An Empirical Relationship between Trade Liberalization and Industrial Growth in Bangladesh

Ayateena Ali and Sakib Bin Amin

This research paper empirically investigated the cointegration and causal relationship between trade openness and industrial growth in Bangladesh economy using annual data from 1980 to 2016. Trade normally defined as the buying and selling of goods and services and when there is trade, it acts as a growth for many countries in developing industries. As there have been many studies relating to this topic, maximum studies showed that there is a causal relationship between trade and industrial growth. To check the causal relationship in the context of Bangladesh, the main variables that have been taken are- Industrial growth, Capital, Labor and Trade. By employing the cointegration and Error Correction Model approaches (ECM), the empirical results suggest that there is an existence of a unique long run relationship. The hypothesis of this research is, ‘Trade liberalization leads to rise in industrial growth. The Augmented Dickey Fuller (ADF) test has been used to check if the variables are stationary. Next, to check the robustness of the relationship among the variables, the Johansen cointegration method has been applied followed by the Vector Error Correction Model (VECM) which also haveestimated in order to determine the shortrun dynamics behavior and lastly Granger causality test has been applied to check the long runbehavior. The results show that bidirectional causality exists in short run and unidirectional causality exists between trade and industrial growth in the long run. Therefore, this proves the support of the hypothesis of this research paper for the economy of Bangladesh.