Exogeneity and the Export-Led Growth Hypothesis: The Case of China

Abstract

During the past two decades, many empirical studies such as Balassa [3, 4], Emery [7], Fajana [11], Feder [12], Maizels [21], Rams [22, 23], Tyler [26], Voivodas [27], Williamson [28], and others have found that exports promote economic growth. In all of these studies, a real output growth variable is regressed on either (i) export levels, (ii) export shares or (iii) export growth by using a single-equation model. The statistical significance of the (positive) coefficient of the export variables has then been interpreted as evidence supporting the export-led growth hypothesis. Chow [6], Hsiao [16], and Jung and Marshall [17] have recently questioned the validity of the above findings. This is because the single-equation (or so called impact) studies using OLS regression are, from an econometric perspective, mostly inadequate in addressing the issue of If a bidirectional causality between these two variables (exports and output) exists, the estimation and tests used in the impact studies are inconsistent. These concerns have subsequently generated a series of new empirical work aimed directly at resolving the issue of causality between exports and output growth [1; 2; 14; 20]. The Granger [15] causality tests carried out in these studies have revealed that the causal direction, in general, depends on the country and commodity group under consideration. Notwithstanding the important contributions of the above mentioned causality studies, there are shortcomings that must be dealt with to permit a better understanding of the subject matter. First, the impact studies presume that the export variable is exogenous. This is a rather restrictive assumption as a feedback from output to exports is very likely [17; 20]. Second, the existing causality gtudies do not make a clear distinction between and causality. As suggested by Engle, Hendry and Richard [10, hereinafter EHR], causality tests, such as the Granger [15] method, are valid only for testing one component of strong exogeneity because they are concerned with sequential marginalizing feedback effects, rather than contemporaneous conditioning