Pakistan 1970 to 2009 Y →Exports Shihab et al. (2014) Jordan 2000 to 2012 Y →Exports Bonga et al. (2015) Zimbabwe 1975 to 2013 Y →Exports Gokmenoglu et al. Costa Rica 1980 to 2013 Y →Exports (2015) Popovici and Calin Romania Quarterly data, Y →Exports (2016) 2001 to 2015 Kalaitzi and Cleeve The UAE 1981–2012 Y→Exports (in the long run) (2018) C: Studies in favour of bidirectional causality between exports and economic growth [i.e. exports and economic growth Granger-cause each other] Kwan and Cotsomitis China 1952 to 1985 Exports ↔Y (for the period (1991) 1952–1985) Bahmani-Oskooee and LDCs 1973I to 1988IV Exports ↔Y (in almost all Janardhanan (1993) countries in the sample) Shan and Sun (1998) China 1987 to 1996 Exports ↔Y El-Sakka and Al- Arab countries 1970 to 1999 Exports ↔Y(Algeria, Mutairi (2000) Bahrain, Egypt, Jordan, Mauritania and Oman Wernerheim (2000) Canada 1947 to 96 Exports ↔Y Abdulnasser (2002) Japan 1966:01 to 1999:01 Exports ↔Y Hatemi-J and Nordic economies Denmark: 1977.1– Exports ↔Y (for the case of Irandoust (2000) 1996.1 Finland, Norway and Finland: 1975.1– Sweden) 1994.4 Norway: 1975.1– 1996.1 Sweden: 1980.1– 1995.2 Awokuse (2005) Korea 1963 to 2001 Exports ↔Y (continued) Table 1. EJMBE Author (Year) Region/Countries Study period Causality 31,1 Shirazi and Manap five South Asian countries Pakistan: 1960– Exports ↔Y (Bangladesh (2005) 2003 and Nepal) India: 1960–2002 Bangladesh: 1973– 84 Sri Lanka: 1960– Nepal: 1975–2003 Jordaan and Eita Botswana 1996.1 to 2007.4 Exports ↔Y (2009) Elbeydi et al. (2010) Libya 1980 to 2007 Exports ↔Y Tsen (2010) China 1978 to 2002 Exports ↔Y Rahmaddi and Indonesia 1971 to 2008 Exports ↔Y Ichihashi (2011) Sallem and Sial (2015) Pakistan 1973 to 2013 Exports ↔Y Sunde (2017) South Africa 1990 to 2014 Exports ↔Y Guntukula (2018) India April 2005 to March Exports ↔Y Kalaitzi and Cleeve The UAE 1981–2012 Exports↔Y (in the short run) (2018) Dinç and G€okmen Brazil 1960–2017 Exports↔Y (in the long run) (2019) Shakeel and Ahmed A panel of five South Asian 1980 to 2014 Exports↔Y (in the short run) (2020) countries D: Studies in favour of neutrality hypothesis [i.e. No causality between exports and economic growth] Ahmad and Kwan 47 African Countries 1981 to 1987 Exports ≠Y (1991) Jin and Yu (1996) US economy 1959:1 to 1992:3 Exports ≠Y Abdulnasser and Greece, Ireland, Mexico, 1960 to 1997 Exports ≠Y (for Greece and Manucher (2000) Portugal and Turkey Turkey) Ahmed et al. (2000) Four South Asian 1970 to 1997 Exports ≠Y (for the case of (Bangladesh, India, Bangladesh, Pakistan and Sri Pakistan and Sri Lanka) Lanka) El-Sakka and Al- Arab countries 1970 to 1999 Exports ≠Y (Kuwait, Libya, Mutairi (2000) Qatar, Sudan and Tunis) Tang (2006) China 1970 to 2001 Exports ≠Y Shirazi and Manap five South Asian countries Pakistan:1960– Exports ≠Y (Sri Lanka and (2005) 2003 India) India: 1960–2002 Bangladesh: 1973– Sri Lanka: 1960– Nepal: 1975–2003 Kalaitzi and The UAE 1975 to 2012 Exports ≠Y (in the long run) Chamberlain (2020) Note(s): Exports →Y means exports cause economic growth; Y→ Exports means economic growth causes exports; Exports ↔Y means there is bidirectional causality between exports and economic growth; and Table 1. Exports ≠Y means there is no causality between exports and economic growth 3.2 Data Exports and The data used in this study cover the period 1980 to 2017. The studied countries were divided economic into two panels where data were available – low-income panel and middle-income panel. The growth in SSA data were sourced from the World Bank’s World Development Indicators. Although a number of proxies could be used to measure economic growth, in this study, real GDP per capita was used to measure the growth of the real sector. The advantage of using real GDP per capita is that it takes into consideration the effect of a population on economic growth. Some of the studies that have used this proxy include those of Shan et al. (2001), Thangavelu and James (2004), Rousseau and Vuthipadadorn (2005), Cooray (2010), Demirguc-Kunt et al. (2011), Odhiambo (2014, 2021), to mention a few. The exports variable is measured by the value of the exports of goods and services, while external debt, which has been used as an intermittent variable between exports and economic growth, is measured by the value of the external debt as a percentage of GNI. 3.3 The panel unit root test In order to identify the order of integration of the variables used in the study, three panel unit root tests are employed: (1) Levin et al. (2002); (2) Im et al. (IPS) (2003); and (3) ADF Fischer tests. The results are reported in Table 2 for both low-income and middle-income countries. The results of panel unit root tests reported in Table 2 show that the variables are consistently stationary in first difference. 3.4 The panel cointegration test Having confirmed the order of integration of the variables used in this study, the next step is to examine the long-run relationship among these variables. For this purpose, two panel cointegration tests are employed in order to ensure the veracity of the findings. These are: (1) the Pedroni (2004) residual cointegration test; and (2) the Kao (1999) residual cointegration test. The cointegration results are reported in Table 3. Overall, the results of the two panel cointegration tests reported in Table 3 reveal that the variables in the two models (1–2) are cointegrated; hence, the Granger-causality test could be performed. 3.5 Trivariate Granger-causality results In this section, a dynamic multivariate panel Granger-causality model is employed to examine the causal relationship between exports, debt and economic growth in both low- LLC t-Statistics IPS W-Statistics ADF - Fisher Chi-square Level First difference Level First difference Level First difference Low-income SSA countries EXP 0.86612 11.4343*** 1.61785 14.3055*** 34.6601 102.194*** y/N 2.06611 6.28614*** 1.26895 11.7463*** 27.7939 126.990*** DEBT 1.91001 8.13716*** 0.13487 10.2718*** 25.4644 77.5907*** Middle-income SSA countries EXP 0.48707 11.9829*** 0.84128 19.0471*** 45.3722 284.127*** y/N 4.20445 7.10078*** 0.80286 13.0152*** 49.2910 219.670*** DEBT 0.80859 8.53214*** 1.11868 15.2553*** 20.8375 235.867*** Table 2. Note(s): *, ** and*** indicate rejection of the respective null hypothesis at the 10%, 5% and 1% significance The results of panel levels, respectively unit root tests EJMBE Panel B: Middle-income 31,1 Panel A: Low-income countries countries t-Statistic Probability t-Statistic Probability Pedroni residual cointegration test Pedroni panel