Impact of Trade Liberalization of Bangladesh

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Impact of Trade Liberalization on Growth of Bangladesh

Md. Hafiz Iqbal

E-mail:vaskoriqbal@yahoo.com

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Graduate School for International Development and Cooperation (IDEC)

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Outline

I. Introduction

II. An Overview of Foreign Trade Policies of Bangladesh

III. Trade Liberalization and Macroeconomic Performance of Bangladesh.

IV. Hypothesis

V. Theoretical Explanation

VI. A Review of Trade Policy and Regimes of Bangladesh.

VII. Data Set

VIII. Source of Data

IXSpecification of Model

XData Analysis and Findings

XIConclusion

XIIReference

1. Introduction: There exists a wide range of theoretical and empirical literature on the relationship between foreign trade and economic growth in both developed and developing countries. The early literature focused mostly on the role of export in economic growth. The spectacular success of the outward oriented policies in the East Asian countries provided a basis for the adoption of such polices in developing countries like Bangladesh. Accordingly, the literature tried to support or reject the logic of universal application of export led growth policy in developing countries. The dynamic linkages between export and import or import and income did not receive much attention in this literature. But experience shows that in many countries export is highly dependent on import of capital goods and intermediate inputs as well as raw materials giving a case of bivariate causality between trade (export-import) and economic growth.

The relationship between foreign trade and economic growth has long been discussed by different school of thought. The theoretical standpoints can be summarized in terms of technological know how, market expansion, resource allocation, ease of balance of payments, employment generation and income creation. (Hossain & Salim 2009). Karl Marx focuses on the role of exchange in economic growth. In his opinion, the expansion of production needs a growing market which will promote production continuously (Chen 2009). The classical school treats the foreign trade as a means of optimal distribution of resources and increasing productivity that stimulate economic growth. In similar vein is Alfred Marshall and his other neoclassical followers and they dictum that trade enhances growth because of the benefits of comparative advantage, full capacity utilization, greater economies of scale and increasing rate of investment and technological change (Krueger, 1978; Kavoussi, 1984).This school identifies five different ways in which foreign trade affects macroeconomics performance of a country: the revenue effect, capital accumulation effect, substitution effect, income distribution effect and the effect of the weighted elements. All these effects together imply that trade strengthens economic growth over time as an economy develops (Chen, 2009). The structuralist school led by Sir William Arthur Lewis (1915-1991) holds that in the dual economy model if the modern industrial sector produces export goods and the traditional agricultural sector produces import substitutes, then foreign trade would expand the market and lead to increase in production. The new growth theories which consider increasing returns to capital put more focus on trade as an argument of growth. According to these theories, international trade leads to technological diffusion that affects the medium and long term output growth of the developing countries by improving productivity. The new trade school (led by Paul Krugman) emphasizes the role of trade in economic growth through economies of scale and improving the optimal allocation of resources. It is claimed that international trade enables countries to specialize in goods and services by stimulating...
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