economics

letters
ELSEVlER Economics Letters 49 (1995) 329-334

Unit roots and cointegration in estimating causality between

exports and economic growth:
Empirical evidence from the ASEAN countries
Jaleel Ahmad*, Somchai Harnhirun
Department of Economics, Concordia University, 1455 Boulevard de Maisonneuve,
Montreal, Quebec H3G 1M8, Canada
Received 16 March 1994; revised version received 12 December 1994; accepted 16 February 1995

Abstract

This paper utilizes cointegration and error-correction representation methodology in estimating the long-run
behavioral relationship between exports and economic growth in the ASEAN countries.

Keywords: Economic growth and exports; Cointegration and causality

JEL classification: O l l ; C40

I. Introduction

The connection between exports and economic growth occupies the center stage in
development literature. A number of recent empirical analyses have employed Granger
causality tests based on Vector Autoregressive (VAR) models to determine the direction of
causality in this relationship. Examples are Jung and Marshall (1985), Chow (1987), Hsiao
(1987), Kwan and Cotsomitis (1991), and Ahmad and Kwan (1991). However, the statistical
methodologies used in these tests limit them to an estimation of some short-run dynamics
between the two variables and, hence, do not permit the estimation of long-run equilibrium
states.
By its very nature, the exports-GDP nexus is a long-run behavioral relationship whose
analysis requires methodologies appropriate for estimating long-run equilibria. An appropriate
statistical test of a long-run relationship must take into account important characteristics of
time-series data. Specifically, the time series on the variables in the model should be tested for

* Corresponding author.

0165-1765/95/$09.50 (~) 1995 Elsevier Science B.V. All rights reserved

SSDI 0 1 6 5 - 1 7 6 5 ( 9 5 ) 0 0 6 7 8 - 8
330 J. Ahmad, S. Harnhirun / Economics Letters 49 (1995) 329-334

co-movement over time, prior to testing for causality between them. Granger-type causality
tests for a long-run behavioral relationship are valid if the relevant time series are found to be
cointegrated. Only in the latter case would there be a presumption for causality to run in at
least one direction (Granger, 1988). In the absence of a co-movement in time series on
exports and economic growth, the search for a causal relationship between the two, as
common in current writing on the subject, loses much of its meaning.
The purpose of this paper is to demonstrate the use of an appropriate statistical procedure
for estimating the long-run relationship between exports and economic growth, and to provide
empirical evidence from the A S E A N countries, namely Indonesia, Malaysia, the Philippines,
Singapore and Thailand. These countries, like others in Asia, have in the past pursued
aggressive export promotion policies and some have indeed witnessed rapid economic growth.
The choice of countries in this investigation is, therefore, not without merit.
The plan of the paper is as follows. Section 2 contains a brief description of the econometric
methodology, the data, and the estimation procedure. Section 3 presents the empirical results
and a few concluding observations.

2. Methodology, the data, and the estimation procedures

Engle and Granger (1987) have shown that when time series are characterized by non-
stationarity, cointegration is a particularly appropriate statistical technique. If these tests
discover co-movement in time series, the residuals from the static regression can be used as
'error correction' terms in the dynamic first-difference equation. To establish the order of
cointegration, it is of critical importance to test whether a series is I(0) or I(1) before testing
cointegration. Only then can one infer that there is some relationship that links the two series,
and their linear combination can be interpreted as a long-run equilibrium relationship.
To examine the time-series properties of the data, we utilize the cointegration methodology
recently proposed by Johansen (1991) and Johansen and Juselius (1990). This procedure is
currently the most reliable test for cointegration and avoids the problems with the E n g l e -
Granger A D F test, as shown in Kremers et al. (1992).
Johansen's (1991) test for a multivariate cointegration system is based on the error
correction representation of the VAR process with Gaussian errors:
k-1

A Z , = a o + ~'~ a i A Z t _ i + I I Z , _ k + B ' Z t + u, , (1)

i=l

where Z, is an m × 1 vector of I(1) variables, Z', is an s × 1 vector of I(0) variables, I I Z t k i a r e

m × m matrices of unknown parameters, B is an m × s matrix, and u, -- N(0, F,). The null
hypothesis is that H in Eq. (1) has a reduced rank of r ( r < s ) , where r is the number of
common roots. Under the number hypothesis,/7 is an m × r matrix, B ' Z t are stationary and
are referred to as cointegration relations.
Most earlier studies on the exports-GDP relationship have utilized the Guilkey and Salemi
(1982) framework for estimating causality through linear least square regression. We,
 J. Ahmad, S. Harnhirun / Economics Letters 49 (1995) 329-334 331

therefore, retain this useful framework for our investigation) If the null hypothesis of
non-cointegration between exports and G D P is rejected, the Guilkey-Salemi framework has
to be a u g m e n t e d with an E C M term, as follows:
p q
St q- al + ~ OllXt-i Jr E ol2rt_l -~- ¢~lIxt-1 "[- E l t '
i=1 i=1
(2)
P q
Yt + a2 + E 021"/~t-1 "[- E 022Yt_i "3i-(D2Ixt-I "31-E2t,
i=1 i=1

where a 1 and a 2 are constants, p and q are optimal lags of series on X and Y, and es are
non-serially correlated residuals. The term Ix,_~, which must be stationary, is the first lagged
value of the error terms from the cointegration regression:
I1, = 6)(, + Ix,. (3)

The data used in this study are annual data for the years 1966-1990 taken from the World
Tables for the years 1987, 1989, and 1993, published for the World Bank by the Johns Hopkins
University Press. The series on exports (At) and gross domestic product (Yt) are both in real
per capita terms in 1980 prices.