cointegration test – within-dimension Panel v-Statistic 14.28669 0.0000 2.838063 0.0023 Panel rho-Statistic 3.458024 0.0003 2.188797 0.0143 Panel PP-Statistic 0.192649 0.4236 1.970811 0.0244 Panel ADF-Statistic 0.457711 0.3236 2.161709 0.0153 Pedroni panel cointegration test – between-dimension Group rho-Statistic 2.734473 0.0031 0.154009 0.4388 Group PP-Statistic 4.279536 0.0000 1.542654 0.0615 Group ADF-statistic 5.138824 0.0000 2.236847 0.0126 Table 3. PANEL 2: Kao residual cointegration test Panel cointegration results ADF 2.627023 0.0043 2.165364 0.0152 income and middle-income countries. The short-run causality is given by the F-statistics, which is expected to be statistically significant (see Asongu, 2014; Odhiambo, 2015). The long-run causality, on the other hand, is based on the coefficient of the error-correction term (ECT), which is expected to be negative and also statistically significant (see Odhiambo, 2021; Asongu et al., 2016). Table 4 presents the Granger-causality results for both low-income and middle-income countries. Based on the findings reported in Panel A, it is clear that exports do not Granger-cause economic growth in low-income countries. This applies irrespective of whether the causality is estimated in the short run or in the long run. The short-run causality has been rejected by the corresponding F-statistic in the growth equation, which has been found to be statistically significant. Likewise, the long-run causality has been rejected by the coefficient of the error correction term in the economic growth in low-income countries’ panel, which has also been found to be statistically insignificant. The same findings apply to the reverse causality from economic growth to exports. This can be confirmed by the corresponding F-statistic in the export’s equation, which has been found to be statistically insignificant. This finding, therefore, shows that there is no causal relationship between exports and economic growth in either direction in low-income countries. This finding, though contrary to some of the previous studies, is consistent with previous studies, such as Ahmad and Kwan (1991) for the case of 47 African Countries, Ahmed et al. (2000) for the case of Bangladesh, Pakistan and Sri Lanka and Shirazi and Manap (2005) for Sri Lanka and India, among others. In middle-income countries (Panel B), the results show that there is bidirectional causal relationship between exports and economic growth. This applies irrespective of whether the causality is conducted in the short run or in the long run. The causal flow from exports to economic growth has been confirmed by the coefficient of the ECM term and the corresponding F-statistic in Panel B, which have been found to be both statistically significant. Likewise, the reverse causal flow from economic growth to exports has been confirmed by the coefficient of the ECT and the corresponding F-statistic in the export’s equation, which have been found to be both statistically significant. Overall, the results of both low-income and middle-income countries show that the export-led growth paradigm, which gained prominence in the 1970s, may no longer be relevant to the countries under study. Other results show that for panel A, there is a long-run and short-run unidirectional causal flow from economic growth to debt in low-income countries. This is confirmed by the coefficient of the error correction term and the corresponding F-statistic in the debt equation, which have been found to be statistically significant. The results also show that for low- Exports and economic growth in SSA Table 4. Granger-causality results for all models Panel A Panel B Dependent Low-income countries Middle-income countries variable D(y/N) D(DEBT) D(EXPT) ECT D(y/N) D(DEBT) D(EXPT) ECT D(y/N) – 1.0432 [0.353] 1.3140 [0.269] 0.0013 (1.502) – 0.1376 [0.871] 9.3387*** [0.000] 0.0013*** (3.707) D(DEBT) 3.5232* [0.061] – 0.00030 [0.987] 0.0425*** (7.183) 1.4591 [0.233] – 3.3745** [0.035] 0.0167 (1.508) D(EXPT) 0.9700 [0.380] 4.9265*** [0.008] – 0.0686*** [3.080] 3.0806** [0.047] 1.6065 [0.202] – 0.0234*** (3.034) income countries, there is a unidirectional causal flow from debt to exports both in the short EJMBE run and in the long run. This finding is confirmed by the coefficient of the ECM and the 31,1 corresponding F-statistic in the export’s equation, which have been found to be both statistically significant. In Panel B, the results show that there is a short-run unidirectional causal flow from exports to debt. This has been confirmed by the corresponding F-statistic in the debt equation, which has been found to be statistically significant. However, no causality was found to exist between economic growth and debt in either direction. This applies irrespective of whether the causality was estimated in the short run or in the long run. 4. Conclusion In this study, the dynamic causal relationship between exports and economic growth has been examined. The study was motivated by the current debate on the export-led growth versus growth-led export nexus. Unlike in some previous African studies, in the current study, SSA countries are divided into two groups, namely low-income and middle-income countries. In addition, external debt has been used as an intermittent variable in a bivariate setting between exports and economic growth, leading to a multivariate panel Granger- causality model. Using an ECM-based panel Granger-causality model, the study found that there is a long-run relationship between exports and economic growth in both groups of countries. However, the causality between these two variables varies significantly between low-income and middle-income countries. Specifically, the study found a short-run and long- run bidirectional causality between exports and economic growth to prevail in middle-income countries. However, in low-income countries, no causality was found to exist between these two variables in either direction. This applies irrespective of whether the causality was estimated in the short run or in the long run. These findings have important policy implications as they indicate that the causality between exports and economic growth in SSA countries varies with the countries’ stage of development. The study, therefore, concludes that the argument that exports always Granger-cause economic growth may have been oversold to many SSA countries. This finding is not surprising given the nature and the composition of the exports of many SSA countries. Indeed, the exports of many SSA countries, especially low-income