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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

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

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

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

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

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Gross Fixed Capital Formation as Percent of GDP Gross Fixed Capital Formation as Percent of GDP Proxy for Capital (LCAPITAL) Human Capital Index (LHCAPT) 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.

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

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

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

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

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

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

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

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Trace statistic has been used to test the null hypothesis of r co-integrating vectors 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 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 only two co-integrating relationships

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

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

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

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

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

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The results confirm the validity of exports led growth hypothesis and New Growth Theory (NGT) for Pakistan The results confirm the validity of exports led growth hypothesis and New Growth Theory (NGT) for Pakistan Thank You all (Dr. Imran Chaudhry)

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