For decennaries, trade-growth relation has gained an incremental attending among bookmans and policy shapers. The impression behind the link is that international trade boosts the growing that it allows cognition diffusion faster ; outward oriented trade policies opens the doors of the universe market and supply the chance to bask increasing returns to scale. Despite conventional wisdom, assumes trade is the engine of economic growing, the impact of international trade on growing is still controversial. “ The ‘neoclassical trade ‘ theory supports, while the ‘neoclassical growing ‘ theory does non acknowledge ; and the ‘new trade ‘ theory is doubtful, while the ‘new growing ‘ theory supports the positive effects of trade on end product and growing. ” ( Singh, 2010 ) .

In order to corroborate the trade-growth relation through empirical observation, trade openness is by and large measured by export to GDP ratio or amount of exports and imports to GDP ratio. Since exports and imports may hold an consequence on growing through different channels, export to GDP ratio is placed into the focal point of involvement in this survey. Correspondingly, prevailing surveies treat trade-growth link as the jerk between “ export-led growing ” ( ELG afterlife ) and “ growth-led export ” ( GLE afterlife ) hypotheses, posterior to the forsaking of “ import permutation ” policies by developing states.

Exports may take to economic growing in legion ways. First of wholly, higher exports enable to loosen foreign exchange restraints and therefore increase economic growing by easing imports of capital goods. Additionally export growing enhances efficiency along with specialisation in production of exportable goods and optimum reallocation of resources. Last export publicity feats scale economic systems, additions returns and leads to higher growing. On the other manus contraries causality may come true. In some instances throughout the absence of export enlargement, end product may still maintain turning. Physical and human capital accretion, engineering transportation via foreign direct investing, larning by making may be the echt cause of growing. Under these conditions domestic demand growing for well turning industries may perchance fall behind end product growing and these inordinate goods are so sold to foreign markets. In a parallel mode, Kaldor ( 1967 ) proposed that addition in end product and capacity is accompanied by productiveness leap and unit cost decrease. “ It is so easier to sell abroad. ” Consequently, one must likewise take into history that end product growing may take to export growing. Bidirectional causality between growing and export may besides keep. Increasing trade brings higher income ; higher income brings higher trade ( Bhagwati, 1988 ) . Productivity additions provide economic systems of graduated table ; economic systems of graduated table cause higher exports. Rise in exports causes cost decreases and cost decrease causes higher productiveness ( Helpman and Krugman, 1985 ) .

In order to set up our research on theory more stiffly, allow us footnote mainstream growing theories ab initio. Neoclassic growing theories are chiefly based on supply side of the growing utilizing the construct of the production map. More specifically, economic growing is a map of labour force growing, capital accretion, technological advancement and so forth. In this context, handiness and copiousness of these factor inputs would be expected to appreciate growing correspondingly. However, resource handiness can non be sufficient status for economic growing in the instance that they are underutilized. Furthermore most resources for growing are endogenous to an economic system and dependant on the end product growing itself ( McCombie and Thirlwall, 2004 ) . Endogenous growing theory keeps all the features of the neoclassical position excepting that the premise of decreasing returns to capital is relaxed. Parallel to classical theoretical accounts this “ new ” growing theory does non turn to the issue of demand, aggregative demand peers to aggregate supply.

Even if resources are sufficiently utilised, supplies are unequal to explicate decays in an economic system of a state following an enlargement period whereas factor inputs remain same in this period. Economic growing is, hence, evidently constrained by other factors. In Keynesian sense, stresses demand-pull features of growing, growing rates vary between states due to demand differences and the differences in factors which have an impact on demand. For the Keynesian demand drives the economic system and supply complies. In this respect, the authoritiess fail to excite demand endure lower growing rate.