countries, are dominated by primary products, whose prices are relatively low when compared to those of manufactured goods. Moreover, given the fact that industrialisation in some SSA countries has been relatively slow, some SSA countries have been forced to continue importing some consumer goods that could be produced locally, thereby leading to widening current account deficits. Consistent with the contemporary literature, the study cautions low-income SSA countries against over-relying on an export-led growth strategy to achieve a sustained growth path as no causality between exports and economic growth has been found to exist in those countries. Instead, such countries should consider pursuing new growth strategies by building the domestic demand side of their economies alongside their export promotion strategies in order to expand the real sector of their economies. For middle-income countries, the results show that the expansion of exports through various exports promotion strategies has been an integral component of their economic growth path. Consequently, the study recommends that both export promotion strategies and pro-growth policies should be intensified as economic growth and exports have been found to reinforce each other in those countries. Notes 1. See Sultanuzzaman et al. (2019). 2. See also Furuoka et al. (2019). 3. See Hsiao (2007). References Exports and Abbas, S. (2012), “Causality between exports and economic growth: investigating suitable trade policy economic for Pakistan”, Eurasian Journal of Business and Economics, Vol. 5 No. 10, pp. 91-98. growth in SSA Abdulkarim, K.A. 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Odhiambo can be contacted at: odhianm@unisa.ac.za and nmbaya99@yahoo.com For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: permissions@emeraldinsight.com http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png European Journal of Management and Business Economics Emerald Publishing

Is export-led growth hypothesis still valid for sub-Saharan African countries? New evidence from panel data analysis

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10.1108/ejmbe-06-2020-0156
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Abstract

Purpose – This study examines the causal relationship between exports and economic growth in sub-Saharan African (SSA) countries during the period 1980 to 2017. The study also examines whether the causality between these two macroeconomic variables depends on the countries’ stage of development as proxied by their per capita income. Design/methodology/approach – The study uses a panel cointegration test and panel Granger-causality model to examine the link between exports and growth. The study also incorporates external debt as an intermittent variable in a bivariate setting between exports and economic growth, thereby creating a dynamic multivariate panel Granger-causality model. Findings – Although the study found the existence of a long-run relationship between exports and economic growth, the study failed to find any export-led growth response in both low-income and middle-income countries. Instead, the study found evidence of a bidirectional causality and a neutrality response in middle- income and low-income countries, respectively. The study, therefore, concludes that the benefits of an export- led growth hypothesis may have been oversold, and that the strategy may not be desirable to some low-income developing countries. Practical implications – These findings have important policy implications as they indicate that the causality between exports and economic growth in SSA countries varies with the countries’ stage of development. Consistent with the contemporary literature, the study cautions low-income SSA countries against over-relying on an export-led growth strategy to achieve a sustained growth path as no causality between exports and economic growth has been found to exist in those countries. Instead, such countries should consider pursuing new growth strategies by building the domestic demand side of their economies alongside their export promotion strategies in order to expand the real sector of their economies. For middle- income countries, the study recommends that both export promotion strategies and pro-growth policies should be intensified as economic growth and exports have been found to reinforce each other in those countries. Originality/value – Unlike the previous studies, the current study disaggregated the full sample of SSA countries into two subsets – one comprising of low-income countries and the other consisting of middle-income countries. In addition, the study uses a multivariate Granger-causality model in order to address the emission- of-variable bias. To our knowledge, this may be the first study of its kind in recent years to examine in detail the causal relationship between exports and economic growth in SSA countries using an ECM-based multivariate panel Granger-causality model. Keywords Granger causality, Economic growth, Exports, Sub-Saharan Africa Paper type Research paper 1. Introduction The relationship between exports and economic growth has attracted numerous studies in recent decades. The thrust of the debate has been whether exports drive economic growth or © Nicholas M. Odhiambo. Published in European Journal of Management and Business Economics. European Journal of Management Published by Emerald Publishing Limited. This article is published under the Creative Commons and Business Economics Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works pp. 77-93 of this article (for both commercial and non-commercial purposes), subject to full attribution to the Emerald Publishing Limited e-ISSN: 2444-8494 original publication and authors. The full terms of this licence may be seen at http://creativecommons. p-ISSN: 2444-8451 org/licences/by/4.0/legalcode DOI 10.1108/EJMBE-06-2020-0156 whether it is the growth of the real sector that drives exports. While the former view is referred EJMBE to as the export-led growth (ELG) hypothesis, the latter is popularly known as the growth-led 31,1 export (GLE) hypothesis. According to the ELG hypothesis, real GDP growth does not only rely on the increase in the amounts of labour and capital, but also on the growth of exports through a multiplier effect. This makes export one of the engines of economic growth. Moreover, an increase in exports as a result of export-oriented policies can also indirectly stimulate economic growth through the efficient allocation of resources, greater capacity