3. Empirical results

Before testing for causality, we checked for the stationarity of the variables by means of the
A u g m e n t e d Dickey-Fuller (ADF) test. The results presented in Table 1 reveal that all
variables are non-stationary in their level data. However, the stationarity property is found in
the first-differencing level of the variables. Table 2 presents the results of the Johansen
cointegration test. As shown, we are able to reject the null hypothesis of non-cointegration
only in the case of Singapore, where r = 0 is rejected at the 5% level, but the null of r < 1
cannot be rejected at the same level. In the case of other countries, there appears to be no
evidence of a c o m m o n trend in the m o v e m e n t of the two variables. Any search for causality in
the case of countries other than Singapore is, therefore, unwarranted, and can lead to
misleading inferences.
The results of the Granger causality test for Singapore, where X, and Y, are cointegrated,
are shown in Table 3. The log likelihood ratios for the error correction model in Eq. (2) are
7.6057(2) and 8.2757(2), since the null hypothesis of X, does not cause Y,, and Y, does not
cause X,, respectively. These results suggest the existence of a bi-directional, feedback
relationship between exports and economic growth in the case of Singapore. One can infer
from this that internally generated mechanisms and exports have a mutually reinforcing
relationship with one another.
In conclusion, the discussion in this paper suggests that causality tests in the absence of

1Geweke et al. (1983) have shown that the Guilkey-Salemi approach performs well in finite sample problems.
332 J. Ahmad, S. Harnhirun / Economics Letters 49 (1995) 329-334

Table 1
The results of the united root test
Variables A D F test A D F test
calculated calculated
critical statistic critical statistic
for one unit root for two units roots
Indonesia
Growth - 1.96122(z~) -2.54676(r)*
Exports - 1.30161(r~) - 3.91738(~)*

Malaysia
Growth -2.03602(r.) -3.00632(r)*
Exports - 0.89943 (r) - 3.02707 (r~)*

The Philippines
Growth - 1.80684(r) - 2.63095 (r)*
Exports - 2.50373 (%) - 4.32590(r )*

Singapore
Growth -3.59898(~) -2.47717(r)*
Exports - 1.82348(r,) -3.64960(r~)*

Thailand
Growth - 1.86890(r,) -4.40469(~)*
Exports - 2.08987(%) - 2.12587(r) *

Notes: *Significant at the 5% level. The A u g m e n t e d D i c k e y - F u l l e r ( A D F ) test for one unit root is based on the
following regression:

i=l

where C is a white noise and t denotes time trends. The following regression is employed to test for two unit roots
where A 2 is the second differencing level:

A2X, = a I + fl2AX,_l + Ot + ~ 4~,a2x,_,+ ~, .

i=l

cointegration of time series on exports and GDP are unable to address the issue of the
long-run behavioral relationship that is the crux of the exports-GDP connection. The existing
results on the causality between exports and GDP should, therefore, be interpreted with
caution. 2 The policy implications of our investigation, though limited, are not sanguine for the
hypothesis of export-led growth in the A S E A N region. But, as the results for Singapore
suggest, there is more convincing evidence of a growth pattern in which internally generated
mechanisms and the growth of exports interact and mutually reinforce one another.

2 The results of our investigation in this paper cannot be directly compared with those of earlier studies that do
not employ cointegration methodologies. But, by way of illustration, we may point out that Jung and Marshall
(1985) had estimated a unidirectional causality from exports to economic growth in the case of Indonesia
(1966-1980 data), and no causality in either direction in the case of the Philippines. Hsiao (1987) reported that
G r a n g e r causality tests for Singapore revealed no sign of causality in either direction.
 J. Ahmad, S. Harnhirun / Economics Letters 49 (1995) 329-334 333

Table 2
T h e results of J o h a n s e n ' s c o i n t e g r a t i o n test

Countries Null Alternative Statistic Eigenvalue

hypothesis hypothesis

Indonesia
r = 0 r = 1 10.5879 0.39600
r< =1 r = 2 6.3683 0.26159

Malaysia
r = 0 r = 1 7.1086 0.28716
r< = 1 r = 2 1.0656 0.04948

The Philippines
r = 0 r = 1 3.8156 0.15923
r< = 1 r = 2 0.9963 0.04427

Singapore
r = 0 r = 1 16.2879 a 0.53958
r< = 1 r = 2 0.9980 0.04641

Thailand
r = 0 r = 1 16.2879 0.31724
r< = 1 r = 2 0.9980 0.04882

Notes: aSignificant at the 5 % level. A s s h o w n in J o h a n s e n a n d Juselius (1990), the critical values of h y p o t h e s e s

r = 0 a n d r = 1 at the 5 % level are 14.9000 a n d 8.1760, respectively. A s for the 10% critical values of t h e s e
h y p o t h e s e s , the c o r r e s p o n d i n g values are 12.9120 a n d 6.5030.

Table 3
T h e results of G r a n g e r ' s causality test: S i n g a p o r e

H0 X-/---~ Y Ho Y-/---~X
Lags 2 Lags 2
LR-test 7.6057 * LR-test 8.2757"
LM-test 1.2558 LM-test 2.2251
Results X causes Y Results Y causes X

Notes: *Significant at the 5 % level. L M - t e s t is e m p l o y e d to test for the serial a u t o c o r r e l a t i o n in residuals.

Acknowledgments

The authors wish to thank Andy Kwan and Ah Boon Sim for helpful comments on an
earlier draft.

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