The general idea of free trade agreement of growth was developed in advocacy of free trade based on neoclassical trade theory (Solow, 1956) and from recent endogenous growth theory (Romer P. , 1990). The support for free trade is drawn from Ricardian principles of comparative advantage (Viner, 1937). Similar idea is drawn from the notion of perfect competition and the believe of neoclassical economists who argues on the importance of efficient capital allocation due to free trade (Krugman, 1986; Corden W. , 1974).
The phenomenon of free trade came under severe scrutiny in the face of Great Depression. Hence, theoretical foundations of ‘optimum tariff' were developed in support of protection (Johnson, 1950; Kaldor, 1940). Johnson (1958, 1971) advocated trade protection in three groups in his classical exposition. They are the economic arguments, non-economic arguments and non-arguments. Economic arguments raise infant industry argument, optimal tariff argument and correction of domestic market distortions, while non-economic arguments emphasize on self-sufficiency for domestic economy. Non-arguments attempt to resolve balance of payment distortions through trade protection. Johnson concluded that ‘optimal tariff' protection is the only valid argument, while in other cases such arguments will only inflict distortions.
The neoclassical economists refute the notion of protection as an alternative, as this would result in intra-industry effects. The increased barrier to entry would make domestic traders to engage in monopolistic competition, while small enterprises will be left inefficient. Intra-industry effects are the source to welfare loss (Tybout J. D., 1991). In addition, Bhagwati(1988) and Kruger(1974), raises the theory of directly unproductive and profit (DUP) seeking activities, which will cause waste to national resources. Additionally, the Solow-growth model embodies technology as an endogenous factor (Agion, 1992; Romer P. , 1989), which argue that international trade ensures faster diffusion of technology, that is embodied into the better intermediate goods which results in higher productivity and growth for domestic economy (Grossman, 1991). This will result in learning by doing effect and technological know-how is surpassed. In addition, management is more efficient and all will combine in high growth (Krugman, 1987; Young, 1991; Lucas, 1988) .
Objective of the study
A high number and standard of studies have been conducted on Export-led growth, trade openness, “manufacturing exports as a new engine of growth”, specifically in the last decade, on different economies, ranging from developed to poor countries, drawing interesting conclusions. The present study seeks to investigate the effects of export, openness on growth in the context of Bangladesh.
Firstly, the study will seek for stable effects of policy shifts and implementation, in Bangladesh, which will be determined by stable changes in the determinants. Stationarity conditions, if satisfied, will ensure the stability of economy and productivity, towards a particular goal.
Secondly, the study will investigate the current association between growth and trade openness. While it is desired, that the adopted outward-looking trade policies of Bangladesh to result in positive association of productivity to liberalization, trade openness might be effected by other variables and may render different conclusions.
Thirdly, the study will examine, if the export led growth hypothesis is still applicable to Bangladesh, as before, while many countries, such as Sri-Lanka, Philippines, Nigeria have seen opposite relationships. Additionally, Hossain and Karunaratna (2004) have argued that “manufacturing exports have become new engine of growth” which is a disciple of the de novo hypothesis. In contrast, Adelman (1984) suggests that, agricultural exports should have dominant effect for a pro-agricultural society as Bangladesh. It is important to see if, ‘manufacturing exports is an engine of growth', or still other factors are dominant as before.
Investment is an endogenous factor that should imply the increased import of intermediate goods, as a result of increased export, and more openness, would consequently; render higher productivity (Krugman, 1987; Lucas, 1988; Young, 1991).
Relevance and limitations of the study
Relevant studies have been conducted in the context of Bangladesh, in last decade and have drawn interesting remarks. However, the major drawback is the timeframe of earlier studies, which did not cover analyses from the last ten years. In the last ten years, econometric methods have changed and improved rigorously. Hence, many studies have been rendered invalid due to absence of proper methodology. The world economy has seen dramatic events in politics, international trade and global economy. The trends in global economy, which were much more rigorous, in the last ten years, have affected Bangladesh magnificently, as Bangladesh emerges as a high power economy in Asia, and have interested researchers, due to high deviations and high rises to productivity. It is necessary to embody recent econometric techniques of Johansen's maximum likelihood cointegration analysis and vector error correction methodology, which will inform on recent associations, among the interested indicators. Hence the state-of-art econometric techniques will provide reliable results that would help the policy makers to observe the relationships and bring sufficient changes, in trade policy to render profit.