utilisation and exploitation of economies of scale (Awokuse, 2003). Apart from stimulating technological enhancement due to foreign market competition, exports also play a critical role in enabling investment and technological transfer, which accelerates the process of globalisation (see Keesing, 1967; Bhagwati and Srinivasan, 1975; Dervis, 1979) [1].An increase in exports also provides foreign exchange, which can be used for importing capital goods and intermediate goods, thereby leading to higher capital formation, which, in turn, leads to higher economic growth (McKinnon, 1964; Balassa, 1978; Buffie, 1992). Indeed, the remarkable performance by a number of Asian countries can be attributed to the beneficial effects of exports on economic growth (see Salim and Hossain, 2011; Awokuse and Christopoulos, 2009; Lee and Huang, 2002; El-Sakka and Al-Mutairi, 2000) [2]. Although exports can significantly contribute to economic growth, some studies have argued that there is a danger in over-relying on exports to boost economic growth, especially in developing countries. This is mainly because the market for the exports of developing countries is limited by the capacity of industrialised countries. Hence, stagnation in demand in developed countries may lead to overinvestment and excess capacity in developing countries (see Blecker, 2002; 2003; Felipe, 2003). Moreover, some recent studies have argued that the benefits of an export- led growth hypothesis may have been oversold, and that the strategy may not be desirable to some low-income developing countries; hence, a new development paradigm is needed. According to Pillay (2011), there is a need for a shift towards a domestic demand-led growth strategy, while maintaining exports as countries still need exports to pay for their imported inputs and some finished goods that cannot be produced locally (see Pillay, 2011,p. 9). As opposed to the ELG hypothesis, the GLE hypothesis postulates that an increase in economic growth could also lead to an increase in exports through a realisation of economies of scale and a reduction in the cost of production (see Bahmani-Oskooee, 2009). Previous studies have also argued that an increase in GDP is likely to lead to a corresponding increase in trade, unless an anti-bias trade is created by the growth-induced supply and the corresponding demand (Bhagwati, 1988). The GLE hypothesis has also been supported by the neoclassical trade theory. According to the neoclassical trade theory, economic growth, through its effects on the supply of the economy (factor endowments), may create more demand for exports within a country, thereby affording a country a strong export production base (Mahadevan, 2007). Although a number of studies have been conducted on the relationship between exports and economic growth, especially since the 1960s, the majority of these studies have mainly been conducted on Asia and Latin America, thereby leaving many SSA countries with little or no coverage at all (see, for example, Ahmad et al., 2018; Ali and Li, 2018; Shakeel and Ahmed, 2020; Dinç and Gokmen, 2019; Kalaitzi and Chamberlain, 2020, among others). Even where such studies have been conducted, the findings on the causal relationship between exports and economic growth remains mixed at best and controversial at worst. In addition, some of these previous studies have fundamental methodological weaknesses. It is against this background that the current study aims to examine the causal relationship between exports and economic growth in 21 sub-Saharan African countries using a panel Granger-causality model. In order to address the omission-of-variable bias, which has been reported in some of the previous studies, the current study uses a multivariate panel Granger-causality model to examine this linkage. In order to examine whether the causality between exports and economic growth depends on the countries’ stage of development as proxied by their per Exports and capita income, the study disaggregated the full sample of SSA countries into two subsets – economic one comprising of low-income countries and the other consisting of middle-income countries. growth in SSA To our knowledge, the studies that are closest to the current research are based on the work done by Ee (2016) and Ahmad and Kwan (1991). However, the current study differs fundamentally from these two studies in various ways. For example, Ee (2016) used fully modified OLS (FMOLS) and dynamic ordinary least square (DOLS) to test the export-led growth hypothesis, while the current study uses an ECM-based multivariate panel Granger- causality model to examine the short-run and long-run causality between exports and economic growth. In addition, in the current study, two panels of SSA countries are used, namely low-income and middle-income panels. Ahmad and Kwan (1991), on the other hand, used a bivariate Granger-causality model, while the current study uses a multivariate ECM- based Granger-causality model, which reduces the omission-of-variable bias and captures the short-run and long-run causal dynamics. The rest of the paper is structured as follows. Section 2 reviews some of the empirical literature on the relationship between exports and economic growth in developing and developed countries. Section 3 deals with the methodology, empirical analysis and discussion of the results. Section 4 concludes the study. 2. Literature review Previous studies on the relationship between exports and economic growth vary significantly between those that are in favour of the export-led growth (ELG) strategy and those that are in favour of growth-led export (GLE) strategy. Theoretically, the export-led growth (ELG) strategy hinges on whether a country should focus on export promotion or import substitution. In the main, the proponents of export-led growth theory support export promotion policy instead of import substitution policy. According to a comprehensive study by World Bank (1987), export-promotion strategy is the best strategy for less developing countries (LDCs) that intends to industrialise and transform their economies into more developed economies (see Tang et al.,2015). This view argues that growth could be achieved better through ELG strategies. A case in point is the growth rate that has been achieved by the Asian economies, such as Hong Kong, Singapore, South Korea, Taiwan, Malaysia and Thailand that were found to have been supported by the export promotions strategies. Over a period of 30 years, these countries were found to have doubled their standards of living