A Macroeconometric Model for Trade Policy Evaluation: Evidence from Pakistan

Abstract

Trade policies are an essential enabler of economic growth, job creation, and poverty reduction for developed as well as developing countries. Trade provides new market opportunities for domestic firms, stronger productivity, and innovation through competition. The macroeconometric modelsplay an important contribution in policy optimization. After reviewing Pakistan’s regional trade performance, it is concluded that regional trade can play a vital role in the economic development of Pakistan. To sustain this improvement, there is a need to construct a macroeconomic model to forecast regional trade and perform scenario analysis to make growth enhancing policies for the country. In this study, we develop a macroeconometric model for evaluation of region related trade policyand forecasting of trade performance of Pakistan. These regions are Organization of Islamic Council (OIC), Organization for Economic Cooperation and Development (OECD), Association of SouthEast Asian Nations (ASEAN), South Asian Association for Regional Cooperation (SAARC) and the rest of the world. Macroeconometric model has been developed that contains 15 behavioral equations and 8 identities. Cointegration results suggest there exist long run relationships among variables of all behavioral equations. Additionally, results of different policy shocks based on (i) export price, (ii) importprice, (iii) exchange rate, (iv) foreign direct investment, (v) interest rate and (vi) foreign exchange reservesuggest that the model is useful for economic planning to sustain growth performance of Pakistan. In addition to this, it is also noticed that very few studies attempt to examine the relationship between international trade and human development. Some panel and cross section studies have been done but mostly Pakistan has not been included. This study also examines first time ever the effect of aggregate and disaggregates trade on human development in Pakistan by vi using annual time series data. This study contains five models in which human development with (i) total trade (ii) aggregate exports (iii) aggregate imports (iv) exports of primary commodities, semi manufactured goods and manufactured goods and (v) imports of consumer goods, imports of capital goods, imports of industrial raw material of consumer goods and imports of industrial raw material for consumer goods are considered. Cointegration test has been applied to check the long run relationship between human development and trade. Sensitivity analysis confirms that initial results are robust. Causality analysis has also been done the causal relationship between international trade and human development. Generally, it is concluded that trade is a significant contributor to human development in Pakistan.