Among the few limitations of the study was the absence of first hand secondary sources. Most data sources for Bangladesh are not available online and are preserved in paper based format. The lack of proper technology and internet, withdraw the authorities of the country, to provide data directly. Therefore, data are collected from World Bank sources, which may not correct for errors, and sometimes fail to provide detailed data series as an intermediary.
Structure of the dissertation
The second section will contain a brief country profile and approaches to liberalization. The third phase will contain literature review that will discuss literatures in support to export-led growth hypothesis and trade liberalization. This section will bring forth studies that contrast and significance of the study. The fourth and fifth section will contain methodology to estimation and results of analysis. The final section will give conclusion and remarks to the dissertation.
Process of trade openness and Export-growth in Bangladesh
After independence in 1971, Bangladesh has gone through three phases of policy changes, towards deregulation and openness to trade. The first phase was marked by severe control on exports and imports. The policy implemented in 1972 to 1975, put the country in a socialist framework, with a fixed exchange rate system. Industrial enterprises, banking and trade infrastructure was massively nationalized as an inward-looking, import substitution approach was adopted. Agricultural inputs and outputs were controlled. Empirical literature suggests that this was a good decision for the researched timeframe (Ahmed N. , 2000).
The second phase of policy shifting began in 1976 and continued up to 1990. This phase of denationalization, deregulation and trade liberalization lacked a good direction to work out the process. Nationalized trade barriers were reduced, and a ‘free trade' approach was undertaken. Privatization of industries and banking sector was allowed and price controls over nationalized firms were lifted. Abolishment of state trading was initiated.
The third phase of policy shift, were introduced in the beginning of 1991 and continued up to 2002 with significant remarks. In the recently developed policies toward export-promotion and trade openness, ‘trade barriers' have been removed as a flexible exchange rate regime is adopted. To encourage further reduction of anti-export bias, export processing zones have been established, to co-operate manufacturing exports. This recent policy shift has moved towards complete privatization of banks, infrastructure and agricultural sector. During this phase, Bangladesh continued to experience rapid liberalization.
In order to further opening up the boundaries, Bangladesh has entered into a ‘free trade agreement' among countries in the region. As discussed, to encourage EP trade policies, and free trade, Bangladesh entered into bi-lateral agreements with India, Pakistan, Sri-Lanka, and continues to trade and investment framework agreement with United States. Bangladesh is an active member of SAARC, Developing-8, and Bangkok Agreement. The country is rigorously seeking to import in developing of a regional co-operation among Bangladesh, Bhutan and seven northeastern states of India and Nepal.
From the graph presented above, it can be seen that, starting form 1971, imports were increasing at a low rate, with a fall in 1976-77, but moved up after that. The import line took a peak after the third policy implementation in 1991, and continued to rise at a high speed. The export trend was almost at a constant level, until the 1991 policy implementation. Afterwards, the trend peaked, gained a momentum after 2000. However, the export line still falls below the import trend.
As reported by the export promotion bureau, in 2005-2006 FY, export earnings have grown by 21.3%, which is due to high demand of, chiefly manufactured goods, led by garments industry and knitwear. During this period, import payments have grown by 9.5%.
In contrast to real export, manufacturing exports exhibit of higher exports than imports which are in percentage of merchandise exports. This is indicative of higher productivity.
When the country adopts rigorous trade policy towards openness and promoting exports, large scale capital owners and labor unions are in oppose to liberalization. The cause of opposition may lie in the fact that, increased competition, effect the workers, in protected public and private sector, who fail to adjust to the exposed economy, with increased productivity. The politicians tend to protect large scale owners, who severely discourage competition and create bias towards exports (Sattar, 2004).