every ten years (see Giles and Williams, 2000). According to the proponents of ELG theory, export growth leads to an increase in the demand for the country’s output, which leads to an increase in real output. An increase in acountry’s exports may inter alia lead to an increase in the specialisation of export goods, which may, in turn, boost the country’s productivity level and eventually leads to output growth (see Giles and Williams, 2000). In addition, the outward-oriented trade policy resulting from the ELG strategy may also give access to advanced technologies, learning by doing gains and better management practices, which may lead to further efficiency gains (see Giles and Williams, 2000; Hart, 1983; Ben-David and Loewy, 1998). Apart from the ELG, recent studies have shown that there is also a potential for growth-led export (GLE). Bhagwati (1988),for example, argues that an increase in GDP generally leads to a corresponding expansion of trade, unless the pattern of growth-induced supply and corresponding demand creates an anti-trade bias. Neoclassical trade theory also stresses the causality that runs from home-factor endowments and productivity to the supply of exports (see Findlay, 1984). On the empirical front, there are a number of studies that have been conducted to examine the causal relationship between exports and economic growth in both developed and developing countries. However, the findings of such studies remain at best inconclusive and often contradictory. Broadly speaking, previous studies on this subject can be divided into four groups. The first group includes studies, whose findings are consistent with a EJMBE unidirectional causal flow from exports to economic growth. These studies include, amongst 31,1 other, studies such as Boame (1998) for the case of Ghana; El-Sakka and Al-Mutairi (2000) for Iraq, Morocco, Saudi Arabia and Syria; Fountas (2000) for Ireland; Awokuse (2003) for Canada; Shirazi and Manap (2005) for Pakistan; Siliverstovs and Herzer (2006) for Chile; Jordaan and Eita (2007) for Namibia; Narayan et al. (2007) for the case of Papua New Guinea in the short run and Fiji in the long run; Dash (2009) for India; Rangasamy (2009) for South Africa; Uddin et al. (2010) for Bhutan; Ramona et al. (2010) for Romania; Samad (2011) for Algeria; Saad (2012) for Lebanon; Tsaurai and Odhiambo (2012) for Zimbabwe; Dritsaki (2013) for Greece; Abdulkarim (2014) for Saudi Arabia; Bilas et al. (2015) for Croatia; Ee (2016) for the case of selected sub-Saharan African (SSA) countries; Ali and Li (2018) for China and Pakistan; Ahmad et al. (2018) for ASEAN5 economies; Dinç and Gokmen (2019) for the case of Brazil in the short run; Kalaitzi and Chamberlain (2020) for the case of the United Arab Emirates in the short run; Kim et al. (2019) for Myanmar; Shakeel and Ahmed (2020) for a panel of five South Asian countries in the long run. Unlike the first group, the second group of studies supports a unidirectional causal flow from economic growth to exports. These include studies, such as Oxley (1993) for the case of Portugal; Ahmad and Harnhirun (1996) for the case of ASEAN Countries; Henriques and Sadorsky (1996) for Canada; Baharumshah and Rashid (1999) for Malaysia; El-Sakka and Al- Mutairi (2000) for the United Arab Emirates; Hatemi-J and Irandoust (2000) for the case of Denmark; Panas and Vamvoukas (2002) for the case of Greece in the long run; Shan and Tian (2002) for Shanghai; Reppas and Christopoulos (2005) for the case of 22 less developed Asian and African countries; Cetintas and Barisik (2009) for 13 transition economies; Abbas (2012) for Pakistan; Igbal et al. (2012) for Pakistan; Shihab et al. (2014) for Jordan; Bonga et al. (2015) for Zimbabwe; Gokmenoglu et al. (2015) for Costa Rica; Popovici and Calin (2016) for Romania; and more recently, Kalaitzi and Cleeve (2018) for the case of the UAE in the long run. Apart from the first group and the second group of studies, there is a third (middle-ground) group, which posits that both exports and economic growth Granger-cause each other. In other words, this group argues that there is bidirectional causality between exports and economic growth. Studies whose findings are consistent within this view include studies, such as Kwan and Cotsomitis (1991) for the case of China during the period 1952–1985; Bahmani-Oskooee and Janardhanan (1993) for the case of LDCs; Shan and Sun (1998) for China; El-Sakka and Al-Mutairi (2000) for Algeria, Bahrain, Egypt, Jordan, Mauritania and Oman; Hatemi-J and Irandoust (2000) for the case of Finland, Norway and Sweden; Wernerheim (2000) for Canada; Abdulnasser (2002) for Japan; Awokuse (2005) for Korea; Shirazi and Manap (2005) for Bangladesh and Nepal; Jordaan and Eita (2009) for Botswana; Elbeydi et al. (2010) for Libya; Tsen (2010) for China; Rahmaddi and Ichihashi (2011) for Indonesia; Sallem and Sial (2015) for Pakistan; Sunde (2017) for South Africa; Guntukula (2018) for India; Kalaitzi and Cleeve (2018) for the case of the UAE in the short run; Dinç and G€okmen (2019) for Brazil in the long run; and more recently, Shakeel and Ahmed (2020) for a panel of five South Asian countries in the short run. Despite the overwhelming causal relationship between exports and economic growth reported in the above-mentioned studies, there is the fourth group (i.e. neutrality group) whose empirical findings show that there is no formidable causal relationship between exports and economic growth and that any perceived relationship could be merely mechanical in nature. Although this view is somewhat unpopular, it is currently gaining traction in the empirical literature. Some of the studies whose findings are in one way or the other consistent with this view include those of Ahmad and Kwan (1991) for the case of 47 African Countries; Jin and Yu (1996) for the USA; Abdulnasser and Manucher (2000) for the case of Greece and Turkey; Ahmed et al. (2000) for the case of Bangladesh, Pakistan and Sri Lanka; El-Sakka and Al-Mutairi (2000) for Kuwait, Libya, Qatar, Sudan and Tunis; Shirazi Exports and and Manap (2005) for Sri Lanka and India; Tang (2006) for China; Tang (2006) for China; economic Shirazi and Manap (2005) for Sri Lanka and India; more recently, Kalaitzi and Chamberlain growth in SSA (2020) for the case of the United Arab Emirates in the long run. Table 1 gives a summary of previous empirical findings on the causal relationship between exports and economic growth in both developed and developing countries, based on these four groups of studies. 