Kaldor ( 1970 ) developed a kind of aforesaid growing theoretical account in order to calculate out the relationship of trade-growth. The footing of the theoretical account was export-led growing, in other words end product growing was defined as a map of export growing and export growing was a map of comparative monetary values and universe income growing. Export-led growing hypothesis is besides the chief focal point here in this survey. To this terminal we adopt demand-pull features of growing and hereby Keynesian position in Kaldorian lines to the economic growing. Going from Kaldorian theoretical account, Thirlwall proposed a growing theoretical account by agencies of Kaldorian lines that handiness of foreign exchange is a restraint against growings. Harmonizing to him balance of payments was the curtailing factor on demand growing. “ If a balance of payments shortage, or foreign exchange deficit, is non automatically eliminated through a alteration in the comparative monetary values of domestic and foreign goods, it instantly becomes a restraint on demand if the shortage can non be indefinitely financed at a changeless rate of involvement, and will therefore impact the growing procedure. ” ( McCombie and Thirlwall, 2004 ) . On the other manus neoclassical theory assumes that balance of payments is self-adjusting. Internal or external demand restraints therefore are ne’er taken into consideration in neoclassical growing analysis.

There be several grounds why mainstream economic experts do non handle balance of payments as a restraint. From a classical economic sciences point of position, all states can be seen as “ little economic system ” in the universe market and hence they encounter boundlessly elastic demand curves. Any goods supplied are sold, there is nil to make with demand and hence growing public presentation merely depends upon supply side. Second, current shortage is the contemplation of capital excess and indicates strength so. Third, many influential classical growing theoretical accounts assume an economic system to be closed so balance of payments is ahead omitted. It is believed that domestic and foreign comparative monetary value motions equilibrate balance of payments. However, Keynesians do non hold with these statements due to the fact that this attack is deficient to construe why factor supplies and productiveness growings are changing among states.

In applied research there is no consensus on the cogent evidence of ELG or GLE hypothesis. Early surveies trusted in cross sectional analyses that by and large produced consequences in favour of ELG. However, cross sectional surveies suffer from several defects. First of all it does non account for state specific considerations. Regressing GDP on exports beforehand adopts the premise of export causes economic growing and export is presumed to be independent of other explanatory variables. Furthermore any important correlativity obtained from the arrested development is unfastened for a argument ; it does non needfully bespeak causality. Last both end product and export may be causal with another set of unspecified variables ( Giles and Williams, 2000 ) . Conventional regressional techniques are non capable of detecting the way of causality ( Ahmad, 2001 ) . The consequences from transverse sectional researches sing to ELG hypothesis therefore are non accommodated in this paper.

The rapid development of clip series econometrics in 1980s, export-growth surveies headed towards this country. This kind of researches implemented so far can be categorized into two groups: surveies before cointegration and after cointegration. The former fundamentally depended upon bivariate or multivariate short-term Granger causality trials without proving for stationarity. Export-growth relation is expected to be a long term, therefore, first group of surveies which were deficiency of cointegration trials and did non seek for long tally equilibrium relationship resulted in fiddling results. In peculiar, if there is a cointegration relationship Granger causality may non be valid, error rectification theoretical accounts may be used alternatively ( Granger, 1988 ) . Additionally aforesaid Kaldorian theoretical account defines variables in a alleged cringle. More specifically end product growing is a map of export growing, export growing is a map of alterations in comparative monetary values and universe income growing, comparative monetary value alterations is a map of pay and productiveness growing while productiveness growing is a map of end product growing. In the theoretical account everything depends on everything that surely reminds us of vector autoregressive theoretical accounts in which dynamic effects of each variable through the full system can be observed. As mentioned before, if the variables are cointegrated error rectification theoretical accounts are adopted. Vector mistake rectification theoretical account including both long tally equilibrium and dynamic impacts hence is the best alternate to prove the theoretical account of involvement.

Recent literature immensely tests for export-led growing hypothesis however to our cognition Keynesian attacks are ne’er taken into consideration in this mode so far. Furthermore there is no comprehensive survey about South African trade-growth relationship. This research brings a new comprehensive attack in Keynesian lines to the bing literature.

This paper is organized as follows: following subdivision represents literature reappraisal on export-led growing hypothesis while 3rd subdivision briefly summarizes South African economic policy during period of 1963-2011. Fourth portion covers Thirlwall ‘s growing theoretical account in a more elaborate manner and 5th portion explains informations and methodological analysis. Last empirical consequences, readings and reasoning comments will be presented.

