Trade Liberalization and Economic Development

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The Lahore Journal of Economics 11 : 1 (Summer 2006) pp. 19-34

Trade Liberalization and Economic Development: Evidence from Pakistan Bushra Yasmin, Zainab Jehan, Muhammad Ali Chaudhary* Abstract
Unrestricted trade stimulates economic growth and bridges socioeconomic gaps existing in different countries of the world. Pakistan has adopted trade liberalization policies since the late 1980s with the same expectations. This study has empirically analyzed how trade liberalization has affected economic development in the country. Its effects have been examined with respect to four measures of economic development: per capita GDP, income inequality, poverty and employment over the period from 1960-2003. The main analysis is based on a simultaneous equation model. Keeping in view the simultaneity of the chosen development measures, the model is estimated with the 2SLS technique of regression analysis. The analysis shows that, over the study period, trade liberalization has not affected all the chosen indicators of development uniformly. It has affected employment positively but per capita GDP and income distribution negatively. However, it has not affected poverty in any way. The obvious message is that trade liberalization has not affected all the indicators of development favorably in Pakistan. It thus implies the need of a cautious move towards liberalization. The focus of trade liberalization should be to bring about improvement in the performance of mediating factors and to focus exports on labor-intensive products. JEL Classification: F41

Keywords: Trade Liberalization, Economic Development, Poverty I. Introduction The world is rapidly transforming into a global village. Trade has contributed to this transformation more significantly than any other factor. In fact, the high economic, social, cultural, political, human and intellectual *

The authors are Lecturers in Economics and Professor of Economics, Fatima Jinnah Women University, Rawalpindi, respectively.

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Bushra Yasmin, Zainab Jehan, Muhammad Ali Chaudhary

integration witnessed in the world in the recent past is due primarily, though not exclusively, to trade among its different countries. Further, trade has contributed much more to the development of the world economies than any other factor. It is because different nations interact with each other through trade that it tends to bring about the desired change through the exchange of goods, services, skills, knowledge and expertise. In the process, trade increases the availability of choices, improves the level and distribution of income, increases opportunities for enhancement of technical capacities and finally motivates people to accelerate the process of change in their countries. This desired process of change signifies development. Development, in turn, is manifested in the enhanced work capacity of the people, augmented empowerment of individuals and thereby, high rates of participation in productive activities. Thus, trade and development go hand in hand and therefore the strategies adopted in the case of the former have a strong bearing on the latter. A number of market-oriented moves have surged during the last couple of decades in the world. In the wake of these moves, the global trend has also witnessed the liberalization of the capital account, foreign exchange, credit, domestic consumption and trade in different countries. However, the area which has received unprecedented emphasis in various economies is trade liberalization. Trade liberalization denote the reduction in barriers to the movement of goods and services in international trade. In the words of Bhagwati and Krueger, “any policy which reduces the antiexport bias will lead towards liberalization of trade” and reduction in the import license premium is the fundamental step towards a liberalized trade regime. 1 A new explanation by Edwards (1993) describes a liberal trade regime as one in which all trade distortions including...
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