3. Empirical analysis 3.1 Model specification – a trivariate Granger-causality model This study uses panel data and a trivariate Granger-causality model to examine the causal relationship between exports and economic growth in SSA countries. The use of this technique is deemed most suitable in this study because of the various advantages it renders. Firstly, a panel data technique has the ability to test more complicated behavioural models than a single cross-sectional or time-series data technique (see Hsiao, 2003). Secondly, panel data contains more degrees of freedom and more sample variability than cross-sectional or time-series data (Hsiao et al., 1995). Thirdly, panel data analysis generates more accurate predictions for individual outcomes by pooling the data rather than generating predictions of individual outcomes using the data on the individual in question (Hsiao et al., 1989, 1993) [3]. The Granger causality model adopted in this study is expressed as follows (see Odhiambo, 2015): q q q X X X Δy=N ¼ α þ β Δy=N þ β ΔEXPT þ β ΔDEBT it 1j it−k it−k it−k 11ik 12ik 13ik (1) k¼1 k¼1 k¼1 þ λ ECT þ ε 1i it−1 it q q q X X X ΔEXPT ¼ α þ β ΔEXPT þ β Δy=N þ β ΔDEBT it 2j it−k it−k it−k 21ik 22ik 23ik k¼1 k¼1 k¼1 þ λ ECT þ ε (2) 2i it−1 it q q q X X X ΔDEBT ¼ α þ β ΔDEBT þ β Δy=N þ β ΔEXPT it 3j it−k it−k it−k 31ik 32ik 33ik k¼1 k¼1 k¼1 þ λ ECT þ ε (3) 3i it−1 it where: y/N Real GDP per capita EXPT Exports DEBT External debt Δ First difference operator ECT Error-correction term « White noise error term i Individual country t Time period q Lag length EJMBE Author (Year) Region/Countries Study period Causality 31,1 Studies in favour of export-led growth [i.e. Exports Granger-cause economic growth] Boame (1998) Ghana 1960 to 1992 Exports →Y El-Sakka and Al- Arab countries 1970 to 1999 Exports →Y (Iraq, Morocco, Mutairi (2000) Saudi Arabia and Syria) Fountas (2000) Ireland 1950 to 1990 Exports →Y Awokuse (2003) Canada 1961:1 to 2000:4 Exports →Y Shirazi and Manap Pakistan 1960 to 2003 Exports →Y (2004) Shirazi and Manap five South Asian countries Pakistan: 1960– Exports →Y (Pakistan) (2005) 2003 India: 1960–2002 Bangladesh: 1973– Sri Lanka: 1960– Nepal: 1975–2003 Siliverstovs and Chile 1960 to 2001 Exports →Y Herzer (2006) Jordaan and Eita Namibia 1970 to 2005 Exports →Y (2007) Narayan et al. (2007) Papua New Guinea and Fiji Papua New Guinea: Exports →Y 1961–1999 Fiji: Long-run Fiji: 1960–2001 Papua New Guinea: Short- run Dash (2009) India (1992[Q1 to 2007 Exports →Y [Q4]) Rangasamy (2009) South Africa 1960q1 to 2007q3 Exports →Y Uddin et al. (2010) Bhutan 1980 to 2005 Exports →Y Ramona et al. (2010) Romania 1999 Q1 to 2009 Q4 Exports →Y Samad (2011) Algeria 1960 to 2005 Exports →Y Saad (2012) Lebanon 1970 to 2010 Exports →Y Tsaurai and Zimbabwe 1980 and 2010 Exports →Y Odhiambo (2012) Dritsaki (2013) Greece 1960 to 2011 Exports →Y Abdulkarim (2014) Saudi Arabia 1968 to 2011 Exports →Y Bilas et al. (2015) Croatia 1996 to 2012 Exports →Y Ee (2016) Selected SSA countries 1985 to 2014 Exports →Y Ahmad et al. (2018) ASEAN5 economies 1981 to 2013 Exports →Y Ali and Li (2018) China and Pakistan 1980 to 2015 Exports →Y Dinç and G€okmen Brazil 1960 to 2017 Exports→Y (in the short run) (2019) Kalaitzi and The UAE 1975 to 2012 Exports→Y (in the short run) Chamberlain (2020) Kim et al. (2019) Myanmar 1981 to 2015 Exports →Y Shakeel and Ahmed A panel of five South Asian 1980 to 2014 Exports→Y (in the long run) (2020) countries B: Studies in favour of growth-led export [i.e. Economic growth Granger-causes exports] Table 1. Oxley (1993) Portugal 1865–1985 Y →Exports Previous empirical findings on the causal Ahmad and Harnhirun ASEAN Countries 1966 through 1988 Y →Exports relationship between (1996) exports and economic Henriques and Canada 1870 to 1991 Y →Exports growth in both Sadorsky (1996) developed and developing countries (continued) Exports and Author (Year) Region/Countries Study period Causality economic Baharumshah and Malaysia 1970:1 to 1994:4 Y →Exports growth in SSA Rashid (1999) El-Sakka and Al- Arab countries 1970 to 1999 Y →Exports (the UAE) Mutairi (2000) Hatemi-J and Nordic economies Denmark: 1977.1– Y →Exports (for the case of Irandoust (2000) 1996.1 Denmark) 83 Finland: 1975.1– 1994.4 Norway: 1975.1– 1996.1 Sweden: 1980.1– 1995.2 Panas and Vamvoukas Greece 1948–1997 Y→Exports (in the long run) (2002) Shan and Tian (2002) Shanghai 1990(1) to 1996(12) Y →Exports Reppas and A sample of 22 less 1969 to 1999 Y →Exports Christopoulos (2005) developed Asian and African countries Cetintas and Barisik 13 transition economies 1995:2 to 2006:4 Y →Exports (2009) Abbas (2012) Pakistan 1975 to 2010 Y →Exports Igbal et al. (2012) Pakistan 1970 to 2009 Y →Exports Shihab et al. (2014) Jordan 2000 to 2012 Y →Exports Bonga et al. (2015) Zimbabwe 1975 to 2013 Y →Exports Gokmenoglu et al. Costa Rica 1980 to 2013 Y →Exports (2015) Popovici and Calin Romania Quarterly data, Y →Exports (2016) 2001 to 2015 Kalaitzi and Cleeve The UAE 1981–2012 Y→Exports (in the long run) (2018) C: Studies in favour of bidirectional causality between exports and economic growth [i.e. exports and economic growth Granger-cause each other] Kwan and Cotsomitis China 1952 to 1985 Exports ↔Y (for the period (1991) 1952–1985) Bahmani-Oskooee and LDCs 1973I to 1988IV Exports ↔Y (in almost all Janardhanan (1993) countries in the sample) Shan and Sun (1998) China 1987 to 1996 Exports ↔Y El-Sakka and Al- Arab countries 1970 to 1999 Exports ↔Y(Algeria, Mutairi (2000) Bahrain, Egypt, Jordan, Mauritania and Oman Wernerheim (2000) Canada 1947 to 96 Exports ↔Y Abdulnasser (2002) Japan 1966:01 to 1999:01 Exports ↔Y Hatemi-J and Nordic economies Denmark: 1977.1– Exports ↔Y (for the case of Irandoust (2000) 1996.1 Finland, Norway and Finland: 1975.1– Sweden) 1994.4 Norway: 1975.1– 1996.1 Sweden: 1980.1– 1995.2 Awokuse (2005) Korea 1963 to 2001 Exports ↔Y (continued) Table 1. EJMBE Author (Year) Region/Countries Study period Causality 31,1 Shirazi and Manap five South Asian countries Pakistan: 1960– Exports ↔Y (Bangladesh (2005) 2003 and Nepal) India: 1960–2002 Bangladesh: 1973– 84 Sri Lanka: 1960– Nepal: 1975–2003 Jordaan and Eita Botswana 1996.1 to 2007.4 Exports ↔Y (2009) Elbeydi et al. (2010) Libya 1980 to 2007 Exports ↔Y Tsen (2010) China 1978 to 2002 Exports ↔Y Rahmaddi and Indonesia 1971 to 2008 Exports ↔Y Ichihashi (2011) Sallem and Sial (2015) Pakistan 1973 to 2013 Exports ↔Y Sunde (2017) South Africa 1990 to 2014 Exports ↔Y Guntukula (2018) India April 2005 to March Exports ↔Y Kalaitzi and Cleeve The UAE 1981–2012 Exports↔Y (in the short