Literature Review

Early export-led growing surveies conveying clip series model tested Granger causality between two variables: end product growing and export growing. Among these surveies as one of the most cited paper Jung and Marshall ( 1985 ) implemented bivariate Granger causality trials for developing economic systems. Kunst and Marin ( 1989 ) extended the trial into four variables and Grabowski ( 1990 ) applied multivariate Granger causality trial by including five variables. Afxentiou and Serletis ( 1991 ) may be the first 1s who add preliminary unit root and cointegration trials into their ELG hypothesis trial. Two-step Engle-Granger cointegration trial is adopted in their bivariate analysis for industrial states. After cointegration techniques improved and allowed to prove for more than two variables, Johansen cointegration trial is the most popular one, Kugler ( 1991 ) implemented a four-variable cointegration trial. Bahmani-Oskooee ( 1993 ) pushes it one measure frontward by following vector mistake rectification theoretical account for cointegrated multivariate series. Van den Berg and Schmid ( 1994 ) , Cheng and Chu ( 1996 ) , Karunaratne ( 1996 ) besides followed the same attack. As an invention they use different information set. Onafowora ( 1996 ) combine vector mistake rectification theoretical account with factor mistake discrepancy decomposition in thier empirical research after using four-variable Johansen cointegration trial. Karunaratne ( 1997 ) employ same attack for six-variable series but besides adds impulse response maps into his analysis. For a more elaborate reappraisal See Giles and Williams ( 2000 ) .

The surveies covering South Africa reached equivocal outcomings, for case, Dutt and Gosh ( 1996 ) and Xu ( 1996 ) failed to happen a cointegration relationship whereas Bahmani-Oskooee ( 1993 ) and Pomponio ( 1996 ) detected cointegration and bidirectional causality in between export and growing. However, Pomponio ‘s bivariate theoretical account concluded noncausality for South Africa contrary to his three-variable theoretical account. Latest researches for South Africa, viz. Rangsamy ( 2009 ) and Ahmed ( 2011 ) found consequences in favour of export-led growing hypothesis.

It is widely accepted that there is no consensus for export-led growing hypothesis in the literature. The deficiency of consensus comes into surface due to either analysing different clip periods or different information sets missing of solid theoretical background. To this terminal our survey employs most recent clip series by agencies of a comprehensive theoretical model supported by relevant statistical diagnostic cheques.

Data and Methodology

Theoretical Model

In Keynesian spirit Kaldor ( 1970 ) develop a growing theoretical account which is built on export and growing link. Exports are taken as chief portion of demand ; hence, end product growing is defined as a map of export growing:

( 1 )

In which is end product growing rate, is export growing rate and is the snap of end product growing with regard to export ( i.e Hicks ‘ super-multiplier ) .

Exports are the map of universe income, domestic monetary values, foreign monetary values and exchange rate:

( 2 )

where is the degree of exports, is domestic monetary values of exports, foreign monetary values, is the exchange rate, and are monetary value and income snap of demand for exports severally. Domestic monetary value addition or rising prices is described by rewards and productiveness:

( 3 )

where symbolizes domestic monetary value alteration, growing of nominal pay rate, is the rate of growing in labor-output ratio, is the alteration in unit labour costs. Last labour productiveness growing is a map of the rate of end product growing:

( 4 )

In which is the Verdoorn coefficient. To sum up the theoretical account assumes that end product growing is dependent on export growing ; export growing is dependent on comparative monetary values of exports and imports plus universe income growing ; and domestic monetary value alteration is dependent upon pay and productiveness progress, and the latter is a map of end product growing. Kaldorian growing theoretical account hereby proposes a cyclical system in which everything has an impact on everything.

The Kaldorian growing theoretical account is widely accepted as an export-led growing theory since end product growing is a map of export growing in Equation ( 1 ) , nevertheless, it can be evidently seen from the other way, export growing is besides a map of end product growing. Traditional OLS analyses, in this context, do non supply the way of causality, regressing end product growing on export growing to prove for ELG hypothesis as a priori premise. On the other manus vector autoregressive methods allow us capturing dynamic relation by arrested development each variables on each other. This is the ground why vector mistake rectification theoretical account ( VECM ) is preferred as an econometrical tool in this paper.

Going from Kaldor ‘s point of view, Thirlwall ( 1979 ) imposed demand restraint into the theoretical account. In Thirlwall ‘s theoretical account trade has an consequence on end product growing by agencies of balance of payments.