E-mail: imranchaudhry@bzu.edu.pk Exploring the Causality Relationship between Trade Liberalization, Human Capital and Economic Growth: Empirical Evidence from Pakistan Dr. Imran Chaudhry Associate Professor of Economics Bahauddin Zakariya University Multan, Pakistan E-mail: imranchaudhry@bzu.edu.pk

I. Introduction Trade liberalization Trade Liberalization and Economic growth Human capital Human Capital and Economic Growth

Theories of Human Capital [See Schultz (1961) and Becker (1962)] Theories of endogenous growth [See Lucas (1988), Romer (1990) and Rebelo (1991)]

II. Data Sources Time series data covering the time period 1972-2007 ESDS international website Pakistan Economic Survey

III. Selection of Variables Real Gross Domestic Product (LRGDP) (Proxy for Economic Growth) Trade openness (TRADE) (Proxy for trade liberalisation) Employed Labour Force Proxy for labour (LLABOUR)

Gross Fixed Capital Formation as Percent of GDP Proxy for Capital (LCAPITAL) Human Capital Index (LHCAPT) Ht = (5H1t + 10H2t + 16H3t) / Population (t)) Where Ht = Human capital stock at year t, Population (t) = Total population at year t, H1t, H2t and H3t represent the number of enrolments at primary school, higher secondary school, and university levels respectively.

IV. Methodological Issues All variables are taken with natural logs Neo-classical Growth Model, originally proposed by Solow (1956) and extended by Mankiw, Romer, and Weil (1992) Cobb Douglas Growth Model

Data Analysis Techniques Descriptive Statistics Analysis Correlation Matrix Augmented Dickey-Fuller Test (ADF)

Johansen approach for Co-integration Error Correction Model (ECM) Granger Causality Analysis

LGDP = β1 + β2 LTRADE + β3 LHCAPT + β4 LCAPITAL + β5 LLABOUR + ut An econometric model of the selected variables used in this study is given as: LGDP = β1 + β2 LTRADE + β3 LHCAPT + β4 LCAPITAL + β5 LLABOUR + ut

V. Results and Discussion a. Descriptive Statistics Analysis Trade openness, labor, capital and human capital have very low variability Residuals for all variables are normally distributed except human capital

All variables are positively correlated b. Correlation Matrix Correlation of variables reveals strength of the relationship of variables All variables are positively correlated labour force participation and human capital index are highly correlated with economic growth Capital and openness are poorly correlated with growth

C. Time Series Econometric Results The regression results are spurious The problem of non-stationary of the variables All variables are found stationer at first difference Co-integration analysis

Trace statistic has been used to test the null hypothesis of r co-integrating vectors Model 2 (Co integration with restricted intercepts and no deterministic trend in the data) was found to be the most appropriate There exists only two co-integrating relationships

There exists long run relationship among the variables All the variables are statistically significant and all coefficients except of human capital are more elastic Trade openness and labor force participation have positive impact on economic growth over the time period

Short run relationship by using an error correction model (ECM) framework Trade openness and labour force participation have significant impact on economic growth The coefficient of ECT(t-1) indicates the speed of adjustment 7 percent adjustment is observed The results are consistent with other studies

d. Granger Causality Analysis The optimum lag length of VAR is k = 2 based on AIC There is only unidirectional causality between the variables Human capital and Labor force participation are causing economic growth at all levels

Economic growth causing trade openness and human capital Human capital causing labor force participation Causality analysis also confirms the Co-integration short-run and long-run results

VI. Conclusion All variables are non-stationary and become stationary at their first difference There exists a long-run and short-run relationship over the period 1972-2007 Trade openness and labour force participation have significant impact on economic growth

E-mail: imranchaudhry@bzu.edu.pk The results confirm the validity of exports led growth hypothesis and New Growth Theory (NGT) for Pakistan Thank You all (Dr. Imran Chaudhry) E-mail: imranchaudhry@bzu.edu.pk