run) (2018) Dinç and G€okmen Brazil 1960–2017 Exports↔Y (in the long run) (2019) Shakeel and Ahmed A panel of five South Asian 1980 to 2014 Exports↔Y (in the short run) (2020) countries D: Studies in favour of neutrality hypothesis [i.e. No causality between exports and economic growth] Ahmad and Kwan 47 African Countries 1981 to 1987 Exports ≠Y (1991) Jin and Yu (1996) US economy 1959:1 to 1992:3 Exports ≠Y Abdulnasser and Greece, Ireland, Mexico, 1960 to 1997 Exports ≠Y (for Greece and Manucher (2000) Portugal and Turkey Turkey) Ahmed et al. (2000) Four South Asian 1970 to 1997 Exports ≠Y (for the case of (Bangladesh, India, Bangladesh, Pakistan and Sri Pakistan and Sri Lanka) Lanka) El-Sakka and Al- Arab countries 1970 to 1999 Exports ≠Y (Kuwait, Libya, Mutairi (2000) Qatar, Sudan and Tunis) Tang (2006) China 1970 to 2001 Exports ≠Y Shirazi and Manap five South Asian countries Pakistan:1960– Exports ≠Y (Sri Lanka and (2005) 2003 India) India: 1960–2002 Bangladesh: 1973– Sri Lanka: 1960– Nepal: 1975–2003 Kalaitzi and The UAE 1975 to 2012 Exports ≠Y (in the long run) Chamberlain (2020) Note(s): Exports →Y means exports cause economic growth; Y→ Exports means economic growth causes exports; Exports ↔Y means there is bidirectional causality between exports and economic growth; and Table 1. Exports ≠Y means there is no causality between exports and economic growth 3.2 Data Exports and The data used in this study cover the period 1980 to 2017. The studied countries were divided economic into two panels where data were available – low-income panel and middle-income panel. The growth in SSA data were sourced from the World Bank’s World Development Indicators. Although a number of proxies could be used to measure economic growth, in this study, real GDP per capita was used to measure the growth of the real sector. The advantage of using real GDP per capita is that it takes into consideration the effect of a population on economic growth. Some of the studies that have used this proxy include those of Shan et al. (2001), Thangavelu and James (2004), Rousseau and Vuthipadadorn (2005), Cooray (2010), Demirguc-Kunt et al. (2011), Odhiambo (2014, 2021), to mention a few. The exports variable is measured by the value of the exports of goods and services, while external debt, which has been used as an intermittent variable between exports and economic growth, is measured by the value of the external debt as a percentage of GNI. 3.3 The panel unit root test In order to identify the order of integration of the variables used in the study, three panel unit root tests are employed: (1) Levin et al. (2002); (2) Im et al. (IPS) (2003); and (3) ADF Fischer tests. The results are reported in Table 2 for both low-income and middle-income countries. The results of panel unit root tests reported in Table 2 show that the variables are consistently stationary in first difference. 3.4 The panel cointegration test Having confirmed the order of integration of the variables used in this study, the next step is to examine the long-run relationship among these variables. For this purpose, two panel cointegration tests are employed in order to ensure the veracity of the findings. These are: (1) the Pedroni (2004) residual cointegration test; and (2) the Kao (1999) residual cointegration test. The cointegration results are reported in Table 3. Overall, the results of the two panel cointegration tests reported in Table 3 reveal that the variables in the two models (1–2) are cointegrated; hence, the Granger-causality test could be performed. 3.5 Trivariate Granger-causality results In this section, a dynamic multivariate panel Granger-causality model is employed to examine the causal relationship between exports, debt and economic growth in both low- LLC t-Statistics IPS W-Statistics ADF - Fisher Chi-square Level First difference Level First difference Level First difference Low-income SSA countries EXP 0.86612 11.4343*** 1.61785 14.3055*** 34.6601 102.194*** y/N 2.06611 6.28614*** 1.26895 11.7463*** 27.7939 126.990*** DEBT 1.91001 8.13716*** 0.13487 10.2718*** 25.4644 77.5907*** Middle-income SSA countries EXP 0.48707 11.9829*** 0.84128 19.0471*** 45.3722 284.127*** y/N 4.20445 7.10078*** 0.80286 13.0152*** 49.2910 219.670*** DEBT 0.80859 8.53214*** 1.11868 15.2553*** 20.8375 235.867*** Table 2. Note(s): *, ** and*** indicate rejection of the respective null hypothesis at the 10%, 5% and 1% significance The results of panel levels, respectively unit root tests EJMBE Panel B: Middle-income 31,1 Panel A: Low-income countries countries t-Statistic Probability t-Statistic Probability Pedroni residual cointegration test Pedroni panel cointegration test – within-dimension Panel v-Statistic 14.28669 0.0000 2.838063 0.0023 Panel rho-Statistic 3.458024 0.0003 2.188797 0.0143 Panel PP-Statistic 0.192649 0.4236 1.970811 0.0244 Panel ADF-Statistic 0.457711 0.3236 2.161709 0.0153 Pedroni panel cointegration test – between-dimension Group rho-Statistic 2.734473 0.0031 0.154009 0.4388 Group PP-Statistic 4.279536 0.0000 1.542654 0.0615 Group ADF-statistic 5.138824 0.0000 2.236847 0.0126 Table 3. PANEL 2: Kao residual cointegration test Panel cointegration results ADF 2.627023 0.0043 2.165364 0.0152 income and middle-income countries. The short-run causality is given by the F-statistics, which is expected to be statistically significant (see Asongu, 2014; Odhiambo, 2015). The long-run causality, on the other hand, is based on the coefficient of the error-correction term (ECT), which is expected to be negative and also statistically significant (see Odhiambo, 2021; Asongu et al., 2016). Table 4 presents the Granger-causality results for both low-income and middle-income countries. Based on the findings reported in Panel A, it is clear that exports do not Granger-cause economic growth in low-income countries. This applies irrespective of whether the causality is estimated in the short run or in the long run. The short-run causality has been rejected by the corresponding F-statistic in the growth equation, which has been found to be statistically significant. Likewise, the long-run causality has been rejected by the coefficient of the error correction term in the economic growth in low-income countries’ panel, which has also been found to be statistically insignificant. The same findings apply to the reverse causality from economic growth to exports. This can be confirmed by the corresponding F-statistic in the export’s equation, which has been found to be statistically insignificant. This finding, therefore, shows that there is no causal relationship between exports and economic growth in either direction in low-income countries. This finding, though contrary to some of the previous studies, is consistent with previous studies, such as Ahmad and Kwan (1991) for the case of 47 African Countries, Ahmed et al. (2000) for the case of Bangladesh, Pakistan and Sri Lanka and Shirazi and Manap (2005) for Sri Lanka and India, among others. In middle-income countries (Panel B), the results show that there is bidirectional causal relationship between exports and economic growth. This applies irrespective of whether the causality is conducted in the short run or in the long run. The causal flow from exports to economic growth has been confirmed by the coefficient of the ECM term and the corresponding F-statistic in Panel B, which have been found to be both statistically significant. Likewise, the reverse causal flow from economic growth to exports has been confirmed by the coefficient of the ECT and the corresponding F-statistic in the export’s equation, which have been found to be both statistically significant. Overall, the results of both low-income and middle-income countries show that the export-led growth paradigm, which gained prominence in the 1970s, may no longer be relevant to the countries under study. Other results show that for panel A, there is a long-run and short-run unidirectional causal flow from economic growth to debt in low-income countries. This is confirmed by the coefficient of the error correction term and the corresponding F-statistic in the debt equation, which have been found to be statistically significant. The results also show that for low- Exports and economic growth in SSA Table 4. Granger-causality results for all models Panel A Panel B Dependent Low-income countries Middle-income countries variable D(y/N) D(DEBT) D(EXPT) ECT D(y/N) D(DEBT) D(EXPT) ECT D(y/N) – 1.0432 [0.353] 1.3140 [0.269] 0.0013 (1.502) – 0.1376 [0.871] 9.3387*** [0.000] 0.0013*** (3.707) D(DEBT) 3.5232* [0.061] – 0.00030 [0.987] 0.0425*** (7.183) 1.4591 [0.233] – 3.3745** [0.035] 0.0167 (1.508) D(EXPT) 0.9700 [0.380] 4.9265*** [0.008] – 0.0686*** [3.080] 3.0806** [0.047] 1.6065 [0.202] – 0.0234*** (3.034) income countries, there is a unidirectional causal flow from debt to exports both in the short EJMBE run and in the long run. This finding is confirmed by the coefficient of the ECM and the 31,1 corresponding F-statistic in the export’s equation, which have been found to be both statistically significant. In Panel B, the results show that there is a short-run unidirectional causal flow from exports to debt. This has been confirmed by the corresponding F-statistic in the debt equation, which has been found to be statistically significant. However, no causality was found to exist between economic growth and debt in either direction. This applies irrespective of whether the causality was estimated in the short run or in the long run. 4. Conclusion In this study, the dynamic causal relationship between exports and economic growth has been examined. The study was motivated by the current debate on the export-led growth versus growth-led export nexus. Unlike in some previous African studies, in the current study, SSA countries are divided into two groups, namely low-income and middle-income countries. In addition, external debt has been used as an intermittent variable in a bivariate setting between exports and economic growth, leading to a multivariate panel Granger- causality model. Using an ECM-based panel Granger-causality model, the study found that there is a long-run relationship between exports and economic growth in both groups of countries. However, the causality between these two variables varies significantly between low-income and middle-income countries. Specifically, the study found a short-run and long- run bidirectional causality between exports and economic growth to prevail in middle-income countries. However, in low-income countries, no causality was found to exist between these two variables in either direction. This applies irrespective of whether the causality was estimated in the short run or in the long run. These findings have important policy implications as they indicate that the causality between exports and economic growth in SSA countries varies with the countries’ stage of development. The study, therefore, concludes that the argument that exports always Granger-cause economic growth may have been oversold to many SSA countries. This finding is not surprising given the nature and the composition of the exports of many SSA countries. Indeed, the exports of many SSA countries, especially low-income countries, are dominated by primary products, whose prices are relatively low when compared to those of manufactured goods. Moreover, given the fact that industrialisation in some SSA countries has been relatively slow, some SSA countries have been forced to continue importing some consumer goods that could be produced locally, thereby leading to widening current account deficits. Consistent with the contemporary literature, the study cautions low-income SSA countries against over-relying on an export-led growth strategy to achieve a sustained growth path as no causality between exports and economic growth has been found to exist in those countries. Instead, such countries should consider pursuing new growth strategies by building the domestic demand side of their economies alongside their export promotion strategies in order to expand the real sector of their economies. For middle-income countries, the results show that the expansion of exports through various exports promotion strategies has been an integral component of their economic growth path. Consequently, the study recommends that both export promotion strategies and pro-growth policies should be intensified as economic growth and exports have been found to reinforce each other in those countries. Notes 1. See Sultanuzzaman et al. (2019). 2. See also Furuoka et al. (2019). 3. See Hsiao (2007). References Exports and Abbas, S. (2012), “Causality between exports and economic growth: investigating suitable trade policy economic for Pakistan”, Eurasian Journal of Business and Economics, Vol. 5 No. 10, pp. 91-98. growth in SSA Abdulkarim, K.A. 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Journal

European Journal of Management and Business Economics – Emerald Publishing

Published: Feb 17, 2022

Keywords: Granger causality; Economic growth; Exports; Sub-Saharan Africa

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